Episode Transcript
[00:00:00] Speaker A: Welcome to Guilty of Savings. I am Divya Gill, cpa And today we are going to break down simple ways to save money and make smarter financial decisions. You are watching now Media Television.
Welcome to Guilty of Savings. I am Divya Gill. On this show, I help business owners make sense of the financial decisions that shape profitability, growth and long term stability. Today we're talking about a distinction that can completely change the way the owner manages his or her money. The difference between simple reporting and or tax preparation which has already going which is going to document what has already happened versus using financial strategy to shape what happens next.
Joining me is Karsh Yadav, CPA, a financial strategist and tax expert with more than 25 years of experience across government, corporate consulting and education, including roles with the irs, Deloitte, eny, Intel and American Express.
Today, as a partner at my Profit Gurus, he helps business owners improve profitability, strengthen cash flow and build more strategic approaches to taxes and financial decision making.
Hirsch welcome to our segment.
[00:01:26] Speaker B: Yevge thank you for having me.
[00:01:30] Speaker A: Pleasure is mine. So harsh. Many business owners think about taxes and all they think about is a return and when it's due. But by the time the return is being prepared, most of the important decisions have already been made.
So the goal here is to help the viewers understand what separates compliances from strategy. Help the owners understand why proactive planning throughout the year can create better decisions, better opportunities, fewer surprises, as well as more control over their after tax cash flow. So with that said, Hirsch, what's the biggest misconception business owners have about the difference between tax preparation and tax planning?
[00:02:12] Speaker B: Divya that's a great question. I think we probably both see this, but I think a lot of business owners assume that because they have a CPA, someone is automatically looking for ways to save them on taxes. And that's not always true. Let's say you own a business making $400,000 a year. Your CPA is going to prepare your tax return and claim your deductions and tell you that you owe $90,000.
Everything might be completely accurate, but nobody asked whether you're operating under the right business structure, whether you could benefit from a retirement plan or whether you have major investments coming up that could be coordinated with your tax strategy. And I think these conversations should have happened months earlier. And here's where I think we as CPAs, sometimes we miss the bigger opportunity. We're so focused on reporting the numbers accurately that we don't always spend enough time helping owners improve them. When somebody comes to us. I want to know about their business before I review their tax return. Where they're making money, how they're. If they're losing it, and whether they're. What they're exactly trying to accomplish. From the business standpoint, I think finding a tax strategy that saves somebody $20,000 is great, but identifying a way to improve their annual profits by 100,000 could be even better.
[00:03:32] Speaker A: You know, that is a great way to lead into my next question.
You talked a bit about the lost opportunity here simply because they waited too long to ask the right questions. Right. So what point do you think is the right point where they. They should start asking these questions?
[00:03:50] Speaker B: Yeah. Yeah. And, Divya, I think we both see this when we're, you know, working with owners who are especially trying to make some of their major financial decisions and they're trying to involve their cpa. I think there is sometimes that opportunity where it goes by because they did not have a chance to talk to their CPA on time. For example, we may have an owner who decides to buy, like, maybe $150,000 worth of equipment in December because somebody told them they should write it off, but they didn't actually need the equipment. And maybe leasing it would have been better.
And did they have enough cash flow after the purchase to actually cover their payroll and taxes? And was December even the right time to make that kind of investment?
It goes deeper when we start talking about other planning opportunities, like retirement planning. And sometimes, you know, that requires, like, advanced setup, you know, to take the maximum deduction. I also think that, you know, sometimes owners look at taxes as something they can deal with after they made all their business decisions. And I think we both know that we really want them to do these tax planning opportunities during the tax year. And I think that's one reason why we at least start with an annual plan. If we know that you're planning to hire employees, purchase equipment, you know, expand locations, or increase income, we want to coordinate that tax and financial implications ahead of time.
[00:05:12] Speaker A: You know, those are some great points you raised. You just made me think of this one client we have who decided to put half a million dollars kid you not in inventory. And that was right on December 31, because they were like, delia, I got a deduction for you. It's half a million dollars. And next thing, inventory is a balance sheet item for the viewers who understand what that is, and of course you and I do, in our world, that doesn't help him or her in that particular situation. So, yes, you know, you have to act before it's too late. And you cannot drive a car looking in the rearview mirror. So point goes to that.
So from your experience, her working for the big four, the irs, what. And this is one of my favorite topics because I love stack strategy, and that's my role in the firm. So it's great to share that floor with somebody of similar, you know, expertise. What separates a legitimate track strategy from a more aggressive one that could possibly create unnecessary risks?
