Episode Transcript
[00:00:00] Speaker A: Welcome to In Plain Legal. I'm DNA High Easton. And today we're making the law something everyone can understand.
You're watching now Media Television.
Hi, welcome to In Plain Legal, the show that makes the law practical, approachable and easy to use in real life. I'm DNA High Easton. Today we're going to talk about a truth most business owners learn the hard way.
Money decisions don't stay in the spreadsheet. They show up in contracts, payroll taxes, and sometimes legal letters.
My guest is Harsh Jathav, cpa, cgma, cfe. Oh, I love all the titles. Partner at my Profit Gurus. He spent more than two decades helping business owners build profit discipline through advanced tax strategy and cash flow systems and profitability analytics. And he's held leadership roles across organizations like the irs, Deloitte, Ernst and Young, intel, and American Express. He also teaches tax and accounting at UC Berkeley and Menlo College.
In this first segment, I'm setting the table. How financial choices quietly become legal exposure and why being profitable is also a compliance clients strategy.
Harsh.
Before we talk about tactics, what's the quick version of your story? I mean like, what pulled you into this work with business owners in the first place?
[00:01:30] Speaker B: Well, DNA, first of all, thank you for having me.
[00:01:33] Speaker A: You're welcome.
[00:01:33] Speaker B: Glad to be here today.
And I started on my enforcement. I started the enforcement side actually working as an IRS auditor where I saw what happens when things go wrong. Whether it's poor records, misunderstood rules, or just bad decisions that snowballed over time. Then I moved into the big four and some industry roles with Deloitte, Ey, Intel, American Express, where I saw how large organizations built systems to prevent the same problems before they actually happened. What really pulled me into working with business owners is this gap I kept seeing. Small mid sized businesses are incredibly smart, hard working, innovative, but they're often operating without the financial structure that large companies take for granted. Not because they don't care, but because no one's ever showed them how to build it. So now what I do is I bridge that gap. I bring enterprise level thinking around cash flow, risk and compliance strategy and translate that into something practical for business owners.
[00:02:31] Speaker A: I love that you know, there's more people that are needed just like you. And I'm sure all of our viewers are going to love to hear all the little nuggets that you're going to share with us today.
[00:02:42] Speaker B: Thank you so much.
[00:02:43] Speaker A: You're welcome. All right, so when you meet a new client, what's the very first thing you look for to understand how they really run the business beyond what the numbers say.
[00:02:55] Speaker B: Strange that I'm an accountant and I'm going to say this here, but the first thing I look for is not the numbers, it's really the behavior behind the numbers. Because financial statements tell you what happened, but they don't tell you how decisions are made day to day. So I start with questions like who actually approves the spending and how does money move from invoice to deposit? How often are decisions made with using data versus a gut feeling? And probably most important, are they reviewing some of the key financial metrics consistently? I also look for some friction points, places where things slow down, maybe there's lots of rework necessary or they depend heavily on one person.
That's usually where risk lives, in my opinion. Once you understand that business actually runs, then the numbers start to make more sense. And then you can start to fix things at the root level versus just at the surface level.
[00:03:46] Speaker A: Wow. So it seems like what you do is you really take the time to get to know every single one of your clients and you have a very well rounded approach to that. I mean, I do the same thing when it comes to my estate planning clients. Right.
I can produce the documents, but the end of the day we need to learn about who you are as a person, your values, your goals. Because then that helps to indicate what the goal is with having the documents. In my case and in your case, it's the numbers.
[00:04:13] Speaker B: Excellent point. 100%. Same philosophy on that.
[00:04:16] Speaker A: That's amazing. I like that there's like minded individuals out there. Do you hear that, viewers? We have some people out here in this world who want to make sure you have a very well rounded approach. Well, on that note, you've worked inside big systems, right? And high stakes environments. What's one behind the scenes truth you've learned that most owners don't realize until it hurts.
[00:04:38] Speaker B: Great question. And one of the biggest behind the scenes truths is that strong companies actually don't rely on smart people. They rely on strong systems. And from the outside, it often looks like large organizations succeed because they have talented teams. And that's true. But really keeps them stable is structure. Clear approvals, defined roles, documented processes, consistent review cycles. What most business owners don't realize is the risk doesn't come from one mistake. It's usually a series of small gaps that kind of compound over time. One person handling too many responsibilities, no separation between who records transactions and who actually reviews them. Decisions happening without documentation and everything feels fine until it doesn't. Right. And until there's a cash crunch or a tax issue or even a fraud. And in larger organizations, those risks are anticipated for and controlled early. Smaller businesses, they're often invisible until they become expensive.
[00:05:40] Speaker A: So I heard so many things that I want to kind of tackle in that statement that you just made. I mean, you talked about systems. That's a big deal, right? What is something or an experience that you've had where you've seen.
Well, let me, let me rephrase. How long does it take for people to build those systems? And is there a kind of a certain period of time where someone needs to have the systems in place before it kind of creates those gaps and those risks that you just talked about?
