All too often we install the security cameras after we are burglarized; start carrying pepper spray after an assault. Business owners, large and small, face heightened risks in our modern world and reactive security plans do not cut it. A proactive plan can prevent the breech before it ever happens.

Small business owners, income property owners and even people with a side hustle need to have a security plan. It’s not only a big business problem. Some businesses are required by law to have a security plan. For example, the IRS requires tax professionals to have a written security plan that is updated annually. Those selling securities or insurance, banks and other financial institutions have similar requirements. 

Whether your industry requires a security plan or not, you must have one. In this post we will start with a short discussion on security plans for tax professionals and accountants because that is the demographic this blog serves. I will then share where the detailed security plan nearly failed in my office and how we shored up our procedures to protect employees and clients. Then we will discuss implementing a security plan for your business, regardless the field you are in. I will point out the benefits of a security plan for even as innocent a side hustle as dog walking. If you never need to test your security plan in real life, all the better. But if fate comes knocking I want you, kind readers, to be prepared so risk is reduced. 

I’ll close this post with a side hustle opportunity.


Security Plan for Tax Professionals and Accountants

I will start with my industry because we are a prime target due to the information we handle daily. Too many tax offices are light on the security issues over cost concerns. Security isn’t always a heavy expense, though tax offices are finding security a rising expense. Avoidance is the most expensive choice. A security breech virtually guarantees the death of the small tax or accounting practice as trust is forever lost.

The IRS requires a minimal security plan for offices preparing taxes. As a professional I take exception with minimal effort in any area of my business. However, small tax practices, as well as those with a side hustle, should consider the IRS plan as a starting point for building a security plan.

Protection of data is the number one issue businesses need to address. Tax preparers handle large amounts of sensitive data; data security has to be a top priority. 

Protecting data is not just about a secure computer system. Training ALL employees on procedures for handling information requests is a must. Malcontents look for the weakest link in a firm to extract data or to access the corporate computer systems. Untrained employees are the weakest link. Once trained, you need to test your employees to determine additional areas needing more training. 

Information, regardless how minor, must NEVER be disseminated without a proper power-of-attorney on file! Remember, the POA doesn’t mean all data is available, only that which has been authorized. 

Measures should be taken so no one else in the office can overhear a personal conversation. A dedicated conference room with sound absorbing material on the walls is valuable if you have a room for such a purpose. Office doors should be closed when confidential conversations are in progress.

Data security is the real issue here. Safeguarding your data is vital. One data breech and your practice can be gone. The cost to recover for a small business is too large in many cases to survive the attack.

The IRS has guidelines in this matter. Your data security plan should:

  • Include the names of all program managers. This would include outside IT companies used to secure your data.
  • Identify risks to customer data.
  • Evaluate the risks and current safety measures.
  • Design a program to protect said data.
  • Once the plan is created it must be implemented and updated.

The data security plan in my office runs over 30 pages and covers every conceived risk to client data with redundancies built into the system. Protecting the client is the highest priority in my firm.

This blog makes my firm more visible so I take added measures. This can be a large burden for small tax firms and those just beginning. Drake Software (the commercial tax software I use in my office) has produced an excellent tool for building your required data security plan. The Drake template is a comprehensive plan useful for most firms. I will not show any details of my actual plan as it contains proprietary information and publishing the safeguards would give scammers too much information to attack my firm. 

The Drake Software Tax Office Security Plan can be had here without cost:

Drake Software Tax Office Security Plan and Sample (1)

The template is also an excellent tool for any small business or side hustle handling client information.


Personal Safety

Now I want to turn to another area that needs consideration: personal safety. In my office I have taken steps to protect my employees from personal harm should a client become aggressive or in the event of a robbery. Workplace violence is real and a common fare in the news feeds. Proactive is the only way to go.

As much thought and effort as I have put into safety and security measures, we still had an incident earlier this tax season we all can learn from and the reason for this post.

Let me first share the post I made in a Facebook private group for tax professionals before I share my solutions:

This is NOT a rant! Rather, this is how to handle a difficult situation safely and correctly.

A client from 20 years ago returned. He was a bit weird in his recordkeeping, wanting us to only scan what we needed and give his stuff back before he left and before we prepared the return. He also wanted us to put documents back in the envelopes they came in.

Not a normal client, for sure, but nothing that would cause too much strife. We can humor a client if they want documents back in envelopes and scan documents and return them prior to preparing the return.