[00:06:08] Speaker B: That's a really great question. And I remember my time when I was at the irs. One thing became very clear to me. There is a difference between having clever explanations for a deduction and actually being entitled to it. Let me just give you an example. I had a business owner who took his family for a vacation to Hawaii, and he happened to spend a couple of hours meeting with potential customers, and he decided that the entire trip should be a business expense.
Now, there may be some legitimate business expenses associated with that trip, but calling it something like a business trip doesn't automatically make the entire vacation deductible. Or, you know, maybe even consider, like, owners who put their family members on payroll, right? That's perfectly legitimate when those family members perform real work and receive reasonable compensation. But you need documentation showing that what they actually did. And I always tell my clients, you know, we can't explain the business purpose and support the transaction documentation, then we really should reconsider the strategy. I don't believe in, you know, being unnecessarily conservative either. There are perfectly legitimate tax strategies that owners should not overlook because their advisors never just brought them up. So I think the objective is just to understand the rules well enough to take advantage of the opportunities without inventing facts to justify them.
[00:07:30] Speaker A: No, those are some great points that you raised, Harrison, you know, in relation to the whole cash flow concept. And we'll dig more deeper once we get into the segments further down the show. But what is one financial habit you wish more entrepreneurs adopted before they reached that next stage of growth? In terms of everything we have been talking about?
[00:07:51] Speaker B: Wow, that's another really good question you're raising. And I wish. I wish more owners would look at their business the way a potential buyer would of their business.
And you can imagine somebody walking into your office tomorrow and offering to buy your company. What would they want to know? They'd ask whether your customers are profitable, whether your revenue is recurring, whether the company can operate without you, and whether your financial statements are reliable. Yet many owners can't answer those questions. I remember how often business owners Focus on total revenue. They'll proudly tell you they're making $3 million in sales.
But my next question is usually how much of that are you actually keeping? And sometimes there's a uncomfortable silence around that. And that's why I like owners to review their business monthly, not just from an accounting standpoint, but from a value creation standpoint. Are we becoming more profitable? Are we becoming less dependent on the owner? Are we becoming more efficient? Are we more attractive to a future buyer? Those are the important questions that ultimately build wealth.
[00:08:57] Speaker A: You know, you reached or you touched something briefly which talked about making the top line revenues. Then you have your net profit, but then you have your cash flow. So then how should a business owner think more in terms of cash flow and taxes when it comes to tax strategy rather than treating it as a once a year expense, what do you, you think a person should take as their approach? As a business owner yourself?
[00:09:24] Speaker B: Yeah, that's a great point because I think both your tax strategy and your cash flow strategy, as well as your profitability strategy, I think all of those need to be married together at some point because you know, you really can't do one without the other. And I recall there was a time, you know, when we had a construction company and this happens all the time, you know, where general contractors will win a big million dollar project and they're expecting a profit of 200,000. Sounds like a really great deal. But the contractor has to pay those employees every two weeks, purchase materials up front, pay subcontractors within 30 days. Meanwhile the customer doesn't pay until you reach like a certain project milestone. So there could be this gap on in terms of cash flow. So you may, they may be showing a healthy profit from an accounting perspective, but money in the bank is just not there and they might need that money or cash that to pay payroll. So really that tax strategy and the, and probably the profitability strategy, cash flow together all need to be married to actually get to that point where you can plan more effectively.
[00:10:27] Speaker A: Those are some wonderful comments that you made harsh. And we plan on touching base more on these and going into further details when we come back. I want to move from taxes to the operating reality as well at some point behind the numbers, how profitability and cash flow can tell very different stories, which is something we briefly touched on and then what business own need to understand before growth starts creating financial pressure. We'll be right back.
We'll be right back with more tips to help you save money, reduce taxes and make your finances work for you. Stay tuned.
And we are back. I am Divya Gill, CPA and your host of Guilty of Savings on NOW Media Television. Let's keep welcome back to Guilty of Savings. I am Davya Gill. Stay connected to this show and every NOW Media TV favorite Life or Demand or on Demand anytime you like. Download the free NOW Media TV app on Roku or Apple and unlock nonstop bilingual programming in English and Spanish on the move. Catch the podcast version at NowMedia TV. From business and new to lifestyle, culture, finance, law and beyond, NOW Media TV is streaming around the clock. Ready whenever you are. I'm back with Harsh Jadhav, CPA partner at my Profit Gurus, whose work helps business owners connect tax planning with profitability, cash flow and stronger financial management. Welcome back, Hirsch.