[00:06:06] Speaker B: Great question. And I think it depends on the type of system you're talking about. Usually initially. If you're talking about accounting systems and I'm talking simple, something simple as QuickBooks or Xero implementing one of those, that's a system itself. It's usually built on best practices. So when you put it into place, you're actually using the best accounting philosophy out there. Other systems, especially when it belongs to your sales process, when you're trying to create like a CRM, a customer relationship management module, or some other method to manage your customers better, that may take a little bit time over a little bit more time because it takes time to really understand what you're trying to accomplish as you're building your business. Sometimes you might need to switch out the system because it doesn't really fit what you're trying to do. But it's a good question because it really depends on the type of system you're implementing.
[00:06:52] Speaker A: That makes sense. So where do you see owners accidentally crossing from like messy business? And I mean, I can probably talk about the legal risk a little bit, but into legal risk, is it payroll, is it sales tax, is it contractors? Or is it something else completely entirely?
[00:07:09] Speaker B: Well, wow, you're right. It's actually all of those. But if I had to prioritize, I'd say payroll classification and sales tax are probably the two biggest landmines.
Let's start with payroll. A lot of owners misclassify workers as independent contractors because it just feels simpler. You know, it's less paperwork, more flexibility. But the rules around that are very specific. And if you get it wrong, you're dealing with back taxes, penalties, sometimes multiple agencies at once.
Sales tax is another one that sneaks up on people. Businesses start making sense sales or hiring employees in other states, and especially with multi state rules and economic nexus, businesses can create a tax Obligation without even stepping one foot in that state there. And unlike income tax, sales tax is considered trust fund money you're collecting on behalf of the state. So when it's mishandled, the consequences can escalate pretty quickly.
[00:08:04] Speaker A: That makes sense. So, I mean, this is in plain legal. So I want to break things down even simpler than what they usually are. Right. So can you classify for our viewers, what's the difference between an employee and independent contractor?
[00:08:16] Speaker B: Yes, and that's a difficult question, as a matter of fact, because there's. It really, there's no defined definition around it. They give you a lot of tests around control. So it depends on, you know, how much control you ever have over that worker. You know, even if they're a remote worker, they can still be classified as an employee. Let's say you set their schedule, you provide them with the tools, you have a manager overseeing them. There's many reasons that would be that would cause that to be a employee relationship versus independent contractor relationship. So I think it's very important to work with an attorney like you, DNA, because I think we want to get that right. The penalties are just too severe.
[00:08:54] Speaker A: That makes sense. So you heard it here, folks. You got to work with your CPA and your attorney to make sure you do things the right way. Right. So if you had to correct one mindset today, what would it be? Would it be compliance first or systems first? And why?
[00:09:12] Speaker B: You know, if I had to correct one mindset, it would be that revenue does not equal success.
And because that belief causes more problems than almost everything else I see you can have a business that's growing really fast, more clients, more sales, more activity, and still be under financial pressure. And you ask why? Well, because revenue doesn't tell you about margins, about cash timing, about tax exposure, operational efficiency. I've seen businesses actually double the revenue and feel worse financially because they scaled without understanding what they were actually keeping. So the shift is from how do I make more to how do I keep control and compound what I make. I think that's sort of what one mindset I would love to shift for many folks.
[00:09:59] Speaker A: Okay, so if that's the case, and I'm assuming, forgive my assumption, but are we saying that the best way to ensure, based on the mindset shift that you just provided, is to make sure that you have the systems in place so that way your revenue can scale and you are able to protect yourself from liability in that regard?
[00:10:20] Speaker B: Yes, the systems are absolutely critical because I think one of the things that really helps is having financial Metrics you can measure, Right? You have lots of metrics, whether it's along the lines of liquidity, solvency, profitability, that helps you drive your business in the right direction. Without those systems in place, you're not going to be able to capture that information accurately or completely or timely. So I think that's, it's a great point you're raising about that.
[00:10:45] Speaker A: I'm really glad you shared that because I think it's really important that people understand that just because you're making money doesn't mean that you're actually being successful. But the goal here is we want to make sure that people are also as successful as it is when it comes to bringing in the clients and bringing in the revenue for their businesses, regardless of whatever type of business it is.
[00:11:04] Speaker B: Correct.
[00:11:05] Speaker A: Right. Well, thank you so much for sharing that. And coming up next, I'm going to get very specific about the legal moves that protect cash flow, business structure, tax elections, and the paperwork people skip until it's too late.
Stay with us. We'll be right back with clear explanations, practical advice, and the legal insights you need without the jargon. This is In Plain Legal on NOW Media Television.
And we're back. I'm DNA. Hi, Easton. And you're watching In Plain Legal on NOW Media Television. Let's continue breaking down the law together.
Welcome back to In Plain Legal. You want more conversations like this? Real people, real issues and real clarity. Watch Now Media TV Live or On Demand on Roku or iOS.