He picked up his return last night and it was reviewed with him. However, he didn’t give us all the tax documents — he was too concerned with his filing system than with accuracy. He discovered the error last night after he left.

He is waiting at the office this morning. An employee who always comes in early to get the office organized before opening was confronted by this client. He tries to push his way into the office.

Let me be clear. This is a female employee with a man pushing in behind her where she would be caught in a small locked foyer area if he succeeded. (We have double doors, double locked for security.) The employee was scared out of her mind obviously.

She managed to keep the client out. She called the police and then called me.

We had some snow last night and I live 20 minutes away in good weather. The snow made the highways worse than the side roads so it was slow ride in.

The police came and made it clear he did something unacceptable. The client left before I arrived.

When I got to the office I heard the employee’s story and believed her story. The client forced his arm into the door so she couldn’t close it and tried to force his way in. If he would have succeeded it would have been tight quarters and even more frightening for the employee.

The client told the employee he was going to get her fired.

I called the client and got his story. His story was he did nothing wrong, of course. Well, until I reminded him I have many security cameras inside and outside the building and that I would review them later today. Then he changed his story, saying he might have tried to force his way in.

I told the client he is fired. I will not cash his check and will not file his return. He is no longer welcome at my establishment.

My employee absolutely did the right thing in calling the police first and me second.

The employee will NOT be fired or even reprimanded. She did everything by the book. No employee of mine should ever feel unsafe in my business. EVER!

It ended with one less client. But no one client is worth it: rude behavior, threats, mistreating employees, cheating on taxes. We are professional people. You should always feel safe at work and home. My office took time this morning to review with all employees the course of action if they ever feel unsafe. The client doesn’t always come first; my team does. Without my team I can’t serve clients.


To start, if this happened at a bank there would have been an arrest. But the police, like much of the public, don’t consider most businesses all that important so they act as if nothing bad has happened until it gets very serious.

Another point to make is that the client hounded my employee that he would get her fired. Threats and intimidation don’t work with me. That is instant ground for removal from my client list.

This isn’t a good policy for tax offices only either. Personal safety is “the” priority always! If you have a side hustle walking dogs you might not need a data security plan, but you do need a personal safety plan. Your plan needs to consider procedures if you or someone else is bitten by one of the dogs in your care, if a dog escapes or if you are attacked by another person while walking dogs. Your plan might include carrying pepper spray and a mapped out route for walking dogs where there are plenty of lights and people present. Safe places along the route should be identified in advance.

The incident in my office revealed one large flaw in my security plan. Employees came in the front door — the same door clients come in. If a client arrives early they can be to the front door before the employee. This is bad. Many early arrivals have no appointment and need to wait until the office is ready to open. Unfortunately, not all have this level of common sense.

I mentioned if this happened at a bank the client would have been arrested. Pushing into a bank behind an employee outside business hours would bring a heavy response from police. But the police didn’t take it as seriously because we did something very different from banks. Bank employees have a separate entrance where it is more difficult for a client to get to as fast as the front entrance. 

My office has side doors! After a review with employees, we set a policy that employees will now use a separate side entrance at all times. If this policy had been in place, my employee would never have had the problem outlined above.


When to Build Your Security Plan?

We can be proactive or reactive. My office’s detailed data plan is an example of good proactive planning. The side door policy for employees is an example of reactive planning. Proactive would have been better.

Tax offices are required by law to have a data security plan. It makes sense to include a personal safety plan for employees at the same time. 

Regardless your business or side hustle, or the size, you need a security and personal safety plan in place. If you handle data, you need a data security plan. Everyone needs a plan for handling the myriad scams and spam calls. Data security and personal safety plans are a must.

The Drake outline is a comprehensive plan for tax and accounting firms. It also is a good starting point for other businesses. 

But it is only a starting point! Your data security and personal safety plans must be reviewed and updated regularly to be effective. Even the best plans have no value if not implemented. And even the best implemented plans will have holes as I found out this tax season. This is not a “set it and forget it” activity.

Security plans must evolve. Society changes, risks change, new risks are discovered. Your security plan must be proactive with the ability to be reactive when a flaw is discovered. 

Businesses face greater challenges than ever before. Not long ago the greatest risk was burglary. Now, scam artists from anywhere on the planet, have an equal shot at harming your business. 