[00:12:00] Speaker B: Thank you, Divya.
[00:12:02] Speaker A: So a company can show a profit on paper and still struggle to make payroll, fund growth, or pay taxes.
That disconnect is where many owners discover that revenue alone does not stand a chance. And you need to focus on cash flows as well, which helps build the financial strength. So our goal here is to focus on the differences between accounting profit and usable cash. My favorite one, Hersh because the decisions that drain the working capital help and how owners can build stronger visibility into the movement of money through the business, it all needs to be factored in. So with that said, Hirsch, why do profitable businesses sometimes still experience serious cash flow pressure?
[00:12:47] Speaker B: You know, I think sometimes there you brought up a really good point earlier about the confusion between profitability and revenues. Right. Many times when you talk to business owners, they tend to think that that's the same thing. And we as CPAs understand revenues to be an accrual concept, meaning this is what you earn, but that doesn't necessarily mean that's what you have in your bank. So that's a big disconnect that I find with business owners and having to explain how cash flow actually works. And I think, you know, the reality of it is that, you know, many people benchmark themselves against other businesses based on revenue versus profitability. I think that's an easier number to target for most business owners. But that doesn't mean it's the right number that you're trying to measure. And I've seen many times where cash flow issues have come into place for very, very profitable or quote, high revenue businesses because they did not manage the cash flow appropriately. And if you have to pay rent to your landlord, they're not going to wait for you to collect your receivables. They want to get paid right on time. And if you don't have money in the bank, doesn't matter how much revenue you've earned, it's not going to really help you in terms of, you know, making sure your cash, cash flow needs are met.
[00:14:03] Speaker A: Right. You used some great examples like your rent, your payroll and things of that nature. And you also commented about benchmarks. And speaking of that, when it comes to benchmarking, what numbers do you think an owner should monitor regularly to understand whether the business is truly generating the healthy cash we are all talking about here?
[00:14:22] Speaker B: Yeah, I think from our perspective, you know, I would start with something probably simple. I like simple. I don't like, you know, having a dashboard with like, you know, 50 different numbers could be really confusing. But I think, you know, like, one of the things I would start off with would be like, how much cash did the business actually generate from operations last month? Not how much revenue, as we talked about, but actually how much profit was reported and then how much cash did the money or did the business actually generate? And then I'm not looking quickly. I'm checking to make sure that we don't have an accounts receivable problem where customers are paying late or not paying at all. So that could be something that could affect cash flow in a big way. And, you know, we might see, and we see this a lot, you know, with credit sales, you know, a company that offers credit sales along with cash sales, you know, with those credit sales not being managed appropriately, them not running an accounts receivable report, you know, where they can understand a little bit about what the buckets are, whether, you know, their customers are paying within 30, 60, 90, 180 days or not at all. That is like a basic report that I think most business owners should have so they can understand, you know, really where they're at for the most part.
[00:15:33] Speaker A: Yeah, that's a great point. And let's take it a little further down the P and L, right? We have the revenue. So if we were to look at the cogs, which is the cost of goods sold now, which ultimately drives your margins, what do you think? Or what is your take? Say the margins are shrinking. Where should an owner look first before assuming the answer is simply to like sell more, maybe hire a better sales team, what do you suggest we do?
[00:16:01] Speaker B: You know, it's interesting because, you know, many of the clients we work with, we find out that it's really a pricing issue. Believe it or not, many business owners are hesitant about raising prices. They feel like they're going to lose customers along the way. They Feel like it's a really uncomfortable type of feeling. Right. Nobody really likes to raise prices. But that's a big miss. That's a really big miss. Because when you are looking at your pricing equation, it's not just the profitability between your product price and your cost of goods sold that you mentioned, but it's all of those other fixed costs that you're using to run your business, whether it's paying rent, the fixed payroll, advertising, these type of things that are part of your running your business that needs to be incorporated also. And one thing that I see people forget a lot is their ability to pay themselves. Right. We're not in a nonprofit business here. We are in a for profit business. And one of the major criteria is figuring out how much do you need as a business owner on a regular basis.
