'The pile'

Jerry Vandever sat across the table from his accountant. Herbert Johnson, CPA, had been an accountant for many years and was looking over the tops of his reading glasses at the file for Patch-a-Pet Animal Hospital.

David M. Lane

Jerry had changed to the firm of Johnson and Johnson about two years ago because his first accountant couldn't seem to cut his tax bill enough. Now Jerry sensed a deja vu and felt a cold sweat developing in the small of his back.

Herbert was well known in town and had come highly recommended. Herbert looked once more over his glasses at the scattered papers before him and then switched his gaze toward Dr. Vandever.

"Jerry, most of this looks in order. I still need a few 1099s and a copy of the lease you signed with the equipment company in Seattle."

"I'll call around and see if I can get them for you," Jerry said with a hint of hesitation. Jerry was preparing to ask the dreaded question that had really brought him to the accountant. He gulped and then took the yearly plunge.

"Herb am I going to have to come up with more money on April 15th or will I get some money back?"

Herb grabbed last year's file and compared some notes and licked the end of his pencil and jotted some figures down on a yellow legal pad. He deftly pulled a calculator out of nowhere and wrote a figure on the yellow pad and shoved it over to Jerry.

Jerry grew pale. The figure on the yellow pad was considerably more than he had in the bank and Jerry was distraught. He had hoped that he would owe about what he did last year and that his quarterly payment would remain about the same.

Herb sensed Dr. Vandever's alarm and said, "That is only an approximation…I'll know for sure when all the documents are in place."

Disbelief

Jerry couldn't believe it. The accounting books always showed that he was making a fair amount of money and he knew that the money that he was taking from the practice wasn't any more than he had been taking out for the last two years. Jerry asked the inevitable question: "Herb, I look at the figures that you give me on a quarterly basis and I just don't understand where this money is."

Herb looked at him and removed his glasses.

"That's what everybody says," Herb lamented.

Herb sighed inaudibly and once again planted his glasses on the end of his nose. He then took about 20 minutes and made an attempt to explain the situation to Jerry. Jerry nodded and seemed to grasp the situation at times but over the 20 minute lesson he would lapse into that same fog that drifted into his gray matter when he had made the mistake of taking a calculus class as a pre-vet student. Jerry did not want to appear stupid so he finally shook Herb's hand and got up and left.

Jerry drove slowly home while his mind raced. He was paying off his home on a regular basis and he had even bought some insurance policies for the kids' college education. Jerry had even thought about buying a boat if there was any extra money this next year. Yet there was nothing in the clinic account to speak of. He realized that there was nothing to pay Uncle Sam within a few months. He could not possibly save enough money to pay both the federal tax and the quarterly payment due at the same time.

Feeling trapped

The practice was doing pretty well but a new practice had opened a few miles down the road. In addition, making up the extra dollars before April would be difficult.

What would his wife think? She had been waiting patiently for enough funds to finish the remodeling of the old house that they bought just before he had decided to start his own practice five years ago. Jerry never disclosed anything to his wife, Ginny, about the family finances. She never asked.

He drove on as a fog again descended into his brain. Jerry had just borrowed money a few months ago to pay off some drug bills. For the first time since he started his practice Joe Smothers down at the bank had asked him for another financial statement. Jerry was feeling trapped. Is this the freedom that seemed so promising with ownership of your own business? The sun was shining brightly overhead but for Jerry, it was a very rainy day.

The tax trap

Failure to plan is a plan for failure. This is critical when paying taxes.

Taxes, of course, are inevitable. Far too many veterinarians view tax expenses as something to put off for awhile when there is a little more money in the coffers-like avoiding the payment of your least favorite drug bill.

Consider this: I know of no drug company with the clout to audit your business or, in the end, to seize your assets-taxing bodies do. This makes delaying or failure to pay the taxing authorities one of the worst business decisions you can make.

One of the reasons that taxes are difficult to pay is that they require extra time and effort, vary from period to period and they do not arrive in the mail with a figure at the bottom that says "Amount Due." You are the clerk and bookkeeper for the government, like it or not.