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I'm back with Harsh Jahav and in this segment I want to talk about prevention, because the cheapest legal problem is the one you never create.
Now, most owners don't need more advice, right? They need clean structure, a defensible tax position and documentation that can survive scrutiny.
Keep it plain. What to do, what to stop doing, and what to document.
All right, Harsh, you ready?
[00:12:27] Speaker B: I'm ready.
[00:12:28] Speaker A: All right, we're going to talk about structure. So what's the most common entity mistake you see that creates tax pain and legal confusion?
[00:12:38] Speaker B: Another great question. So the most common mistake I see is owners treating their entity choice like it's a one time decision instead of like a strategy that evolves with the business. A lot of people either default to an LLC because it's easy to set up, or they rush into an S Corp because they heard it saves taxes. But they don't actually align that decision with how the business makes money, how cash flows and how they plan to grow. The real issue isn't the entity itself, but it's the mismatch between the entity and how the business actually operates. For example, I'll see someone running a profitable service business in a basic LLC with no tax election leaving money on the table from self employment tax perspective. On the flip side, I'll see somebody elect S corp status way too early before they even have any consistent profit. Now they're dealing with payroll compliance, reasonable compensation rules and even higher administrative costs for very, very little benefit.
[00:13:35] Speaker A: You know what, that makes a lot of sense. And I will tell you as a attorney, I also practice a little bit in business law and sometimes when it's just you, sometimes it makes sense to have an LLC because you don't know what your business is going to grow to before you end up electing for that, that S corp.
So let's talk about the S corp election, right? When does it make sense to revisit an S corp election or avoid it? And what are the legal tax trade offs owners miss So I can talk about the legal and I'll let you talk about the taxes.
[00:14:06] Speaker B: That's perfect. And you know, I think from my side DNA, the S corp conversion is one of the most misunderstood areas in small business tax strategy, period. At a high level it starts to make sense when a business has consistent predictable profit. Typically once you're clearing enough income where you're paying yourself a reasonable salary still leaves meaningful profit distributions. That's where I think self employment tax savings can become real.
But what a lot of owners miss is that S corporations is not just a tax benefit, it's actually a compliance commitment. And if an S corporation you're looking at distributions, you're talking about basis, you're talking about salary and all these things need to be tracked pretty carefully. I think once you elect S corp status you also expect to run payroll, you have to document reasonable compensation, file additional tax returns and there is probably a higher level of formality involved which maybe as a business owner you, you're just not ready for it. You know, you're, you're just running your, you're running your business there and this is a really big compliance issue you'd have to deal with. I'm curious to hear your side of it too. For the legal side.
[00:15:13] Speaker A: Well, I will say that, you know, there's a lot of confusion about what's considered like reasonable salary, right? Like what is reasonable to reach that level when it comes to how much someone is making to start to have the, the S Corp election. I mean there are some businesses that I've seen that have come in and said immediately like we want to be an S Corp, we want to be a C Corp. This is how we're going to do it. Because they have the intention of growing a lot faster.
Maybe a single member llc, right. Or even members that are part of an llc. So it just, I agree with you on the legal side. It just really depends on the people's goals and what they're able to do. Because if they're not going to be making that amount of money, you're putting yourself in a deeper hole to pay out more for the S Corp election than you would be if you have an llc. Right. And I'll even be totally frank, right. When I started my law firm I didn't know what things were going to look like. So, so I started off with an LLC because I said, you know, the goal is to get to a place where I can have that S S election. But here it doesn't make sense. Because if I'm a, a solo entrepreneur. Right. Does it make sense to elect at that early time? Not necessarily. So I feel as though the attorney in me helps save me a lot. Even though I would be qualified to have to pay for the self employment taxes. And I believe right now it's, it's 15.3%. Correct?
[00:16:29] Speaker B: Correct.
[00:16:29] Speaker A: Yep. So self employment. See look at now. You know, I'm a good attorney to viewers and folks. But no, I, I think it's really great that we can talk about this because a lot of times people just hear things in the community and they think that just because this person's doing it, I need to do it too. But this is why it's so important to make sure you have the right resources. You have the right attorney, you have the right cpa, you have the right systems in place to help you scale. So that way you're, you're basically doing the right elections for yourself.
[00:16:59] Speaker B: 100.
[00:17:00] Speaker A: So when you, you know, what's your simple tests for whether a business is misclassifying contractors versus employees and what's the risk when they guess wrong?
[00:17:10] Speaker B: I think you know, like back to control. I think that's, that's the big risk, right? Like how much control you have over that worker and it's, it's stealing. I think, you know, sometimes you may think in good.
Basically you're thinking well wait a minute, you know, I really don't have much connection with this person. I'm not going to use them much in the future.