[00:17:07] Speaker A: And you know, we are talking about pricing. And I totally agree with that because oftentimes I find myself having that conversation with clients where I go, if you do not put value to yourself and you do not portray that outwards, clients will not value you. So that's something I definitely want to make sure it resonates with the viewers. Don't be scared. Yes, there might be some initial, you know, repercussions of possibly losing a client here or there, but there are ways that you could work with, in collaboration with the CPA that you're working with experts like you and I, and we can come up with a methodology. You don't have to go with a knee jerk reaction where everything is raised overnight. You could have a gradual price increase, a systematic way of doing things. So that's. Those are all good points you made. And then the question I have about growth, let's now talk about a little happier thing, which we all get excited about. Growth. So how can growth itself create a cash flow problem if receivables, inventory, payroll, payroll taxes, all of that is not carefully managed? I'm trying to focus more on the fixed variances because we already covered the other direct costs.
[00:18:20] Speaker B: Got it. Yeah, I think that's a great point. And maybe what I'll do is I'll share maybe an example, you know, so like you can imagine like a wholesale distributor that normally sells like maybe $200,000 a month, suddenly a major retailer offers them a contract that could double their sales. Most owners would celebrate for that, right? It's a big win. But let's look behind the scenes of what really actually happens. Now that distributor needs to purchase additional inventory immediately.
They may need a warehouse space, they may need more employees Their suppliers want payments within 30 days, but the retailer pays in 90 days.
So the owner could be looking at a biggest opportunity in company's history and still not have enough cash to fulfill it. That's why I don't automatically get excited when somebody tells me that they want to double their revenue. My first question is, can your business actually finance the growth? That's the major part of what we look at in our annual growth plan when we go, we do with our clients. We start off every year with annual growth plan to really understand, you know, what are those expectations for the year, have they won any major contracts? You know, like you talked about, the fixed expenses, that's a key piece of it because those, those expenses are going to be there and you have to generate enough revenues to at least overcome your fixed expenses. So we need to have sort of that fixed expense line and what is that minimum amount of revenue to break even. So it's a good point you're bringing up.
[00:19:44] Speaker A: Right. And then in terms of the small and mid sized businesses that now use this forecast and they're using the cash instead of reacting to shortages after they happen, what are some of the practical processes these small and medium sized business owners, they can put in place so that they are well apprised of the situation?
I'll let you answer that.
[00:20:09] Speaker B: Yeah, I'm super visual. So like, you know, for me it has to look, I have to see it on a dashboard or some kind of graph or something like that before it really sinks in. So we try to implement very, something very similar for our clients and we use a 13 week cash forecast because it's simple enough for smaller businesses to maintain. And let's just say over the next four weeks you're expecting to collect like $250,000 from your customers, but you also pay $200,000 in payroll that's due at the end of the month. That means you're expecting to net 50,000 at the end of the month. Suppose one of those customers delays a $60,000 payment. Now suddenly you're looking at a $10,000 shortfall.
That's information you need today, not four weeks from now. So that's really where that forecast comes in really handy. It really helps us plan ahead, you know, really managing receivables a little bit better. Maybe negotiate some payment terms with our suppliers and you know, maybe just delay a purchase if necessary.
[00:21:07] Speaker A: Right. No, absolutely, totally agreed. And I truly believe looking at the cash flow is something we encourage our clients to do. The issue is, whenever they come to us, to your point, you talked about the top line. People get excited. And my question, the very first question is how much of that did you keep for your business and your personal in terms of savings, et cetera? So with that said, Harsh, we want to keep going deeper after the break because good financial management is not about drowning in the reports. Right. I want to look past those few numbers that actually improve decision making and how owners can use them to lead the business instead of just recording the past. We'll be back.
We'll be right back with more tips to help you save money, reduce taxes and make your finances work for you. Stay tuned.
And we are back. I am Divya Gill, CPA and your host of Guilty of Savings on NOW Media Television. Let's keep.
Welcome back. We are continuing with Harsh Chadha, cpa, a financial strategist, published author and accounting faculty member who specializes in making complex financial concepts practical and actionable for business owners. More data does not automatically create better decisions. The real advantage comes from knowing which numbers are meaningful, how do they connect and what action they should trigger. In this segment, we'll examine how financial reporting can be turned into a leadership tool by focusing on different metrics and KPIs called the key performance indicators, cadence, accountability and the questions owners should be asking of their financial professionals. So, Harsh, welcome back and let's continue our dialogue.
If an owner could consistently review only a handful of financial indicators, which ones would you prioritize and why?
