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Business Financing-Financial Reports and Tax returns

  1. Needs vs Wants
  2. Long-Term vs Short-Term
  3. Business Credit
  4. Traditional Financing
  5. Creative Financing

Needs vs Wants This goes for all of our expenses-not just the big ones because we, as entrepreneurs have a propensity to throw money at “opportunities” usually getting us into trouble and/or providing us with a new expensive lesson. I believe to tread slowly and follow your budget carefully, run ideas by trusted advisors and maybe even your accountant. That would make sense but knowing that we don’t always follow common sense all I ask is that you ask yourself 3 questions:

  • Do I need it
  • Do I need it right now
  • Can I get by without it right now

If your answers go as follows:

  • Do I need it-NO-don’t spend the $$
  • Do I need it right now-NO-don’t spend the $$
  • Can I get by without it right now-YES-don’t spend the $$

Long-Term versus Short-Term Long term is anything you sign up for that your going to be making monthly payments for over 1 year. Short term going to be paid in less than a year. Pretty simple right? The problem is when Entrepreneurs take short term financing and turn it into long term financing. IE: Using credit cards to make purchases and not paying them off quickly. Using a line of credit and not paying it down.

Long term loans should be used for asset purchases such as cars and equipment. Short term financing should be used to bridge short-term cash flow gaps.

Business Credit – it is possible to establish business credit separate and apart from you personally. This is very desirable as a small business owner because it increases your ability to expand without affecting your personal credit. Your personal credit plays a significant role in your life and your business so it’s important to preserve your credit score.

Obtaining business credit is a process but once you start it will pay handsomely later. The easiest way to start is by requesting terms with your vendors I have a construction client with a $150,000 line with one vendor which equates to not having to tap into our cash or line of credit to purchase materials and supplies. We have terms with all our vendors that total close to $1,000,000! This equates to ordering materials for up to $3,000,000 worth of additional jobs we could take on which equates to an additional $400,000 in profits!

Not many small businesses can enjoy those kinds of numbers but what if it meant another $10,000 in profit to your business? Is it worth the time and effort of simply asking?


Traditional Financing – Alas we finally come to the topic that has ruined hundreds of millions of small business owners, some of them mine. This is why I strongly urge new business owners stay away from any kind of business financing unless they have been in business for a significant amount of time, know their numbers and have discussed all of their financing options with trusted advisors.

Creative Financing – The concept is to use techniques such as barter, joint ventures and leveraging existing relationships to build and manage your business. Affiliate programs, having one of your MasterMind members send an offer out to their list and any other out of the box ways you can conjure up without spending cash or creating debt.

The last note I want to make here is that most of the time it comes down to our own hard work-not what we can buy that makes us successful.

Financial Reports and Tax Returns – Your not getting financing unless you have these

Tax Returns

Let’s take a look at the different reports that are used in preparing a tax return. First, we will review the different types of tax returns that are filed:

1120-Corporation Tax Return – Also known as a “C” corp. A “C” corp is an incorporated entity establish at the state level through the department of state your business is located.

 1120S-S Corp Tax Return – A “C” that has elected a special tax status where all the income and expenses flow through to the shareholders. Most incorporated small businesses are “S” Corps.

1065-Partnership Tax Return – An unincorporated entity with more than one owner.

 1040 Schedule C – An unincorporated business with only one owner.

990 – Non-For Profit Tax Return – An incorporated entity that qualifies for tax-exempt status.

Now for the financial reports that are used to prepare these tax returns.

Balance Sheet – A “snapshot” of the entity’s assets, liabilities, and equity on a specific date. Most entities are on a calendar year for tax purposes.

Income Statement – A summary of the entity’s revenue and expenses during a specific time period. Entities on a calendar year basis would use the time period 1/1/xx-12/31/xx

That’s it – those two reports are what every entity needs to file a tax return with the exception of a sole proprietor. Form 1040 Schedule C does not require a balance sheet. It is still advisable the business always keep one to account for all of their transactions properly.

So when we have an accurate balance sheet and income statement we are in a position to do what 100% of business entities (including not-for-profit entities) must do, file a tax return.

Keep in mind that those entities that do not have a robust set of books are probably filing inaccurate tax returns. I’m sure this is not intentional but a simple lack of knowledge about the financial side of the business.

Now to get to the Balance Sheet and Income Statement we must produce the summary of their financial transactions referred to in IRS Publication 583-Starting a Business and Keeping Records. That summary is called a Trial Balance.

The Trial Balance is your chart of accounts with a summary of all your transactions. How simple is that?!!! Now the question is where do the numbers come from to create the trial balance. That report is called the General Ledger. The General Ledger is a compilation of the monthly list we learned about in chapter 3. Those lists are called Journals.


Journals include cash disbursements, cash receipts, sales, purchases and payroll.


A WORD OF EXTREME CAUTION: Once you get your General Ledger compiled there is one crucial step that should be followed before a tax return is filed. That step is the review by your accountant. Your accountant may want to make some adjustments to your figures to get to an ADJUSTED TRIAL BALANCE. If an accountant is not making any adjustments for items such as depreciation, interest, reclassifications, accruals, etc. you have what we call an UNADJUSTED TRIAL BALANCE.


So let’s create a picture that shows the flow from handshake to Balance Sheet and Income Statement.

Handshake-before any transaction takes place there has to be a meeting of the minds or a meeting of the product or service and the consumer of that product or service. Where and how this takes place is of utmost importance in the bookkeeping process.

Transaction-the exchange

Jornal-a list of the transactions

General Ledger-a detailed compilation of all the journals

Trial balance (unadjusted)- a summary of the general ledger balances

Trial Balance (adjusted)

Balance Sheet – the amounts on the adjusted trial balance from Retained Earnings up

Income Statement- the amounts on the adjusted trial balance from Retained Earnings down

Retained Earnings – the total profits or losses from inception to the balance sheet date.


The Handshake



The Transaction



The Journal



The Ledger


The “Unadjusted” Trial Balance

Trial Balance

The Accountant



Adjusting Journal Entries   (Don’t try this at home)

Adjusting Journal Entries


The “Adjusted Trial Balance

Adjusted Trial Balance


The Balance Sheet

Balance Sheet


The Income Statement

Income Statement


The Tax Return

Tax Return


Now if you have followed this course you won’t have to worry about this!!!

selected for audit

If this happens to you just email me at



Joe DiChiara CPA offers Small Business Advisory Services to passionate entrepreneurs that want to Start, Build and Manage a small business successfully. He enjoys being an “Out of The Box Thinker” and has helped thousands of small business owners start, build and manage their own business. In 2009 Joe discovered a new approach to business through “The Science of Getting Rich” written by Wallace Wattles and the inspiration behind the movie “The Secret”.

After successfully applying the SOGR principles as well as Napoleon Hill’s “Think And Grow Rich” to his own business, Joe discovered that there is a large market segment that is being overtaxed, unprotected and unfairly targeted by IRS. Every year over 3,000,000 entrepreneurs start businesses unaware of the dangers of operating as a sole proprietor with over 25,000,000 in the process of going bankrupt.  This discovery inspired Joe to develop programs, tools, and resources to help stem the tide of these avoidable small business failures.

Currently, Joe is building an online school for small business owners and which will help entrepreneurs create the books and records needed to survive any tax audit. 

Joe is a #1 Amazon Best-Selling Author and you can Check Out Joe’s Books on Amazon by clicking here!





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