That Might be more of a good basis to call them more of a contractor. But if you're planning on using them more longer term, then I would say the employee is probably, they're probably going to be classified as an employee. And I think, you know, when you look at the rules in general, right, Like a true contractor is operating independently, typically they have their own business, they're serving other clients, and, you know, they're running their own show. You're actually just paying them really for a result at the end of the day. Now, oftentimes, you know, if you have them working in your shop or working in your office, that all of a sudden is going to provide a situation where you might be actually controlling them a little bit more, maybe they might kind of morph into more of an employee at that time. So we've got to be really careful about that part of it.
Now I can say the IRS has a really good publication. It's the IRS publication 15. And it actually walks in very simple language, you know, how you might want to classify a contractor versus versus an employee. It goes through some tasks, gives some really great examples. I would definitely start there if I'm not very familiar with this area.
[00:18:37] Speaker A: And you know what, I appreciate that because I think this is where it's important to speak to an attorney. Right? Because we can actually there's some attorneys that are doing tax law, but they're also attorneys that do business law. And we can help you classify which is the right direction to go into when it comes to your employees versus your independent contractors. Right. Like I consider independent contractors to be people that are helping with your business, but they're not actually within your business. So, like, they can go out and do their own thing and have their own lives and have a totally different job. Because I'm not, you know, or anybody as a business owner is not in control of said people. So I think that you did a great. Even if you say it's not your area, it is your area because, you
[00:19:15] Speaker B: know, I think it's a great point and if I just add to that, because I think the, the other side of it is we, when we're working with our clients, we will always recommend, recommend that they talk to an attorney. Because I think the, the penalties are pretty steep. I mean, you can have labor penalties, unemployment claims, workers comp issues, even lawsuits. And of course, you're dealing with the irs. You really, really need to sit down with an attorney because those laws are not very clear. There's a lot of gray in them. And by getting an attorney to kind of review your circumstances and facts. I think you can come up with a better, reasonable basis for taking a position one way or another.
[00:19:51] Speaker A: Absolutely.
So you have talked about in the past about, you know, monthly financial analysis as a growth tool. Right. So what are three of the reports you consider non negotiable?
If someone wants audit ready books.
[00:20:07] Speaker B: So if someone really wants audit ready books, and probably more importantly decision ready books, there are three reports that I would consider non negotiable. First is your profit and loss statement. But not just a high level one. This has got to be categorized properly where you can actually get some real good information. And it should be sort of a month over month type of method so you can see your trends over time.
Second is your balance sheet. And believe it or not, this is where a lot of businesses fall short. Your balance sheet tells you whether your books are actually tying together. You know, you see some of your assets like cash, your accounts receivable, your liabilities and even your equity. And if this isn't accurate, then probably your P and L can't be trusted. And then the third document is probably your cash flow statement. And this tells us, this is a formal statement. We run it like kind of a rolling 13 week type of cash flow statement. So we predict your cash and in the increases and the decreases over time. So we can predict, let's say in one month or two months out whether you're expecting to have like lower cash needs at the time or higher cash needs at the time and being able to come up with a solution way ahead of time versus trying to fight that at that point in time.
[00:21:19] Speaker A: Wow. So you had said something, you said pmo. Can you just explain what that is for our viewers just in case they don't know what that acronym is?
[00:21:27] Speaker B: Pmo. Did I, did I? I might have. Was it the profit and loss statement?
[00:21:31] Speaker A: Oh yeah, that's what it was. Okay. It was profit and loss. Make sure I. Because you know, we, we do in plain legal here. So we got to make sure we spell it out for everybody so that they know exactly what we're talking about. Okay, that's good. So I'm misunderstood. Profit and loss.
[00:21:43] Speaker B: Oh, no worries, no worries.
[00:21:44] Speaker A: Okay, so these three reports, non negotiable. So let's say somebody hasn't done this in a while. Right. Where do they start when it comes to all of these reports?
[00:21:56] Speaker B: I think they need to hire a professional, actually I think they need to hire a bookkeeper or hire an accounting professional to put those statements together. Because you're really kind of flying blind at that point in time. If you really don't know what your financials look like, I think even when it comes to tax time, you know, if you're pulling receipts on April 15, that's not good enough. All your planning is actually done in the year before. So if you're not managing your books and closing your books on a monthly basis, that can be really, really problematic. So I think hiring a bookkeeper early on to help you get through that is really, really beneficial, especially if they could put you on an operating system like QuickBooks or Xero. That would be wonderful.
[00:22:35] Speaker A: That's amazing. Thank you for sharing that information.
So if I'm an owner trying to be boring in a good way, what's a basic documentation habit I can start this week that reduces disputes and tax drama?
[00:22:50] Speaker B: That's another great question. And I think nothing wrong with being boring, by the way, especially when it comes to finances. And I think, you know, I think our, at least for our clients, you know, slowing down your business is making your business more defensible in the long term. Right. You're making your decisions more easy to explain to a banker or to a regulator or to, you know, to your investors.