[00:23:09] Speaker B: You know, for Divya, I think from my perspective, you know, I'd probably start with revenues, gross margin, operating profit, cash flow, which we've talked about, and the customer acquisition economics. But let me explain why I wouldn't just focus on revenue. And we've talked about that now before in a prior segment. But suppose, you know, you run a dental dental practice and your marketing agency is telling you it needs to generate 100 new patients inquiries last month.
That sounds pretty impressive. But let's say only 20 people of those hundred actually scheduled appointments, 15 showed up and maybe 10 became paying clients. That means if you spent $5,000 in advertising, your acquisition cost per patient was $500.
Now, whether that's good or bad depends on the lifetime value of those patients. But it's a consideration we have to have in our mind because when we look at marketing numbers and advertising numbers, the real goal is to see if we are being very effective in that type of advertising.
Our firm does a lot of front end work. So we don't do bookkeeping, we don't do audits we do a lot of work on the revenue side of it. So we're like looking at key metrics on how business clients can actually improve their marketing numbers to gain more clients. That's what we're really focused on. We create some software around that. So I think that or those are probably the tools that I look at on the front end.
[00:24:49] Speaker A: I think you touched. Based on the return on investment, the roi, is it actually delivering? Right. So that takes me directly into my next question. What would be some of the key KPIs?
I would be interested to know. What do you guys focus on? On the revenue and when it comes to gross margin, gross revenues and all of that.
[00:25:08] Speaker B: Yeah. So for us, you know, we are really focused on like the bottom line is what we look at. And we talked about the fact that, you know, what our owners want to have is they just don't want their business to be successful, but they want to have a mechanism to gain as much money for their own personal life. Right. Nobody is working really hard in their business, so their business can succeed on its own. They want to reward, they want to, you know, enjoy some of the rewards from all their hard work. So we start from that, actually. We start from that because I think one of the key questions, and Divya, you've probably seen that too, is, you know, when, when clients come in, they're. They're looking for a, for a tax answer, right? They think a tax saving answer is the answer when in fact, you know, we can actually 10 times their revenue. And now they have a huge amount of money coming through which can now can be used for retirement and many, many other options, both for the business as well as for personal, right?
[00:26:05] Speaker A: We all, we all see this, right?
When we are dealing with entity structuring as a part of tax strategy. We see clients who might be making a million dollars on their 1099 income and they're still not using corporate structures like S Corporation incorporate the C Corp. And then what they tend to do is they'll gravitate more towards sole proprietorship or they'll open up a single member LLC without understanding the LLC is a legal strategy, it's not really a tax strategy. Right. So those are the nuances that people run into and those definitely make a difference. And when you show them, hey, if you did this, you could have actually saved $50,000 in taxes that you actually did pay out. And the reaction is like flabbergasted, you know. So with that said, we are talking about financial reporting at a very deep Level. So how should financial reporting then change what you do with the dashboard and all the work that you do on the revenue end? How does that change as a company grows from that founder led business into a more complex organization?
[00:27:07] Speaker B: Yeah, that, that's another great question. I think, you know, when businesses are small, usually it's the owner who usually knows everything about what's happening. Right. They know their customers, they know their employees, and they know the expenses personally. But as the company starts to grow, that becomes impossible. You can imagine like a business with three locations and financial statements show that the company made $300,000 in total last year.
Sounds great, but what if location A made 4, 400,000, location B sort of broke even and then Location C lost $100,000? Without reporting by location, the owner may never really realize which one of those operations were successful and which ones were subsidizing the losses of another. And I think that's why financial reporting has to evolve. You need to be able to understand profitability by location, by service, by customer, segment, whatever is really driving the business. You also need some reliable forecast and accountability. And I think one of the challenges we see when we're helping growing businesses is addressing moving from basic bookkeeping to management reporting. That helps the owners actually make decisions. Because I think the larger the business gets, the more expensive it becomes to manage by intuition alone, right?
[00:28:27] Speaker A: Oh, absolutely. And you know, you touched two points and those are my favorites. I always talk to people, don't just be a bookkeeper, you know, my team as well. Get into the management reporting mode. Can you speak a little more to that? What's the difference? So that audience understands it.
[00:28:43] Speaker B: Yeah, and let me, let me even give you like a practical example around that. So a bookkeeper might tell you that, you know, payroll is increased from 80,000 to $110,000 a month.
