It should be well-understood that effective planning is a key ingredient in achieving business success. Winston Churchill famously said, “He who fails to plan is planning to fail.” Among the elements of effective business planning, tax planning is critical to obtain optimal financial performance.
What is Optimal Financial Performance
Financial performance is an assessment of a company’s financial health through the analysis of its assets, liabilities, expenses, revenues, and profit. The analysis is conducted utilizing the company’s balance sheet, cash flow statement, and income statement. It is intended to provide an in-depth portrait of a company’s financial strength. Optimal financial performance should be the aim of every business.
A company’s financial performance tells investors and other stakeholders how well the company is doing. Specifically, whether the company’s operations and profits are on track to grow satisfactorily. Positive measures show investors and lenders that a company represents a good investment. Those measures also help internal analysts understand a company’s strengths and weaknesses.
Here are the metrics of a company’s financial health: competitive comparables, based on financial statements in the areas of liabilities and cash balance. Total assets. A company’s liquidation value. Measures of the company’s operation efficiency, comparing the ratio of its profits to operating expenses. And, solvency, is measured by a ratio of assets to liabilities.
The measures of optimal financial performance are: First, growing revenues. Second, keeping expenses relatively flat relative to the growth of the business. Third, practicing good cash flow management so that funds are available for additional inventory, equipment, or staffing. Fourth, a good debt-to-assets ratio or debt-to-equity ratio of less than 1.0, shows a safe level of financial leverage. Fifth, positive profitability ratios measure a company’s capacity to make a profit. Sixth, activity ratios demonstrate how a company manages its assets. These ratios include asset turnover, inventory turnover, and operating expense ratio. Seventh, a positive record of repeat customers and obtaining new customers. Eighth, a high profit margin which measures the ratio of income to revenue. Ninth, spending on inventory. This shows how much a business can spend on inventory to continue operating in a financially healthy manner.
Tax Planning Strategies
When a business owner plans effectively, he/she can take advantage of available tax breaks and deductions, and manage revenues and expenses strategically to achieve optimal financial performance and benefit the owner and employees. Strategies can include the following:
- Reduce taxes by deferring taxable income into the following tax year. Or accelerate income if that will result in a lower tax rate.
- Maximize deductions and credits.
- Make contributions to retirement accounts like IRAs or 401(k) plans.
- Choose the most tax-favorable business entity structure.
- Sell investments that have a declining value to offset capital gains.
- Increase charitable giving to obtain tax deductions.
- Invest in business equipment, supplies, and other assets.
- Prepay for services that will be used in the coming year.
- Write off aged unpaid accounts and other bad debts.
- Overall, pay attention to changes in business tax law.
It is important to reinforce that tax planning is a legal practice used to minimize tax liabilities and improve profits within the structure of existing tax laws and regulations. Also, it is important to start tax planning early in the year to facilitate good financial analysis, develop options, and make any necessary business course corrections. Of course, tax planning strategies (and regulations) can change over time.
Should I Seek Professional Help to Achieve Optimal Financial Performance
It is wise to seek professional help with tax planning and the practices leading to achieving optimal financial performance. A professional CPA will understand complicated tax rules and can provide both helpful insights and guaranteed compliance with financial statements and tax laws.
Get Expert Accounting and Financial Assistance
Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting, tax preparation, and financial assistance that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.