I think the simplest and probably the most highest impact habit you can start with is documenting your decisions as they happen, not after the fact. Every time you make a financial decision, hiring someone you know, paying a large expense, issuing a bonus, capture the why in a simple format. It could be an email, it could be just a note in your accounting system or even a shared document. Because I think months later, when that question comes up again, maybe from your accountant, you're going to need to have the substantiation in place to be able to document. It's really hard to remember a year later. I can't remember what happened yesterday. So I think it really, it's good to keep that contemporary log ready for yourself.
[00:23:53] Speaker A: Well, you know what, thank you so much for sharing that. That was very, very insightful. And up next, we're going to talk about the moment owners dread an audit, a notice or a something's off letter and how to respond without making it worse.
Stay with us. We'll be right back with clear explanations, practical advice and the legal insights you need without the jargon. This is IN Plain Legal on NOW Media Television.
And we're back. I'm DNA High Easton, and you're watching in Plain Legal on NOW Media Television. Let's continue breaking DOWN the Law together.
Welcome back. I'm still with Harsh Jahav and now we're going into response mode. What to do when the government or any authority starts asking questions.
This is where legal thinking really matters. You know, timelines, evidence, clean narratives, and knowing what not to say too early.
Harsh's internal audit background is perfect here, because what controls are just proof that you run a real business. Right. So, Harsh, you ready? What are the most common triggers that get a business notice? Without getting too technical, surely.
[00:25:06] Speaker B: So I think one of the biggest triggers are mismatches. For example, when income is reported on your tax return, but it doesn't align with the income that's reported on a 1099 or some other third party source, that usually creates an immediate signal to the IRS that you know something, there's something they need to look into.
Usually it'll indicate some sort of a correspondence audit where they're going to ask you some questions to justify what that income is.
I think as I see more clients opt into receiving paperless statements, it's easy to forget that you had an account that you rarely use. And another common trigger is when expenses appear unusually high relative to revenue. I think that's especially a category like meals or travel or maybe like mileage. We see a little bit of that happening in that. That's another area, triggers. And then I've seen also that there's more audits happening when payroll looks disproportionately low for the size of the business, which can raise questions once again, as we talked about before, about worker classification or whether compensation is being structured properly. I think what's important to understand is that the IRS systems are sort of designed to identify patterns. They're not just looking at your numbers, but they're comparing them with the prior years and other businesses just like yours.
[00:26:20] Speaker A: Wow. You know what, thank you for sharing that. And I want to kind of draw your attention to something that you said. You know, a lot of times when you have a higher amount of money that you spend on mileage or, you know, food and meals, what happens if people are. That's the nature of their business. Right? Like they're always wining and dining people or they're having to drive long distances. I mean, would that cause a trigger that the IRS would notice or would they take account into what type of business the person has and think about the full view, not just what they see on the statement?
[00:26:52] Speaker B: Yeah, that's a good point. And I think, you know, they typically will look at industries, right? They'll look at. If you're like in sales, for example, typically you might have much more meal expenses, mileage expenses, because you're out and about, versus being maybe a CPA or maybe a daycare provider, somebody like that, that's more home based. So they will look at the industries. But I think what's important to know is that it's the documentation piece. You might legitimately have high business expenses compared to the average in your industry.
That doesn't mean you're wrong. And even if you get audited, if you have sufficient documentation and you have a really good ability to tell them why it was necessary, what the ordinary and necessary aspect of it is, you can easily justify to the IRS that they, that, that that's a legitimate expense. And if you're organized and you're, you have documentation like, like a logbook, for example, they typically will accept what you have to say because they know that you're running your business like a business. And there's nothing in the law that says you have to run your business exactly like everybody else in your industry does. So I think that's, that's what I would say.
[00:28:01] Speaker A: Okay, so when a notice arrives, what are the first 72 hours supposed to look like? Like, what should someone gather? What should they not do?
[00:28:11] Speaker B: All right, so the first thing to understand is when a notice arrives is it's not typically a crisis, it's a request for clarification. But the way you respond in the first 72 hours really matters. The most important step is to take a deep breath, slow down, read that notice carefully. You need to know the deadline that you need to respond, which is usually highlighted in the notice. And you want to know, understand exactly what is being asked.
I can't tell you how many times I hear from some of our new tax resolution clients who refuse to open IRS letters. By the time they actually open the letter, it's past the deadline to respond, and the IRS is already threatening to take some kind of collection action.
In some cases, the letter concerns more like a mismatch, like we talked about earlier about reported income. Those are easy to administer. You can usually do that through, through sending them a letter or answering via fax. So very, very simple ways to work with that. I think once you understand the issue, you can start then gathering all the relevant documentation. And that usually includes things like bank statements, invoices, receipts, payroll records, and even prior tax records. Anything that directly supports the item in question.