And an accountant might even explain how that increase affected your operating profit. But I think when you're talking about high level CFO engagement, they should be asking the why questions, right? Like why has payroll increased and whether the business is actually getting an appropriate return, The ROI on that investment.
Did we hire the right people ahead of demand? Are our employees working overtime because our processes are inefficient? Or did we add a sales team that's going to generate significantly more revenues six months from now? I think those are completely different conversations. And that's where I think many smaller business owners maybe see a gap and they have someone recording the transaction, Some are preparing the taxes, but nobody's really helping them make that strategic financial decision. So I think, you know, hiring a fractional CFO or a financial lawyer, CPA really could fill that role.
[00:29:51] Speaker A: So while we're on the topic of hiring a cfa, a CPA or a cfo, a fractional cfo, to your point, what questions do you think audience or the entrepreneurs should be asking? Because they're like probably looking at us going, you guys are the experts, I don't know what to ask for. So what do you encourage them to ask when it comes to hiring somebody for this particular purpose?
[00:30:16] Speaker B: Yeah. And like you said, you know, like, I don't think that all financial professionals have the same objective or the same experience.
So, you know, you are, you have to ask the right questions to find out, you know, who's the appropriate one for you. But I think, you know, in general, you know, business owners need to start asking questions that are a little bit more forward looking. So for example, instead of asking how much did I make last year? It's like, why didn't I make more? Right. That's a probably much more interesting conversation.
Or they may even ask like, you know, which part of my business is generating the most profit? Or if I want to double my business in three years, what do I have to change?
How much cash would I need to really support that growth? Those are the types of questions and I think my favorite is what am I doing today that could become a serious problem when my business gets bigger. Right, because we see those problems, right? They continue to multiply if you don't take care of them right away.
[00:31:09] Speaker A: Right. Because you have to look at your process, you have to look at your systems, you have to look at everything you're doing.
And you know, and you also touched, based on the whole, we talked about a founder led decision making, but also thinking about succession planning. These are some of the things because you might not look further down at some point. You want to pave the way for the new blood to come in too. So these are the questions I would definitely encourage people to look into.
And then we also talked about the budgets and forecasts. Can we speak a little more to as to how owners can use the budgets and forecasts? We are moving past like just the profit and loss and the balance sheet and the cash flow and all the good stuff to budgets and forecasts. You talked about a 13 week rolling forecast. How do people use these without making them rigid tools where they get like pigeonholed rather than using it to their advantage?
[00:32:06] Speaker B: Right, great, great. Yeah, that and we see this a lot, right? You know, A lot of folks confuse a budget with a forecast, with an annual report, things of that nature. I think the biggest mistake, and we see this, people do this personally too, is they, they treat their budget as a, as something that's set in stone, right. It can't be changed. And, you know, they don't really look at the assumptions that are actually used to make that budget. Right. So if you own a home services company and you're, and you'll plan calls for like, you know, $2 million in revenue, you'll assume you need to generate a certain amount of leads, say a thousand qualified leads, to convert 30% of them into customers and earn an average of about $6,000 a job. So for the next three months into the year, your conversion rate is only 20%. Now you got problems. Now you're not quite reaching the conversion rate you were expecting. I think that becomes a little bit more of an issue. And then you start have to ask the next question of, you know, are we attracting the wrong customer? Do we have our prices too high? Is the sales team, you know, failing in the process? So I think it leads to a lot of other questions that you can see as you set your budget and see why you're off target.
[00:33:15] Speaker A: Great point. And in our final segment, Harsh, I want to bring up bring all of this together rather around the bigger objective, not just saving on taxes, but building a business that protects cash, improves profitability and creates financial strength that can last, thereby creating legacy for generations to come. We'll be right back.
And we are back. I am Divya Gill, CPA and your host of Guilty of Savings on NOW Media Television. Let's keep.
Welcome back to Guilty of Savings. Stay connected to this show and every NOW Media TV favorite live or on demand, anytime you like. Download the free NOW Media TV app on Roku or Apple and unlock nonstop bilingual programming in English and Spanish on the move. Catch the podcast version at NowMedia TV.
From business and news to lifestyle, culture, finance, law and beyond, NOW Media TV is streaming around the clock, ready whenever, wherever you are and whenever you are.
I am back with Harsh Chadhav, CPA partner at my Profit Gurus, for a final segment on how tax strategy, cash flow discipline, profitability and financial leadership can come together to support sustainable business growth.