Protect your data, protect your clients and employees. Backups and layers of security measures are the brave new world we live in. We can navigate these waters, but it takes effort. 

And my clients, my employees, are worth the effort.


If interested in a side hustle idea, consider security planning for businesses. Here is some additional reading on the subject:



More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Two major tax increases are about to crush middle class Americans. The first tax increase has already been passed into law and will soon go into effect. The second massive tax increase is more sinister. The amount of the increase has yet to be determined, but we can get a good idea how much will be pried from your wallet if you don’t take steps to defend your wealth.

The Tax Cuts and Jobs Act of 2017 (TCJA) lowered taxes for the vast majority of individuals and regular corporations. There were a few losers. Taxpayers with high state and local taxes (SALT) found their deductions declining faster than rates fell causing a sharp pain behind their left eye on April 15th.

Other taxpayers feeling the pain of a tax increase include truckers, sales people, artists and others with work related expenses. Unreimbursed employee business expenses were eliminated. Truckers (and others) no longer can deduct their work expenses. The TCJA hurt a large number of hard working Americans. Even the mortgage interest deduction was slightly curtailed. Not as many felt that sting, but all the same, the TCJA was uneven in reducing taxpayer liabilities.

Regular corporations saw the biggest benefit. Corporations now have a flat 21% tax rate. Except for corporations with less than $50,000 in profits, this was a tax cut.

Small business owners fared well, too. The qualified business income deduction (QBID) lopped off 20% of profits from the taxman. Income property owners also benefited from QBID, but with a different formula. 

Here is where is turns ugly. Regular corporations saw a permanent cut in rates; individual tax cuts were only temporary. Truckers might find the reversion back to 2017 tax rules in 2025 a reprieve. The bulk of taxpayers, however, will see a serious tax increase. 


Planning for the Inevitable

Rumors have surfaced that a Tax Cut 2.0 is in the works where the temporary tax break for individuals would be extended another 10 years to 2035. The treasury will suffer a $1.4 trillion reduction in tax collections over the time period involved if this is the case. Regardless, the proposal will not pass prior to the election and once the election is past, promises are less likely to be kept.

I place the odds of taxes reverting to 2017 laws at 80%. That assumes taxes are not hiked earlier after the election when the new Congress sits with whomever wins the White House. The odds the temporary tax cuts for individuals get extended to 2035 is less likely at 20%. More on this in the second tax increase discussion below.

Several tax planning opportunities exist under the temporary rules. The amount of long-term capital gains taxed at 0% is much higher right now. Those affected by the SALT limitations need to throw out old tax theory until rules revert back to before the TCJA. Tax brackets are lower and extend to higher income levels. These and other changes from the TCJA mean you must be multi-year tax planning or you will seriously overpay your taxes.

Here are some of the things you need to consider when reviewing your long-term financial planning as it involves taxes:

  • Forget old rules of accelerating deductions and delaying income. It doesn’t work for individuals in most cases anymore. Preserve those deductions as long as possible in anticipation of the old rules kicking back in where they have more value.
  • Business owners need to forget the above rule as well. QBID has turned that philosophy on its head! Business owners — and to a lesser extent, income property owners — want to accelerate income and delay deductions, especially when the end of the temporary tax cuts approaches. Business owners get up to a 20% non-cash deduction on profits under current tax law. 
  • Truckers, musicians, sales people and anyone else with large amounts of unreimbursed employee business expenses needs to think of ways to delay some of those expenses. I understand it is hard to delay many of these expenses and here is an alternative. You must always be aware of any costs you can defer. If you can slip it far enough into the future the expense might reduce future taxes, whereas, they have no current tax benefit.
  • Pay property taxes as late as possible without incurring a late fee. Preserve as many SALT deductions as you can. At some point these expenses will potentially regain their larger deductibility. Pay at least $10,000 of SALT since that amount is deductible if you normally itemize. Otherwise you want to push out as many SALT expenses as possible for as long as you can. Once again, the idea is to preserve as many deductions as possible for when they could regain deductibility.
  • The 0% tax bracket for long-term capital gains is very high at this time. Tax loss harvesting might be the worst idea at this time. Tax gain harvesting has some powerful incentives while the TCJA remains in effect for individual taxpayers. Locking in gains at 0% or even 15% could amount to serious tax savings.
  • Be sure to consider the other effects your actions will have on your tax picture. While you might enjoy a 15% long-term capital gains rate with tax gain harvesting, you also need to consider the Net Investment Income Tax issues if you take this to higher income levels.
  • Lower income taxpayers also need to consider Social Security benefits. Accelerating income might increase the amount of Social Security benefits subject to tax.