[00:29:25] Speaker A: You know what? Thank you for saying that, because I know that a lot of clients that come to me, they're panicked, right? The fear sets in more than the actual Circumstances of why something is being sent. So the key that I always tell my clients is check the date, right? What is, what's the date say? When do you have to respond? Take a deep breath, first and foremost, and then we can address the problem. So a lot of times, like, when do you think people should be contacting you? I know when they should be contacting me as the attorney. But when should they be contacting you? When they, when they do get a notice?
[00:29:58] Speaker B: I think right away. I think right away. Because, you know, the type of notice also matters because sometimes the notice is very, you know, regular. I'll call it very ordinary, where they're asking for basic information.
But the notices could range to something more significant like fraud. And you really need to talk to either a tax professional, you need to talk to your attorney to understand a little bit more about what the intent of that letter is. So if you suspect something, why not run it by a professional who deals with it all the time to give you better advice?
[00:30:27] Speaker A: That makes a lot of sense. Thank you for sharing that.
So you've worked in an internal audit, right?
What is the simplest internal control a small business can implement that makes their book instantly, I don't want to say more believable, but makes their books legitimate, surely.
[00:30:46] Speaker B: And I think the simplest intro control, there's many of them, but I think one the most powerful ones is the separation responsibility. You know, this is even done in even a small way.
Like let's say, for example, one of the biggest red flags in any business is when one single person is responsible for handling, let's say, the recording and reconciliation of transactions without there being any type of independent review.
That's where errors and sometimes fraud can go undetected.
Now, I know small businesses don't always have large teams, but you can still create some basic separation responsibilities. For example, the person entering transactions should be the one reviewing the bank reconciliation, and the owner or manager can review those financials monthly and ask questions. Even that small layer of oversight can make a big difference. And maybe another simple but critical control is ensuring every transaction is supported by documentation.
Every expense has an invoice or receipt attached to that.
[00:31:48] Speaker A: You know, let's talk about receipts.
I think it's everyone's favorite topic, right? We are supposed to be saving all of our receipts.
So what happens if people don't save all of their receipts? Because, I mean, I feel like the nature of this economy and how we all move is it's a very, you know, tech world, right? So we're not always wanting to just, you know, go to the gas station and print the receipts. So what do people do if they do not have the receipts to back up, you know, have the proper documentation for a potential audit that does happen?
[00:32:20] Speaker B: That's a great question. I'll tell you from my experience as an auditor, an IRS auditor, if I found, for example, that by and large, you know, let's say I'm auditing meals, for example, and I see that they have 90% of the meals receipts and maybe 10% are missing, that happens in anybody's business. We're just human beings, and it's happens. As an auditor, I would be willing to pass on that. I'd say, you know what? I think for 90%, you got it pretty much. Well, I get it. You know, you're busy, things get lost, and, you know, maybe you didn't have the other 10%, but I'm willing to give you 100% deduction because it's legitimate. Especially if all of your other mail receipts are documented with the plays, the time, the purpose, and, you know, sort of like the. The amount everything is put together, I would feel very much in your favor to give you the entire deduction. But I will say, like, nowadays, you know, we have technology in our side. There's many, many great applications that we can actually take pictures of our receipts, document. It goes directly into our accounting system. Wonderful things. There's even great tools that track mileage. So you just turn it on, turn it off on your. On your smartphone. Very, very good tools that can make our life a lot easier when it comes to tracking those type of things.
[00:33:32] Speaker A: Have you seen people who are previous business owners or current business owners use their bank statements to show off another version of receipt? Or do you guys see that as attention for an audit?
[00:33:45] Speaker B: And I just want to make sure I understand your question there. So we're talking about comparing the bank statements to the actual receipts themselves.
[00:33:52] Speaker A: Do that, reconciliation that, or if people don't have the receipts, does the irs, when they look at that, do they see that as a potential for an internal audit if they just have bank statements? Because I do know of a lot of business owners that do that, right. They won't save the receipt. They won't take a picture. They won't classify it under the type of technology to make it easier. They'll just say, okay, well, I'm using my bank statements. Everything goes through my bank. It's all clearly in my statement. Would that raise a red flag for the irs?
[00:34:22] Speaker B: I think it would for a very different reason. Though, because I think one of the areas the IRS is concerned about is differentiating between personal expenses and, and business expenses. Just because the business paid for it, that doesn't mean it has a business purpose to it. People may accidentally use their corporate card and pay for a personal meal or maybe the lunch that they paid for is not a business related occasion. There's many reasons why I think you still need the receipt. As a matter of fact, the IRS actually mandates that you have receipts so you can document on the receipt, receipt or in your journal what that, what that expense was actually for. So I think if it was like a small amount that you need to verify, maybe. Okay, but I wouldn't use that for all my receipts as my, you know, without having the actual receipts available.
[00:35:11] Speaker A: Well, that leads me to my next question. If you had to give owners one audit proofing habit that also improves profitability, what would it be?