The goal here is not to simplify or minimize a tax bill or make this quarter look better. The goal here is to understand how strong financial strategy should leave the company with more options, more resilience, and greater capacity to invest in what comes next.
The focus here is on integrating tax planning and financial management into long term wealth creation, reinvestment, risk management, and better strategic choices for business owners.
So with that said, harsh, how should a business owner balance the desire to reduce their taxes with the need to show healthy income, credit worthiness and reinvest in the growth?
[00:35:31] Speaker B: Yeah, you know, Divya, you had brought up the last segment, you know, that whole opportunity for legacy planning, right. Leaving your business for future generations or to sell it eventually. So I think all of that comes back to, you know, creating a valuable business that's part of the structure. And you know, I've seen owners make decisions, you know, that save on taxes, but they probably don't necessarily improve their financial position. You know, like for example, an owner might spend $100,000 in equipment primarily because they expect a tax deduction. But even that expenditure really just saves them $30,000 in taxes and they've really spent $70,000 still out of their coffers. So if the equipment isn't really going to improve productivity or isn't going to really generate any additional revenue, then why buy it?
So, and I think there's also another consideration, you know, you know, supply us. Suppose you're planning to apply for maybe financing next year, right? You need to think about your decisions and how they affect your cash flow, you know, your reported earnings, the financial information lenders use.
So now that tax deduction doesn't automatically prevent someone from getting a loan. But tax planning and financial decision shouldn't happen independently. That's why I like looking at the business as a whole. Sometimes the smartest decision is to reduce taxes, but other times it may be to preserve cash, pay down debt, or maybe reinvest something that generates a stronger return. I think the objective should be improving the owner's overall financial position, not just simply minimizing one line of the tax return.
[00:37:05] Speaker A: You know, there's some great points you raised. And my question is, in your practice, do you also walk clients through the impact, what that would have? As an example, we had a client who made great profit.
Bottom line looks very healthy. But when it came time to paying the taxes, they had no cash sitting around because they used all of it to pay down their loans. And the struggle the client had understanding was why couldn't I deduct the lenders lender related expenses? We're not talking interest expenses, we're talking about I paid down all this principal, where's the deduction? Have you had situations like this?
[00:37:45] Speaker B: Yeah, I think there's been plenty of situations like that. Divya. Where they really didn't understand maybe the tax nuances or even more so, the financial nuances.
You had brought up a really good example earlier, too, of the purchase of inventory and the fact that that's actually a balance sheet item.
The owner probably expected a big deduction, but in fact, it really didn't help them at all. But that's probably something where that strategic planning needs to come into play. We really need to have more examples where they can understand that maybe doing what sounds like a good investment or sounds like a good financial planning opportunity might not be as good as they think as they thought about it. So that's where they really need to connect back with their CPA and think through the entire strategy and make sure that, you know, they're looking at all the different facts and circumstances before they make that decision.
[00:38:36] Speaker A: Right. It's about the education part. Right. So what you do is in your practice, you take that time to educate that person, because then there are people who we like, we have in construction who, who don't want to pay any taxes, but they want to show very healthy income so that they can bid on the next contract with the defense of the government. So I totally understand. What are some of the signs that an owner has outgrown reactive accounting and needs a more strategic financial approach?
[00:39:02] Speaker B: I think one warning sign is when owners can't explain why their business isn't generating more cash. You know, they'll say something like, we're doing $4 million in revenue, but the business has never been better. But somehow there's never enough money in the bank. Right.
That's when I start asking questions, and I'll say, well, are your customers paying on time? You know, have margins declined? Or are you carrying too much inventory? Or, you know, maybe your expenses are rising faster than your revenue?
I think another warning sign is when every decision becomes a crisis. Right. The owner wants to hire someone, but they don't know if they can afford it, or they want to expand, but they don't know how much capital they need or they get a big tax bill. Right. And they have no idea where the money's going to come from. So I don't think these are bookkeeping problems. These are definitely more planning problems. And, you know, maybe with the. Like you talked about education, that's absolutely key. That's another role of a CPA is to provide that education so you can make better decisions.
[00:40:07] Speaker A: Absolutely. And while we are still talking about the education piece, how do you educate your owners to decide how to navigate through the available cash? You know, how to distribute it, how to reinvest it, and rainy day funds. My favorite, sitting them, sitting them down and walking them through, like the whole cash flow thing or just to reduce your risk so that you have enough money for payroll and rent. That's coming up.
