By L.Kenway BComm CPB Retired
Updated April 29, 2024 | Revised April 18, 2024 | Originally Published on Bookkeeping-Essentials.com in February 2009
How To Get Started | No-Tech Option | Low-Tech Option | Affordable Tech Option | Simple Cash Management System | Owner's Pay | Wrap-up
If you keep your books solely for year-end and tax preparation purposes, tax experts suggest you establish this simple method to meet this requirement.
It can be especially stressful when year-end and tax preparation comes around. Even more so if you developed the bad habit of ignoring your bookkeeping throughout the year. Here are the steps to remove some of the stress from tax time:
What this method requires:
Step One: At the beginning of each calendar year, refer to your prior year T2125 Schedule. Take a file folder (or envelope) and write on the front - the year, the tax line number from the T2125 Schedule, and the expense name. Do this for every line you used on last year's T2125 Schedule or expect to submit a tax claim on this year.
Step Two: Throughout the year, place all your corresponding business receipts in the appropriate file folder.
Step Three: At the end of the year, run a tape listing (or tally in an Excel spreadsheet) of every receipt for each file folder. Write the total expense for that line on the outside of the file folder. Insert or staple the paper tape listing to the inside of the file folder.
1. You could go low-tech and create these folders on your computer for the receipts. Instead of filing paper receipts, you will take pictures of all your receipts and store them in the electronic folders you created. It ensures your year-end and tax preparation will be a breeze!
2. Use an Excel spreadsheet instead of a tape listing calculator.
Step Four: Keep all file folders pertaining to one tax year together in a box. If you are audited, you've got everything you need to support your return.
Why It Works: It is a simple, low-tech way to keep and get your tax information ready for your tax preparer.
Drawback: It makes it onerous for your tax preparer to determine if all your deductions listed are allowable. You really need to be on top of knowing the rules.
It's also not the best way to implement good bookkeeping practices in your business. It does not provide information on whether you are making money or not. You could work around this if you are willing to use several bank accounts to manage your cash flow (see below).
Other Filing Options: Consider other low tech filing organization options if you want to use your records to help you run your business.
If you want to have access to your historical information in the future to assist with strategic planning, you could use a program such as QuickBooks Online (QBO) Canada - Self-Employed version like a calculator:
What this method requires:
At Year-End and Tax Preparation Time:
Instead of running a tape listing, you would print out a QBO report (in PDF format if you want to be paperless) for each expense line and place it in the file folder.
If You Don't Want To Use Bank Feeds: Just set up a bank account called Cash and be sure to enter all your sales through Sales Receipt form and pay all bills through the Cash account using Write Cheques form. You won't have a set of books prepared in accordance with Canadian ASPE (Accounting Standards for Private Enterprise), but you should have all the information you need for your tax preparer to file your tax return.
Best Feature: Organizes your receipts in the cloud to manage your tax deductions so you are audit-ready. It makes year-end and tax preparation relatively painless.
What's Great About This Option: You could have reconciled bank and credit card statements. This shows your tax preparer you have captured your income and expenses.
Who It's Not For: This version of QBO is not for businesses that have employees or need to track QST.
MORE >> Be Audit Ready If CRA Examines Transactions Between Family Members
Self-employed business owners who only do their bookkeeping sporadically or for year-end and tax preparation need a method to manage their cash flow. Cash is what keeps your business going. This system helps with that. It gives you a clear picture of your cash position at the start each day allowing you to get a feel for your cash flow trends and whether you need to change your plans.
How does it do?
By prioritizing profit generation, not generating sales; by setting predetermined allocations for the cash coming into your business. Mike Michalowicz's book Profit First outlines a system for managing your cash flow to prioritize profits ensuring you are not living in entrepreneurial poverty. To implement this financial management system based on human behaviour (which is why it works), you need to create your TAP.
Who is this system for?
What is TAP?
TAP stands for targeted allocation percentages. They are predetermined percentages of your incoming cash flow allocated to different bank accounts. It puts many of your cash management decisions on autopilot.
Why is TAP important?
TAP helps you prioritize profit and is a way to achieve financial stability for your business. It allows you to allocate your hard-earned revenue in an effective, efficient, not wasteful manner. If you want to emphasize growth over profits, then tweak your TAP to achieve that goal.
Basic steps:
Step 1: Determine your TAP (target allocation percentages)
While every business is different, service-based businesses usually have higher profit margins than product-based businesses. You may need to review your financial statements (or last year's T2125 Schedule) to determine where your business currently sits. Here is a good starting point that you can then tinker with until you get something that fits.
As your business grows or you become more comfortable managing your cash, you can add other target accounts, such as a capital expenditure account, a debt repayment account, a marketing account, or a rainy day account.
Step 2: Open six bank accounts.
Think of the bank accounts as similar to the old envelope personal budgeting system, which used an envelope for each saving/spending bucket. Here, you will be using bank accounts instead of paper envelopes.
Step 3: Twice a month, you will allocate your TAPs from the incoming cash bank account to the other five bank accounts. One suggestion is the 10th and 25th of each month, or you could do this weekly - whatever lets you feel in control of your cash.
Move your GST HST funds collected first before calculating your TAP. This money is held in trust for the government and should not be used to fund business purchases or personal lifestyle expenses.
Don't pay attention to the amount being transferred at the start, even if it's just 25 cents. Don't tell yourself it's not enough to make a difference so I'll just skip it. Just make the transfer. You are establishing habits. The amounts being transferred will grow. Consistency and discipline is what makes this system work.
Step 4:
Pay yourself on a regular basis. It could be weekly, bi-weekly, or semi-monthly. I suggest semi-monthly on the 13th and 28th of the month.
Here's how it would work:
Options:
One method (shown above) is to forgo a pay cheque if there are not enough funds to cover the entire pay due. The remedy for this is fine-tune your business by finding ways to reduce expenses or increase sales. The theory is not receiving a pay cheque will motivate you to work at making your business more efficient to ensure you always receive a pay cheque. This wouldn't work for me personally.
Another method would be to seed the bank account for your first pay cheque at the start before you begin applying TAP. It gives you a head start to funding the account properly. If you set your TAP properly, you shouldn't have any shortfalls. Remember you can tweak your TAP quarterly, so maybe you get paid less during your slow season initially until you have built up a reserve. In the example above, if the account had been seeded, no pay cheques would have been missed.
Step 5:
At least once a quarter, in addition to making quarterly payouts, you will review your TAP and decide if you need to make any adjustments. You will also adjust your TAP immediately if there is a significant event.
Things to keep in mind when you review and tinker with your TAP:
What's Great About This System:
It effortlessly manages your cash, so you are always in control of your finances, even if you are behind in your bookkeeping. It will likely make your year-end and tax preparation easier. Putting your money decisions on auto-pilot actually reduces some of the stress in your day as you don't have to think about it, you just do it. It lets you exhale so you can just breathe.
If your personal finances are in a mess too, you can setup this system for your personal finances as well.
Discipline Required:
Joey Ragona has an excellent YouTube video on how to implement this system.
Disclaimer: I am not a certified Profit First Professional or associated with Mike Michalowich. I just like the system and introduced some of my client's to it. Get Mike's book to learn more about the system.