[00:35:21] Speaker B: Ah, good question. Okay, I think that for me, what it is, it's more about systems as we talked about earlier, right? If you have a really, really strong system where you're not really even needing to do it for tax purposes, but you're doing it for financial purposes, this is the way you run your business. You run it like a professional. You have your books close on a monthly basis. You have your accounting statements, the balance sheet, the income statement, statement of cash flows presented and created on a monthly basis. We have it reviewed, we have it, we have it going to the accountant. We have it. You know, like second review done there. I think that systems are the most effective way to really do your planning, I think, in my opinion.
[00:36:06] Speaker A: Well, thank you so much for sharing that. And Harsh, if someone wants to connect with you, I'll show your public contact. Is it 1-800-769-0092?
[00:36:16] Speaker B: That is correct.
[00:36:17] Speaker A: And can you share your email for the lovely people?
[00:36:20] Speaker B: Of course. You can reach me at Harsh. That's H A R S H at my ProfitGurus with an S dot com. So it's harshyprofitgurus dot com.
[00:36:31] Speaker A: Thank you so much. And they can also find you on LinkedIn under Harsh Jahab. Is that correct?
[00:36:36] Speaker B: That is correct.
[00:36:37] Speaker A: Amazing.
Well, in our final segment, I want to connect the dots between profit discipline and legal peace. Because cash flow issues don't just cause stress, they drive bad decisions fast.
Stay with us. We'll be right back with clear explanations, practical advice and the legal insights you need without the jargon. This is in plain legal on NOW Media Television.
And we're back. I'm DNA High Easton. And you're watching In Plain Legal on NOW Media Television.
Let's continue breaking down the law together.
Welcome back to in plain legal. Watch Now Media TV live or on demand on Roku or iOS plus full episodes in podcast form on Now Media TV's podcast channels.
Stay with us.
I'm back with Harsh Jahav and I want to end with something practical.
How owners build financial systems that reduce legal exposure without living in fear of the IRS or a lawsuit.
So this is kind of like what they say, the grown up business segment, cash flow forecasting, profit planning and making decisions that hold up under scrutiny. It's not about being perfect, it's about being defensible.
When cash is tight, what's the most dangerous financial shortcut you see owners take and how do they avoid it?
[00:38:06] Speaker B: I think what I've seen is one of the most dangerous shortcuts I see is when cash is tight, they start using money that doesn't actually belong to the business. And I'm talking specifically about payroll taxes or sales taxes. And they use this money to basically cover a short term gap, thinking that they're going to be able to repay that over some period of time. Now, from an owner's perspective, it feels like a temporary solution, but you think, you know, I'll catch up in a month. But those funds are actually considered trust funds. You're holding them on behalf of employees or the state, and when they're not remitted properly, the consequences escalate quickly. Penalties, interest, and sometimes even some personal liability. And I think what makes it really risky is it starts small. One tight month turns into two. And now you're digging out of a deeper hole which is giving you less flexibility.
And a way to avoid it is to treat the obligations as untouchable. Right. Build a system where payroll taxes and your sales tax are set aside completely into a different account where you're not using them for your operations of your business.
[00:39:14] Speaker A: So based on that example, I mean, can you share an example of what has happened or the impact of that when you did see an owner taking that type of legal. I mean, I'm sorry, the financial shortcut that you just described.
[00:39:27] Speaker B: Yeah, I can give you one example. We had a client, you know, they were responsible for collecting a fair bit of sales tax.
Unfortunately, the owner was going through a divorce and needed quite a bit of money to pay the attorneys and things of that nature.
They had a bad couple of months. You know, this was around the time of COVID so they had really, really tough months going on and they just weren't getting the revenues in. They felt like Covid was going to be a much, much shorter cycle. So eventually in about a couple of months, they would be back to resuming and getting earning the revenues they're used to. It just didn't happen. Covid took a long time, but in the meantime they were taking a lot of money that was already put aside for sales tax and payroll taxes and using it to just keep the business afloat and also paying for some of the divorce fees that were necessary. At the end of the day, the owner thought that they could just shut the business down, file bankruptcy, and that doesn't work. These trust fund cases actually go after the owner and the owner is actually responsible for those even after bankruptcy. So that's what becomes really critical is that you just don't want to touch trust fund monies at all. It's never a good idea.
[00:40:39] Speaker A: Thank you for sharing that. And I mean, I'm going to go into the legal side just for a hot second, but I mean, the fact is there's a business during the pendency of a divorce, I mean, that's subject to division in and of itself. So it's just, it's creating a multitude of problems. So thank you for sharing that example for people to understand.
So you work with medical professionals and executives.
What's unique about those industries that creates kind of hidden tax traps? Like, I mean, I think I'm thinking like payroll deductions, entity structure or multi state issues.
[00:41:10] Speaker B: That's a great question, but I'm going to answer it a little bit differently. Probably a little bit more surprising on what I'm finding with our, with our clients.