[00:40:32] Speaker B: Yeah. And for us, we rely very heavily on the forecasting tool, that 13 week forecasting tool. I think what that does, it really gives the business owner kind of a bird's eye view of what's happening in the future and it forces them to think about it. I think, you know, like the feedback I got Divya from, you know, some of the owners who are very hesitant about using it initially, they said, oh, that's a lot of work. I don't want to really look at this stuff. But you know, when they started using it, they started really getting more enlightened. It's interesting because they would see like maybe a cash flow issue coming down maybe a month or two down the way, and then they would have that discussion with me as a cpa and we were able to plan and strategize and think about it and come up with some options and alternatives on how maybe they want to address it. So I think you're right on point on that. You know, I think that is probably an area, you know, where the strategic financial advisory.
[00:41:25] Speaker A: Great point.
And then in terms of the size of the firm, we are focusing more on the small to medium sized businesses. But in your experience, what financial mistakes do you see? When these companies follow what you're doing right, everything is going perfect, but then they start growing. Growth is pain. It's never easy. And it appeared successful with the model that worked till last year. But then how do you go about handling that? What do you see in your experience?
[00:41:51] Speaker B: Yeah, and that goes back to your earlier point about legacy planning. And I think one of the biggest issues I see is not so much a tax or a financial issue, but it is the owner's reluctance to give up pieces of the business because they feel they have to be involved.
And you know, when we have those discussions and I get it right, because if you, if it's your baby, if that business is your baby and you've seen it since its infancy and you've grown that business, your reputation, maybe your relationships with your clients, with your vendors, that goes back a long ways. It is really hard to let go because you never feel like somebody else can do as good of a job as we do.
But then we talk, like about what you said earlier about legacy planning, which is A big deal is. Now assume once again you have somebody who's a buyer who's coming to purchase your business.
Do they really want to buy you in the business or are they buying your business?
And the more automated your business can be where you're not as involved, I think that becomes a much more sellable asset. And I think that when you get owners, especially as they're starting to think about retirement, to think about it from that perspective, it opens their eyes. It opens their eyes and they learn that delegation is actually a really important skill. And you know, as great as we think we are, our skills are not replaceable and we can or not irreplaceable, I should say. And we have folks who are been with us for a long time that can easily take it on. And as a matter of fact, we can actually start to work on more strategic parts of the business versus some
[00:43:27] Speaker A: of the day to day, you know, harsh. As we wrap it up, I'm getting into the final question, which is a very important question here.
First, somebody who is watching the show and wants to start today, what financial discipline would you advise to follow at this point? And then if they want to reach out to you, what do you suggest? How do they get a hold of you?
[00:43:49] Speaker B: Sure. So I'll start off with the reach out piece of it, you know, so the best place to get ahold of us is on our website, www.myprofitgurus.com. right now we are offering a free annual marketing plan.
So usually we charge about $1,500 for it. For the end of the year special we're offering that for free. And that will allow business owners who are looking to really project their income over the next year or so. It'll talk about how paid ads and how organic ads as well as all the different features of your website can integrate and actually make you maybe pull you another five to ten clients a month. That's something we're offering right now for free. And the other things we're offering is a free website.
So if you're interested in getting that's a very professional website. And we find that that is one of the big missing links because most websites look pretty, but they're not converting websites. So we are offering that as well. And you can once again reach us at www.myprofitgurus.com.
now to your question though. And like, you know, the, the discipline piece of it, I like to tell them I start by figuring out, you know, actually what they want in their business. Right. To accomplish what they the next 12 months. And it's not just the revenue number as we talked about. And let's say your business is generating $1.5 million a year and you want to reach 2 million.
I want to understand what is your plan to get that $500,000? Where's it going to come from? Do you need 50 more customers? Do you need existing customers to spend more? Do you need to introduce maybe another service? Or could you even be pricing, improve your pricing to reach that goal? So I think we look at all of those different parts of it and it's whether it's employees or technology, we want to be able to discuss those opportunities with you.
[00:45:27] Speaker A: Perfect and harsh. But this conversation, it comes to an end because I thoroughly enjoyed it. But it reinforces something I want. Every business owner watching us is that savings are one of the most powerful, powerful tools when they come from better decision making and not shortcuts. When you understand your taxes, your cash flows, your margins and the financial priorities together, that's when you are able to gain that control that you need in order to run a successful business. Thank you so much for joining us today and I appreciate your time.
[00:46:01] Speaker B: Thanks for having me.
