Budgeting for tax season means creating a financial plan to prepare for tax obligations, payroll, and cash flow management. Budgeting for tax season can feel overwhelming and uncertain, especially for small business owners. But if you create a budget for tax season, you can navigate the time smoothly.
With a workable budget in place, you gain control over your finances. More than that, though, you do three things:
- Make sure tax payments are covered
- Plan for tax savings
- Simplify record-keeping
Why build a budget?
1. Building a budget covers estimated tax savings.
A budget helps you set aside funds throughout the year to cover tax obligations so you won’t have to scramble for money when taxes are due.
2. Opens up funds for operations and tax-saving accounts and write-offs.
With a budget, you can allocate funds to tax-saving options like retirement accounts or small business tax credits. You can also maximize your deductions, whether that’s for advertising, depreciation, or the purchase of equipment.
3. Finally, a budget allows you to simplify record-keeping.
A budget helps you organize your financial records, so you’ll have an easier time gathering the information you need to file your taxes. Budget properly to save time and reduce stress during tax season.
A budget doesn’t need to be perfect.
Okay, now that you know why you should have a budget, let’s discuss how to make one.
First, though, I want to say one thing: A budget doesn’t need to be perfect. It’s more important that it be workable.
You can’t predict the future.
Revenue and expenses can change unexpectedly. A rigid plan doesn’t account for that.
Make sure you have a flexible budget that allows you to adjust spending; this will enable you to prioritize the essentials without getting derailed.
You need three documents to build a budget.
Those three documents are:
- a balance sheet,
- an income statement, and
- a cash flow statement
These documents give you a snapshot of your financial health, highlighting assets, profitability, and liquidity to help you make informed decisions.
Step #1: Review your data.
Once you have your balance sheet, income statement, and cash flow statement, you can examine the numbers.
Your balance sheet shows your assets, liabilities, and equity. Your income statement details profitability and expenses. Your cash flow statement guides liquidity.
Step #2: Set budgeting goals.
Identify your priorities. If you want to grow, allocate funds for marketing or new hires. If you’re more focused on stability, make a goal like reducing debt by x amount. Just make sure your goals are measurable and specific.
Step #3: Create your budget.
I think small business owners should focus on two categories:
- payroll
- income taxes
They’re critical for financial stability during tax season. Make sure your budget for each is aligned with your business’s goals.
Allocate resources based on priority.
After addressing payroll and income taxes, focus on other categories based on your needs. Maybe that’s cash flow. Maybe that’s debt reduction.
Choose an approach.
There are a lot of different approaches — percentage of revenue allocation, historical data-based budgeting, and project-based budgeting, among others. Each approach gives you a different way to divvy up resources, depending on your situation.
Step #4: Assign accountability.
Choose someone at your organization to manage the budget. You want to make sure they regularly track fixed versus variable costs, the stability of income sources, and the impact of loans or debts on your financial situation.
That person could be you — whoever you choose, make sure there’s accountability with your budget.
You can get help with QuickBooks Online (QBO).
Small businesses should use the right tools to be efficient and increase accuracy. QBO is a great software option for small businesses to budget for tax payments and payroll taxes.
QBO integrates with bookkeeping and accounting tasks, allowing you to track income and expenses automatically and estimate payroll taxes and other liabilities. A professional QBO set-up from a qualified CPA firm will not only get your business started with correct bookkeeping and accounting, but provide for future integration with tax professionals, and vendors, as well as transparency with investors.
But you don’t have to use QBO if you’re more comfortable with other software. Many small businesses have success with Xero, Freshbooks, or Wave.
Get professional support budgeting for tax season.
If you’re considering adopting a specialized budgeting approach—like aligning your budget with growth goals or adjusting it based on fluctuating revenue—consulting a tax advisor can help ensure your strategy is on track.
Even if you’re not taking a specialized budgeting approach, it’s a good idea to consult a tax professional if you have any budget-related questions.
Focus on short-term budgeting for tax season.
Tax season is coming up. For now, take a short-term approach geared toward your immediate needs. Make sure you have enough funds to cover operational expenses.
Concentrate on taxes, payroll, and essential bills to stay prepared without overcomplicating things.
Then, move to long-term budgeting for growth.
After tax season, focus on long-term financial planning. A strategic budget helps your business manage resources and grow.
We’re a Fort Worth-based CPA with more than a decade of experience helping businesses like yours succeed.
If you need help with your budget — any help at all — schedule a discovery call with us today. We’ll put you on a clear path for your tax season budget.