There are many additional tax planning options under the TCJA. I encourage a serious conversation with a qualified tax professional to maximize your benefits. (Wait until after tax season before jumping every tax professional you know so they can get their tax season work completed in a timely fashion.)

Virtually nobody is thinking long term with these tax issues. Nearly every client in my office is getting advice that will affect them in future years and the dollar amounts are not small. Consulting clients find I am drifting strongly toward multi-year tax issues. Saving money today is not enough! How much you pay in tax for all years is a far better planning strategy!


The Second Secret Tax Increase

The first tax increase discussed above is fairly easy to plan since the rules are defined, at least for now. The rules might change, but the concepts will remain static. Under current tax laws businesses want to accelerate income in most instances and defer expenses to maximize QBID or the lower corporate tax rate. Individual taxpayers want to push out certain expenses to the future where they might have some benefit.

The second tax increase is harder to quantify and involves some logic and deduction. We know the tax increase is coming, but the timing and amount is uncertain.

Estimated federal government revenues for the 2019-20 fiscal year are estimated at $3,644.8 billion; outlays are projected at $4,745.6 billion. (See tables.) This leaves us with a projected deficit of $1,100.8 billion. This gets added to the credit card, aka the national debt which is now over $23 trillion. The actual deficit will be different, of course. It could be better or worse. In any case, the amount of debt being added is huge and these are economic good times. What happens when the economy slows?

At some time the party will end. I refuse to call an expiration date because many people much smarter than I am have called it wrong up until now. What we do know is this cannot go on forever. Eventually the price will be paid. Inflation or lack of confidence in the government’s ability to repay the debt will effectively end the party. If the government can’t support the debt the house of cards collapses.

The national debt in and of itself is not bad. If the debt rises at less than the rate of economic growth the debt would actually be getting easier to support. Unfortunately, the debt is rising faster than economic growth currently. Therefore, the national debt, as a factor of GDP, is growing. That is unsustainable. The only question is: When will it end? And will we regain fiscal sanity before the forces of nature enforce it upon us?

A closer look at the federal budget will outline the seriousness of the issue and why it will end sooner rather than later. 

We have an estimated revenue for the federal government of $3,644.8 billion this fiscal year. We will assume this number holds true for our examination and no recession makes an appearance. Most of the revenue comes from personal income and payroll (Social Security and Medicare, aka, FICA) taxes. (Table 5)

We need to make some logical conclusions on where the nation’s finances are headed and the likely consequences. The real question is: How many bills can be paid with $3,644.8 billion of revenue?

Looking at Table 6 we see the biggest expenses for 2020, in order, are: Social Security, national defense, Medicare, health, income security and interest on the debt. If we drop income security to zero and forget every other item on the spending side of the budget we can balance the books! Of course that means TSA is gone. Just think! No more waiting in line to enter a plane. Very convenient. No more Ag Department. Yeah, food will go unregulated. But the corporations will take care of that just fine. Right? No more R&D, no more housing or FHA loans, no student loans, no development, no international or wall on the southern border, no energy, no immigration policy. It would be funny if not such a serious issue.

All that remains are Social Security and Medicare, national defense, health and interest on the debt. Obviously we can’t cut spending close to enough to balance the budget. Well, unless you want to cut Social Security and/or Medicare. But do we still collect the payroll taxes for these expenses if we no longer provide the benefit? So Social Security and Medicare are a nonstarter. 

We could default on the debt and refuse to pay the interest. But, that would destroy American banks and insurance companies. Also, we would never have the ability to borrow again regardless the crisis, so we probably should pay the debt.

Maybe we can cut national defense? Is there anyone in the room who wants to cut the military the amount needed to balance the budget? We could save some by reducing waste. Unfortunately, there isn’t enough waste to cut to solve the budget deficit problem in more than a token amount.

Then we come to health. Well, America has such an enviable health care system it can take come cuts. We are the most expensive in the world and no longer rank in the top 25 in most surveys of health. Besides, a little coronavirus never hurt anyone. Again, this is no joke. We could make meaningful changes to medical care to reduce federal spending and for individuals as well. Still, it will not be enough to stem the red ink.

