How to Include Taxes in Your Business Forecasting

A business woman draws business forecasting on a whiteboard

As a business owner, it is essential to have a clear understanding of your finances. Your business forecasting plays a critical role in ensuring that your business is not only profitable but also sustainable in the long run.  

One important aspect of business forecasting is including taxes in your financial projections. Taxes are essential in every business transaction, and failure to consider them can have significant consequences. The failure to accurately account for taxes can cause a significant strain on your business’s cash flow. 

Do you feel that forecasting taxes is just another bureaucratic task that eats up your valuable time? Having a trusted advisor and partner, like Maximum Possibilities, can help you successfully complete your business forecasting while saving you the time and trouble of completing the work yourself. 

In this blog post, we will discuss how to include taxes in your business forecasting. 

Understand the Different Types of Taxes 

The first step in including taxes in your business forecasting is understanding the various tax types. The primary types of taxes in most countries are: 

  • Income tax – usually based on the income earned by the business and individuals. 
  • Sales and Use taxes – Sales tax is a government-imposed levy on goods and services at the point of sale. Use tax is charged on items bought without sales tax or from a non-taxable vendor, compensating for unpaid sales taxes. Both are revenue sources for states and local jurisdictions for public services and infrastructure. 
  • Payroll tax – a tax on the salary and wages paid to employees of the business. 
  • Property tax – a tax on any physical property the business owns.  

Understanding these taxes will help you determine the appropriate taxes for your business. 

Keep an Eye on Tax Laws and Regulations 

The first step in forecasting taxes is keeping yourself up-to-date with the latest tax laws and regulations that apply to your business. These changes can be significant and may come with additional tax liabilities or benefits. Therefore, it is essential to be in the know with these changes and appraise their impact on your business’s overall finances. 

Keeping updated on all the changes is itself a business challenge. This is why having a trusted partner is integral to every business owner’s success. When you have someone you work with whose responsibility to stay on top of tax laws and regulations, frees you up to focus on the other operational details of running your business. 

Project Your Business Income 

The next step in including taxes in your business forecasting is projecting your business income. You need to have an estimate of your business income over a specific period, such as a fiscal year.  

Projecting your business income allows you to estimate the amount of taxes you will pay based on your income. Without a clear projection of your business income, you may not be able to estimate the correct taxes to include in your business forecasting. 

Here are some methods you can use: 

  1. Historical Data Analysis: One of the simplest ways to project future income is by looking at your past performance. If your business has been operating for several years, you can use your historical data to identify trends and patterns that can help you make accurate predictions. 
  1. Market Research: This involves studying your industry, your competitors, and your target market to understand potential growth opportunities and threats. 
  1. Sales Funnel Analysis: By understanding how many leads typically convert into customers, and what the average spend per customer is, you can more accurately predict future income. 
  1. Scenario Analysis: This method involves creating different scenarios based on various factors such as market conditions, competition, etc., and then predicting the income for each scenario. 
  1. Financial Modeling: This more complex method involves creating a model that represents your business’s financial performance. This model can include various factors such as sales revenue, cost of goods sold (COGS), operating expenses, taxes, etc. 
  1. Growth Rate Projection: This method involves estimating the rate at which your business’s sales are expected to grow in the future. You can base this on past growth rates or on industry averages. 

Estimate the Taxable Income and Tax Deductions 

Once you have projected your business income, the next step is to estimate the taxable income and tax deductions. By estimating your taxable income and tax deductions, you can accurately calculate the tax owed by your business. 

Estimating taxable income and tax deductions for a business involves several steps and methods. 

  1. Determine Taxable Income: Taxable income is calculated by subtracting allowable deductions and expenses, including operating costs, depreciation, and interest expenses, from the business’s gross income. The result is the net income that is considered taxable under law. It includes wages, salaries, bonuses, and more.  Consult with a qualified tax CPA to assist you in determining the differences between book and tax income and how to estimate these.  
  1. Determine the tax rate: The next step is to determine and apply the tax rate that applies to your business. Apply the income tax rate to the sum of all the taxable income streams to calculate the income tax expense. 
  1. Taking Business Tax Deductions: There are several methods for calculating business tax deductions. The two most common methods of calculating the business percentage are actual expenses and the simplified method. 
  1. Tax Write-offs: A tax write-off refers to any business deduction allowed by the IRS for the purpose of lowering taxable income. 

Determine the Due Dates for Tax Payment 

Another essential aspect of including taxes in your business forecasting is determining the due dates for your tax payment. Tax payment due dates may vary and depend on the type of tax. Late payment of taxes can result in penalties, which can negatively impact your business finances.  

By determining the due dates for the tax payment, you can plan your cash flow. This will ensure that you have enough funds to pay your taxes on time. 

Create a Tax Planning Calendar 

A tax planning calendar is a useful way to help you stay on track with your tax forecasting and payment deadlines. Creating a calendar with all tax payment and filing dates, along with payment amounts, will give you a clear picture of when you should make your tax payments.  

Use Business Forecasting Software 

Business forecasting software can help you include taxes in your financial projections. The software integrates tax rates and tax laws into your business forecasting, enabling you to have accurate tax projections. The software can also help you automate processes such as tax deductions, tax payment reminders, and tax reconciliation, saving you time and money. 

With the right software, you can set up tax codes and categories to better understand how your taxes affect your business.  

Factor in Seasonal Changes 

Seasonal changes, such as during the end-of-year holidays, can affect your business cash flow and make tax payments difficult. Make sure to account for these changes in your forecasting to avoid any unnecessary surprises. 

Seek Professional Help 

As a business owner, your plate may already be full, and, as such, it may be challenging to take time away from running your business to forecast taxes accurately. An expert eye makes it easier to identify all the tax savings opportunities and provides you with expert insight. 

Business Forecasting with the Maximum Possibilities 

Forecasting taxes may seem like a trivial task, but it is paramount in ensuring your business’s financial success. Use the tips outlined above to gain a better understanding of how taxes affect your finances.  

Implementing these tips not only makes taxes easier to manage but also ensures that your business has sufficient cash flow to thrive. These steps will also help you make informed financial decisions and avoid penalties resulting from nonpayment of taxes. 

Maximum Possibilities is a trusted advisor that can assist with proper business forecasting. Call us today to discuss how we can help alleviate your stress while ensuring you’re best prepared for the future. 

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