Tax time, does your business software measure up?
With fall come many beautiful things. Leaves change colors, football season starts and kids go back to school. It is also the last chance to file taxes. This can either be a beautiful experience or an absolute terror.
I have had conversations where people argue the sole purpose for an accounting software system is to be able to accurately file income taxes. Countries like Bahamas would then simply not need accounting software. While this is a noble thought, the reality is that most developed countries in the world have income tax laws and enforce them rather strictly.
As companies go through getting the numbers to tie out and preparing all the data to submit to the government, it is a good idea to take a look at all the work that goes into it. How can you save on that work for next year? Is there anything you can improve proactively, rather than being reactive at the last minute?
Many companies, do not have an integrated system. They might run separate sales invoicing system and purchase order system. At the end of the year, they do an inventory count, add up all the sales and purchases and come up with the gross profit something like this:
GROSS PROFIT = SALES – PURCHASES +/- CHANGE IN INVENTORY VALUE
Then they add up all their overhead expenses and get to their net profit.
While this is a simple way to figure out how well you did last year there are a number of problems with this approach. Perhaps the most glaring one, is the fact that you are sailing the ship and most of the time you do not know whether it is going in the right direction. If you wait until the end of the year to see if you made the numbers, it might be too late to take action. Other problems, include details that are missed. For example you might have received inventory, but not the invoice. Are you accounting for that in your purchase system? How did you arrive to the value of your inventory? Are you using FIFO, LIFO, average or standard costing method? If you are not using standard, then you need to prove that the value is really what you say it is. If the sales and purchase systems are not connected with an inventory system, then that could be a difficult problem.
Some companies just print the entire thing out and send it to their CPA to deal with. The CPA firm will just file according to what they receive. They do not take any responsibility to the quality of the data. If there is an audit then they come back to the company to prove the numbers.
Finally, even if the company is using an integrated system where purchase, sales and inventory all talk together and post to the chart of accounts, there still might be issues. Many systems are not sophisticated enough to accurately balance out accounts receivable, accounts payable and inventory value to the general ledger. This becomes clear as daylight during tax time, but seems often to go unnoticed throughout the year.
As an executive responsible for running a company successfully, numbers are everything. It would be a good feeling to know your numbers not only tie out every year, but always. System is always in sync with the information entered. Instead of worrying if the numbers are correct, you can worry about how to run the business. That is the state every business should strive for. Microsoft Dynamics NAV is the tool we at iNECTA use to get our customers there. Filing your taxes can be a beautiful thing!