Obviously this does not work. We can’t cut government spending enough to come close to balancing the books. And all the money printing hasn’t given us economic growth above 3%. The only remaining variable is taxes. Whether we like it or not, they will eventually go up in the near future. (For the record, I like lower taxes. Don’t take my conclusions as wanting higher taxes. My job is always to help clients pay the least tax by law.)

How much will taxes have to rise? We don’t have to cover all spending. If the national debt climbs at a slower rate than economic growth the debt becomes easier to manage in the same way Bill Gates can manage a million dollar mortgage better than someone in the middle class. 

If we assume (I know, I know) inflation hovers around 2% and real economic growth does the same, we get nominal economic growth of around 4%. Yes, that means the national debt can grow around $920 billion per year without the national debt becoming a larger burden compared to the size of the economy. 

There are two issues with my simple analogy. First, it assumes interest rates never climb and forgets about the unfunded liabilities (Social Security and Medicare, most notably) facing the federal government in the near future.

A $300 – $500 billion tax increase could solve the budget problems for the foreseeable future. We would still run large deficits, but if the economy kept growing it would not be a serious issue. The national debt looks big because we are largest economy on the planet. 

There is no doubt sovereign debt is climbing worldwide. U.S. debt is also piling on rapidly. At some point, under the current system, we face a fiscal crisis. A recession throws my modest proposal out the window and balloons the debt fast. Taking steps while the world is wonderful and kind economically makes sense to this weary old accountant.

Taxes will go up. The federal government has shown no desire to stop spending. Individuals received a temporary tax cut only. And still, to fulfill all the promises the government has made will require more money. And you can’t just print it out of thin air unlimited. At some point Uncle Sam will eye your wallet.

There are 6 tables for your review in this post. You can come to your own conclusions with the data. I spent a lot of time playing with the numbers. I will be interested in your prediction for future tax rates and the steps individuals can take to reduce the bite. You can read more about how the federal budget works here.




More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Business owners are in trouble. Income property owners, too. The demands of running a business or managing investment properties has reached an all-time high and banks are demanding more detailed financial statements than ever before. And therein lies a side gig opportunity with high income potential.

Every tax season my office sees hundreds of financial statements prepared by the client or their staff. You can’t imagine the mess most are in.

The client always thinks they are doing an awesome job of keeping their books. . . until they need a loan and the bank is less willing to decipher their books than the accountant.

The ability to read a financial statement is a powerful wealth building skill. You can detect fraud, analyse an investment and manage business liquidity. 

Banks will not spend time trying to figure out a mess. It is easier to pass. If the funding required is significant pristine records are not an option.

In short, reading a financial statement is a requirement for wealth building and business management. The financial statements tells you how the business is doing and the direction it is heading. Often, the financials will indicate problems before they are apparent in the real world. These festering problems are easier to fix when they are still small.

Reading financial statements are a good opportunity for you to generate extra income. It can even be a high-paying full-time business. Understanding how money works requires you to understand how money is recorded and that means financial statements. The number of business owners looking for help in securing a loan is a business opportunity that starts with the ability to read financial statements.

Buyers of a business are investing serious money and definitely need help understanding the value of the investment. Real estate buyers the same.

Accountants and attorneys are an obvious choice. However, many do not handle this kind of work. As a specialist, you can solve a business owner’s financing problems while earning an excellent income.

We will now review the three most common financial statements: the balance sheet, income statement and cash flow statement. The examples used are filled with errors I see in my office frequently. You can find more errors than I discuss as I added plenty.

By understanding common mistakes business owners make you can become familiar with the issues and become a value added service. Good financial statements (good records) are not an expense! Clients seeking help improving their records will be more profitable and therefore, a long-term client.


The Difference Between an Income Statement and the Balance Sheet

This may come as a surprise to you, but very few people know the difference between an income statement and a balance sheet. And don’t get me started on the cash flow statement.

I see clients recording entire loan payments as an expense on the income statement. For some reason they know loan proceeds are not income because they don’t want to be taxed on that money. However, when it comes time to pay the loan they think the whole payment is an expense (and deductible). It isn’t!

