CPA is not your cash flow expert!

In my last newsletter we highlighted the possibilities of adding value to your team of subject matter experts by surrounding yourself with both a CPA and a CFO or Cash Flow Consultant to help you optimize cash flow and maximize profitability.   Your CFO should be helping you with proactive financial strategies.  The CPA, your tax compliance expert, takes the opposite approach, viewing finances from the rearview mirror as a reactive strategist. I find it unfortunate that we business owners are usually groomed to manage our businesses from a tax perspective.  What if you combined the financial conversation of how much taxes will I owe this year with how much cash do I need to reserve now to  pay those taxes?

My Dirty Little Secret around working with CPA’s is that you can be profitable and have a cash flow problem. A common circumstance is when the business profits pass through to the owner’s personal tax return and the owner owes a large sum of taxes but doesn’t learn that fact until the taxes are due in April. This scenario confirms another Dirty Little Secret: The CPA is your tax compliance expert—NOT a cash flow expert. You can avoid these kinds of cash flow storms by considering the value of working with both subject matter experts; one to answer the question of “What is my tax liabilities projected to be for this year?”.  The other to help you plan for cash requirements, and both working together to get more money into your pockets.   

Get your CPA & Cash Flow Consultant WORKING TOGETHER

Slower summer days is the perfect time to sit down with your Cash Flow Consultant and your CPA to take a good look at your year so far.

Although no one wants to think about taxes in the middle of the summer, having eyes on year end taxes can give you peace of mind. The conversation now between you, your CPA, and your Cash Flow Expert should be focused on what your estimated taxes will be for 2020. If you’re profitable mid-year, what kinds of strategies should you be creating now to help reduce the tax liabilities before year’s end? Always looking at taxes from a proactive position, rather than a reactive position, can help you forecast your cash flow and optimize your profitability. This will help you avoid the end of the year scramble, and the stress that comes with it!

In June we talked about building a business owner’s sandbox with a team of subject matter experts. The highlights being that your bookkeeper is the “keeper of the cash flow” and your CPA is your tax compliance expert. In July, we talked about the role of the CFO and the importance of that subject matter expert to help business owners ensure they don’t run out of money.

Let’s talk about the role of your CPA and adding value by working together with your CFO or Cash Flow Consultant to help you optimize cash flow and maximize profitability. The role of your CPA is normally focused on tax compliance. It’s their job to keep you out of harm’s way with the IRS and local tax agencies. It’s important to note, however, most CPA’s are looking in the rear-view mirror to figure out what your tax liabilities will be for the current year. This subject matter expert is most focused on net profits and how to minimize that to help you pay the least amount in taxes, right? Managing cash flow is best served by creating proactive (not reactive) strategies. It also requires a higher net profit to help with future cash requirements. Bottom line, your conversations with your CPA can’t always be about taxes and how to pay less money to the government. A better question might be: How do you increase your net profit for cash flow and work with your CPA to figure out tax strategies to get more money into your pockets instead of paying more in taxes? To answer that question, it will take the best of two subject matter experts – your CPA and your CFO/Cash Flow Consultant.

Red Flags with your CPA:

It’s not uncommon for me to come in as a Fractional CFO/Cash Flow Consultant and uncover the shortfalls that the CEO is having with their current CPA. Here are my top red flags that you may not have the right CPA working with you:

  • You were surprised in April to learn how much taxes you owed
  • You don’t have 2020 projected tax liabilities to minimize year end surprises
  • You are still awaiting your 2019 tax return extension
  • No mid-year tax strategy meeting scheduled with your CPA
  • No clear strategy on 2020 owner’s compensation splits between W2 wages and owner distributions

How do you know if you need to add a CFO to work alongside your CPA?

A CEO recently contacted me because the feeling of his financials being out of his control was keeping him awake at night. He knew he was bringing in money, but he was basically trusting his COO, bookkeeper, and CPA to handle it all. He was profitable and was already paying a fair amount of money via quarterly tax estimates. None of these subject matter experts could answer the question that was keeping him awake at night: “I am showing a nice net profit but am still juggling vendor bills and struggling to make payroll on a regular basis. Where is all the money going?”

Managing cash flow takes a team of subject matter experts. If you are putting all your eggs into one trusted subject matter expert, your CPA, to handle all financial activities in your company, I would encourage you to expand your financial conversations. As an Outsourced CFO, we come into the sandbox with a different perspective on your financials. We take a 360 view; not just a two-dimensional view of profits and taxes. We incorporate the cash flow component and facilitate the conversation with your CPA and other trusted advisors to help you proactively manage those quarterly tax payments. We are getting answers at this time of the year to know how much money owners will pay in taxes; and helping to create proactive strategies to reserve cash and help owners find peace of mind..

The bottom line is you need to be talking to your CPA now to plan for end of year tax liabilities. Add a Cash Flow Consultant to the conversation and you will ensure that you will have enough cash reserves to not run out of money. By working together with these two subject matter experts, I am sure you will find empowerment around your financials and will sleep like a baby at night not worrying about making payroll!