The simple life

Now if you work as employee your life is much simpler. The employer makes all the proper deductions and payments for you. He or she also contributes additional money on behalf of the employee that mostly goes unrecognized by the worker. The remainder of the paycheck is available to you for your personal expenses. What could be easier?

For the unsuspecting business owner the freedom that comes from owning a business with a steady (or not so steady) cash stream often leads to a serious trap. The trap will easily snare the unprepared.

The problem with the pile

When you start your business you open a business checking account in order to make deposits from your business. This is your pile.

From the pile you pay bills and draw out money to live on. This money that you draw out is just that-a draw. The government and the accountant don't really care if you take draws or not. The draw also has very little to do with the reality of taxes. It is not your salary-it is simply the draw.

Although in most cases a business owner must take out draws to live on, you can have a business and taxable income and leave all the profits in the accounts of the business. It is simply useful for the accountant-it has nothing to do with your income from the business at all. A draw is simply a subtraction against the accounts of the business.

The big pile creates problems. What happens when you have just barely made payroll and the accountant, your wife or book-keeper, tells you that your quarterly estimate taxes are due tomorrow? In some cases you simply have to call your friendly banker and write a bad check (this is known as kiting). This could land you in jail if you are not on real good terms with your banker.

Another pile fact

Here is another thing about the pile. The pile may or may not correlate to the current assets that may appear on your business balance sheet.

The accountant must balance the accounts, and in most cases, prepare your tax returns. Certain adjustments and the way assets are held in your business may make the reality of your current asset page differ from "the pile." Your job is to keep the pile in the black. The accountant's job is to balance the accounts. There is a difference and business owners need to realize this.

The solution to the pile problem

If you are an employee you may need to have just one pile of cash. For business owners the solution to most cash flow issues is to plan and save for a rainy day by creating more piles. These rainy day piles should be set up to anticipate cash flow issues in as much of a predictable pattern as possible.

• The side pile:

Have the bank where you have your business checking account set up a savings account or a second checking account. Have them make a monthly transfer into this account. Try to figure what would be a good amount to have in this account when some unexpected expense pops up and then try to have something "on board" in excess of that. Figure in all personal taxes, personal social security, real estate taxes, worker compensation payments and any other irregular payments that have come up in the past and then add them up and divide by 12. You will then have a monthly transfer amount to start from. Any money that you can sock away in this account will come in handy later.

The money is still yours-it is just in a pile that is a little harder to tap. Do not worry about trying to get the "best interest" in town. You will defeat your purpose if you try to shop around at different banks. These accounts are not for retirement purposes-think of it as bail money in case the IRS comes calling. The money transferred each month will need to increase over time to adjust to your growing practice.

• The future pile:

If you do not have an IRA an emergency exists. In fact, it has existed for some time. If you are at work and sitting, please stand up and walk to the front desk and announce that an emergency exists. Reschedule all appointments and call your broker or get in your car and drive to the nearest financial institution or broker and get in line to set up an IRA. Now this line probably does not exist but it should. If you are under 30 get in the Roth IRA line. By opening an account now those in the Roth line can be assured that they will be able to buy tickets in 40 years to see a chubby Brittany Spears singing all her oldies from the turn of the century. All contributions into the future pile reduce the amount you will need to put into pile number one above-thereby reducing the amount of money you send on a one way trip to Washington D.C.

Other piles

You may wish to make other small piles that are hard to touch and will make your cash and tax life a little easier such as:

Medical IRAs

Simple IRAs or other employee pension plan side funds to help pay the once-per-year matching payments on their behalf.

Equipment fund.

List of excuses

The human side of veterinarians will complain that this is just more work for them to do and keeping track of all this is more paperwork.

I can assure you that the financial institutions or brokers that you use will take good care of you on this issue. All you will need to do is buy some file folders to keep the records that they keep for you on file somewhere-nothing could be easier.

And so remember to fasten your safety belt (extra cash accounts); the pile you save may be your own.