Loan proceeds go on the balance sheet, of course, as a long- and/or short-term liability. If you require detailed records for a business sale, purchase or bank loan, you will need to separate a loan into long-term (amounts due in over one year) and short-term (principle due in one year or less). If the business is small the owner may not want to separate the loan into long- and short-term. In those instances the loan should be recorded as a long-term liability. (The correct way is to list long- and short-term. In no way do I feel the shortcut of listing all loans as long-term acceptable.)

Loan payments have three entries in a general journal: cash out of checking (balance sheet), principle portion of the payment (balance sheet) and interest payment (income statement). As all accountants know, only the interest is an expense. 

If you can clean up this one issue you will save more businesses than you can imagine. If your client is making this mistake you may need to junk the entire set of books and start over. The books are a mess and in no condition for a banker or the tax accountant. (Tax accountants deal with this all the time and if the books are bad enough and the client unclear in explaining what they are doing, taxes can be wrong as well. If you give your tax accountant clean records she will save you money in taxes versus wasting time trying to ferret out what your numbers really are.)


QuickBooks Does Not Make You an Accountant

The biggest mistake business owners make is thinking QuickBooks makes them a good bookkeeper or accountant. This is about as true as saying TurboTax makes you a tax professional. If you believe that I have some cheap ocean front property to sell you in Montana.

The only thing QuickBooks lets you do is dig the hole faster unless you understand basic accounting. 

As we review the following financial statements you will see some of the crazy things tax professionals see every tax season: balance sheets with equipment and no accumulated depreciation and negative numbers where they don’t belong. (Yes, I know contra accounts happen. But negative petty cash?)

I gathered financial statement issues from multiple sources and introduced as many issues as I could in one set of financials. I started with a sample account QuickBooks provided in an older version to construct this monstrosity. I have seen worse unfortunately, but this will do for our needs. 

Do not focus only on the errors. Keep a keen eye on issues the financials expose. Getting the books in order before presenting to a bank is vital. Once the bank (or investors) start expressing concerns over the financials they start to lose confidence. Deal with the weaknesses of the financial statements before presenting. You still need to provide honest information and it must be clear. Having answers prepared in advance can make or break a deal.

The same rules apply from the other side. As a buyer of an income property or business you will be looking with the same jaundiced eye at the financials. If the books have errors it becomes difficult to trust the investment is solid.


Balance Sheet

You can click all financial statements in this post to open in a second, larger window.

Novices always want to start with the income statement. The income statement is too easily doctored to give a false picture. Assets and liabilities are the place you want to start, especially if concerned with the value of the business..

The above balance sheet has the head-scratcher of a negative petty cash account. In effect, this means the petty cash account is overdrawn. Someone will need to explain that one to me. 

The other account issues that make no sense is a negative loan to John Doe, a negative bank loan for equipment, negative accounts payable and receivable, and negative payroll taxes due. You might be amused by this, but half or more of all business financial statements I see each tax season have these types of errors.

To be fair, QuickBooks (QBs) is a disaster when it comes to payroll. Payroll taxes payable need to be adjusted periodically for some reason on the balance sheet. QBs even has a neat tool to make the adjustments. The rest of the payroll module is accurate, just the balance sheet has this slowly roaming error that needs periodic correction.

I’m not sure how you get a negative accounts receivable and payable. 

This balance sheet has too many loans to friends. Don’t loan money to your girlfriend from the business. Take a distribution (if allowed) and give a personal loan to your girlfriend. Better yet, don’t be your girlfriend’s banker. It never works. I see that in the office, too.

Under fixed assets we have office equipment listed without any accumulated depreciation. Land isn’t depreciated, just about everything else is. Was depreciation expense missed, too? Yup.

All these errors are the result of incorrect accounting entries. The loan to John Doe shows up as a liability because I treated it as paid from a payroll deduction. John is an employee. It takes fancy footwork to get the books this bad in QBs.

Financial records this bad are unsalvageable. You will need to start over. Fixing this mess would take more time than building a whole new QBs file. You could have a full-time business just setting up QBs files for businesses. If you never turned a client away you would have an army of employees hired to keep up. There is that much to do. Almost all records kept internally by the client are in need of attention. And if you think this balance sheet example is bad, you are wrong. This is typical. The only matter is the degree of issues involved.

I intentionally excluded the equity accounts to save time. 


Income Statement

You can click all financial statements in this post to open in a second, larger window.

There are plenty of concerns on the income statement, sometimes referred to as the profit & loss statement. 

