Why You Should Not Take Business Advice from Your Tax Preparer
Chelsea M. Williams 💵⚖⏱Chief Financial Architect
I help law firm owners understand their numbers so they can scale and exit profitably with financial systems I Chief Financial Architect I Podcast Host
If you’re meeting with your Tax Preparer less than four times each year, they are not in a position to give you adequate business advice.
Too often we see business owners panic because their tax preparer told them they shouldn’t have to spend as much as they are and it’s eating profits. They’re left with a sense of urgency and no sense of what to do or how to do it.
Navigating the financial landscape of a law firm can be complicated, especially when it comes to deciding who to trust with business advice. It's tempting to turn to your tax preparer for guidance, but this might not be the best approach.
While tax preparers are skilled in their field, they often lack the broader business strategy perspective that a CFO or financial advisor might have.
Let's dive into why relying solely on your tax preparer for business advice can be problematic and how we can help you find the right support.
Understanding the Roles
Tax Preparer vs. Fractional CFO
First, it's essential to clarify the difference between a tax preparer and a CFO. If your tax preparer is also your CFO, this advice might not apply. A CFO, especially a fractional CFO, provides comprehensive financial oversight and strategy. They are deeply involved in your business operations, ensuring that every financial decision aligns with your long-term goals.
On the other hand, if you meet with your tax preparer once a year, and they only see your numbers during tax season, their advice may be limited. Tax preparers focus on compliance and minimizing tax liabilities for the previous year. They are not typically equipped to offer forward-looking business strategies.
Why Tax Preparer Advice Can Be Limited
Lack of Context and Understanding
Most tax preparers do not ask the in-depth questions needed to understand your firm's nuances. For instance, they might look at your payroll expenses and suggest you're overpaying your staff without understanding the reasons behind your current staffing. They don't see the day-to-day operations, the value your team brings, or the strategic investments you're making for future growth.
Rearview Mirror Perspective
Tax preparers look at past financial aka the rearview mirror. Their focus is on historical information, which, while valuable for compliance, does not provide insights into future planning. They analyze a completed year and make assumptions based on that snapshot. However, businesses are dynamic, and the decisions you make should be based on forward-looking projections, not just historical data.
The Importance of Asking the Right Questions
Imagine your tax preparer reviews your 2023 tax return and tells you to pay yourself more and cut staff costs. This advice might seem logical from a tax savings perspective but could be disastrous for your business operations. They might not consider that your current staffing levels are essential for maintaining service quality and supporting future growth.
A good CFO, however, will ask about your business goals, upcoming projects, and market conditions. They will understand that your payroll expenses are an investment in your firm's future and provide a strategy that balances immediate tax benefits with long-term growth.
A Real-Life Story: Erica's Experience
Erica had hit her breaking point before she came to us looking for help. She didn't know exactly what she needed but realized something had to change.
People change in four seasons:
Erica had just lost her bookkeeper, and that hurt her enough that she had to seek a change in providers. What was interesting to us was why she lost her bookkeeper.
After getting to know Erica and her law firm in a discovery call, she explained how her CPA had fired her independent bookkeeper. The CPA felt the bookkeeper was overstepping into her territory, leaving Erica to hunt for a new one. This was interesting because the bookkeeper’s actions were meant to help Erica and her financial goals but made the CPA’s job more time-consuming during tax time.
We could tell that Erica was looking for a bookkeeper who would tip-toe around her CPA and the limits she was imposing on her financial reporting. So, in true form, we stuck to our core values and explained to Erica that while we pride ourselves on working well with other professionals, there comes a point when we may suggest a new CPA if she's not willing to work with what we know she needed to succeed in her law firm. Erica hesitated for a minute, so we asked, "Why are you loyal to your CPA?" her answer was one that we hear all the time: "I've been with her for so long."
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The Hard Truth About Change
The hard truth about change is that sometimes it means you outgrow people and situations that are not conducive to your growth path. There's only two options when you're faced with these hard decisions:
If you're not actively choosing growth, you are passively choosing to shrink.
We didn't get halfway through onboarding Erica as a new client before we ran into the roadblock that was her CPA. What we knew we had to show Erica was that her CPA was killing her growth at a foundational level. She could never build a framework and rise to the level of success she was after within the constraints that her CPA was placing on her financial systems.
Creating Change: the Seasons of Change
She already hurt enough, so we didn't need to inflict pressure. Sometimes in finance, people are hurting themselves and don't even know it. It's like going to the doctor about a numbness in your finger and finding out the root cause is a pinch in your spine. We feel it but have no clue where it's coming from and don't even consider the sources that seem irrelevant.
We had to show her exactly why she should be inspired to make this change. Another reason why Erica felt "safe" with her CPA was because they specialized in audits. Erica was afraid to be audited. The truth is, less than 3% of firms get audited. While you should always protect yourself from an audit, it is not the central concern to focus on inside of a business finance setting. Erica's fear of the worst was keeping her from the opportunities ahead. That was a paradigm shift for her.
This started to make her want to change her relationship with her CPA. So we took it a step further and showed her numerically what she could achieve if she could just step out of her comfort zone and find a CPA who could grow with her. The tens of thousands of dollars she could make and save if she stepped away from the fear of an audit and into the confidence of strategy.
Once she had received enough education and visual proof, she was able to confidently break a tie that she didn't even realize was holding her back.
The Value of Financial Foresight
CFOs and Financial Advisors
A fractional CFO or financial advisor provides financial foresight. They look ahead, helping you navigate future opportunities and challenges. They understand that your financial decisions today should align with where you want to be in the next few years. This future-focused approach is crucial for setting the right direction for your law firm.
Strategic Financial Planning
Strategic financial planning involves more than just looking at the numbers. It includes understanding your goals, risk tolerance, market trends, and operational needs. A CFO will create a financial roadmap that helps you achieve your milestones, ensuring that every decision supports your overall strategy.
A tax preparer AND a CFO are partners who work best when they collaborate and stay in their zones of genius. That's why it's critical to have both Key Financial Players on your team.
Making the Right Choice
Consulting with Experts
Before making significant business decisions based on your tax preparer's advice, consult with a CFO or financial advisor. They will provide a more comprehensive analysis, considering both the technical and strategic aspects of your business.
This approach ensures that you are not just minimizing taxes but also positioning your firm for sustainable growth.
How to Move Towards Growth
While your tax preparer plays a vital role in managing your tax compliance, relying on them for broader business advice can be risky. They might not have the complete picture of your business operations or future goals. Instead, consider working with a CFO or financial advisor who can provide the financial foresight you need to navigate the complexities of running a law firm.
Navigating business finance means understanding who your key financial players are and how to work with each of them in a way that drives you towards your version of financial freedom and freedom in time to live in abundance.
You don't know what you don't know. If you feel like you're being held back in your law firm finances but you don't know where to look or what to do, I want you to know that there is a path waiting to be discovered by you.
Will you wait until a season of change? Or are you brave enough to see you're on your way and don't want to reach that point before you create the change you're seeking?
Core Solutions Group specializes in providing financial services tailored to law firms. Our team of experienced CFOs and financial advisors can help you create a comprehensive financial strategy that aligns with your business goals. Connect with us today!