There is a large amount of non-taxable revenue listed. This should be clarified and listed below sales for aesthetic reasons. I’m concerned this could be “other income” or a refund of some sort that should be listed under Other Income at the bottom of the statement or treated as an adjustment to an expense. 

Auto expense requires explaining. Was the IRS mileage rate or actual expenses used. If the mileage rate was used there is an opportunity to add the depreciation portion of the mileage rate back into income for lending purposes. (What condition is the vehicle log for tax purposes? Were personal miles mixed in?)

Contributions were really donations to charity. Sometimes a business can deduct donations as a sponsorship. Personal donations to church are not a business expense and should not come from the business account. 

Miscellaneous expenses are high and need to be accurately classified. 

Payroll and payroll expenses should utilize sub accounts. The officer’s wage looks fine (if this is an S corporation) compared to net income, but the type of business may change that determination. Removing contributions and a few other items from the expense column could leave the reasonable owner’s wage requirement a bit light (for corporations only).

The SEP/IRA is a concern. Is this a retirement account run through payroll or an IRA contribution for an owner paid out of business funds? It needs to be cleaned up or clarified. Payroll with sub accounts would be ideal to address the lack of clarity.

The business portion of Social Security is listed, but is the wrong percentage. The Social Security portion of FICA is 12.4%; half paid by the employee, half by the employer. The Social Security expense of $5,562.26 is more than 10% of the officer’s wage of $53,800. The employer’s portion is only 6.2% and there are no other wages listed on the income statement!

Payroll expenses are listed as $18,909.25. Is this employee wages? It would explain the FICA issue. This would need to be cleaned up/clarified before presenting to a bank or buyers.

Finally, utilities are not an “other expense”. This needs to be moved up with the regular expenses. The sales tax adjustment also needs addressing.


Cash Flow Statement

You can click all financial statements in this post to open in a second, larger window.

The cash flow statement is my favorite. I want to see where the money is coming in and going out. This includes loan proceeds and retirement of debt. If the statement is accurate it can tell you a lot about the health of a company. As you can see, this is not an ordinary business.

If the balance sheet and income statement were clean I would have confidence in this cash flow statement. However. . . 

We discussed several issues on the income statement and balance sheet which reflect here. The item I want to point out is the shareholder distributions. Added to the officer’s wage, we get the total cash the owner received from the enterprise in 2018. 

Even with terrible books we are still able to get a vague idea how much the business is disbursing to the owner. The odds are pretty good the owner received a $53,800 wage and $35,950 in distributions. Cash was negative at the beginning of the period (unbelievable) and around $34,000 higher at year-end (believable if the rest of the books were not a mess). Messy books means the business probably throws off close to $90,000 in cash to the owner, more if contributions are not really a business expense. If the books were clean we could add the $34,000 increase in cash for the year since I don’t see any lending activity.


Analysis and Opportunity

Obviously this was an extraordinary mess used to illustrate multiple recordkeeping issues. Many businesses have books this bad, if they have any records at all. A thriving business can fail due to mismanagement of recordkeeping. Poor records can cause a business to over-pay taxes, lose bank funding and result in a lower sale price of the business at the end of the owner’s career.

Warren Buffett has said many times Accounting classes were the most important he attended in college. I agree. Without a fundamental knowledge of accounting it is difficult to build serious wealth and almost impossible to run a successful business. With a sound understanding of accounting and financial statements you are qualified to manage most businesses and investments, including finding the true value of the asset.

You don’t have to be a banker or financial analyst to use financial statements. Investing in a stock is investing in a company and should be treated the same way as buying an entire smaller local firm. Buying income property successfully requires understanding financial statements to make a sound decision. You want to know the rent history and expenses, plus required deferred maintenance, before making a decision to buy or pass.

Since most roofers are good at roofing and poor at keeping accurate records, you have a powerful side gig opportunity to make a difference in your community while earning above average income. 

All business eventually need funding. Your ability to read financial statements allows you to consult with clients at a higher level and to gain desired result. You can handle the raw data entry if you want or farm it out to a bookkeeper. Regardless, you lead and give directions. 

Done right, you and your clients will profit.



So how can you start reading financial statements as a side gig or person use if you don’t know how already? You could always take a college or technical school course. Or, you can self-study. Here is a good book to get you started. It will cover 99% of what most people will ever need. Note you will still look things up from time to time. It is the nature of the skill. The linked book is a good reference source. 



More Wealth Building Resources

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Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here.