I think what's really unique about executives and medical professionals is they actually are too conservative for their own good when it comes to filing their taxes.
You know, they've been typically trained in like highly regulated environments, whether it's corporate or healthcare. So they carry this constant fear of audits and you know, the scrutiny of an audit. And because of that they don't take the deductions they're absolutely entitled to. So instead of, you know, taking, making aggressive tax mistakes, the real issue is the opposite. They overpay their taxes just to feel safe. Now layering the complexity of how they get paid and some of the hidden traps that show up. And there are like, there are some for executives, it usually boils down to equity compensation. Whether there's RSUs, stock options, deferred comp, any of those type of things. They're not structured properly. They can really expose the client to some significant taxes.
Also for medical professionals, it's more around the entity structure. A lot of them are operating with the wrong entity setup, not optimizing payroll with versus distributions. They're leaving deductions on the table and things like CME equipment, even home office, because they're afraid it's going to trigger an audit. So maybe a little bit different view of it.
[00:42:33] Speaker A: That's very interesting. I mean, in the day and age of COVID right. When all of that happened, there was a lot of people that transitioned their businesses from being in an office to being at home. Right. And then there's even businesses that do hybrid. I mean, what do you say for people that have a hybrid model when it comes to working from home, but also having an office where they go in and help with their, you know, with their clients?
[00:42:57] Speaker B: I think it makes a big difference whether they're an employee or versus they have. They have their own business. You know, I think one way or another, I think what you're trying to do is you're trying to track and actually come up with the amount of time you're spending in the office. It's. It's got to be a regular use and it has to be something that is required for your business. If you're an employee. Typically a good practice is to have your employer say that you do need an office in your home so you can justify it. It's from your employer to give you that work. If it's more of a business situation, you have a lot of control in your hands. And I see this a lot with medical professionals because they not only work in a hospital or an office outside, but they may actually do work in the house as well. We have some folks who work in the psychiatry and psychology space, and they actually have work that they do out of their home where they visit with clients. Clients come there as well. So when you look at all these different combinations, I think the office in the home could be a legitimate deduction. And whenever possible, we want to maximize that. Every dollar that you're saving in taxes, you can reinvest in your business. And we want to do it as quickly as possible.
[00:44:03] Speaker A: Thank you for sharing that. That's amazing. I'm sure a lot of our viewers would like to hear that because, I mean, they're kind of in that in between phase of being hybrid. Right. So what does cash flow discipline look like in your life? Weekly rhythm, owner paid strategy and forecasting so that the business stops operating on hope.
[00:44:21] Speaker B: I think at a practical level, it starts with sort of a weekly check in. Not a deep analysis, just a clear view. What's coming in, what's going out, what decisions need to be made in the next seven to 14 days. I think that alone eliminates a lot of surprises. And then from there you can build a structure around how many moves, maybe one piece is having a defined owner pay strategy. Instead of taking money sporadically, you establish a consistent approach, whether it's a fixed draw or a salary or some kind of combination so the business isn't constantly reacting to personal needs.
And then forecasting is a third layer. Even a simple rolling 8 to 12 week cash forecast gives you really good visibility to you, the upcoming gaps or opportunities. It allows you to plan ahead, adjust your expenses, accelerate collections or even delay non essential spending.
[00:45:14] Speaker A: That's awesome. So when should people be contacting their cpa? Like if they're looking at the numbers weekly, when do you suggest that they should be contacting you to talk about those numbers?
[00:45:26] Speaker B: You know, I actually prefer like at least quarterly, but even more monthly if it's possible. If your CPA is on the same wavelength because too many things happen in your business where you don't want to be visiting them annually to talk about it, you need their advice and they're going to help you come up with a strategy to potentially fix something that's potentially going to go wrong. Why not engage them as soon as possible possible? So I think at a minimum, quarterly, I like monthly.
[00:45:56] Speaker A: That's good to know. So if someone's a business owner who wants to grow. Right. What's the cleanest way to fund growth without creating compliance chaos like not having debt or having to reinvest or tightening margins first?
[00:46:10] Speaker B: I think in my opinion actually the cleanest way to fund that growth is to start internally, you know, through margin improvements, meaning like profitability and some disciplined reinvestment.
You could probably go down that path before really reaching out for external capital. Capital is really expensive and you sometimes involve parties that you really don't need to.
It's better if you can handle it internally.
Now I know many owners jump straight into debt or outside funding because growth feels urgent. But if the underlying business isn't operating efficiently, then you're just basically scaling inefficient efficiencies. And the first question should be, can we improve margin?
And might that even mean like adjusting pricing, reducing unnecessary costs, maybe improving operational efficiency? And all these small changes can really add up and free up a lot of cash without really adding much more risk? So I think that's kind of the plan I would take. And then you can talk about reinvesting in a proper way and then maybe debt as the third option.
[00:47:12] Speaker A: You know what? That's very insightful. And I will say that kind of ties back into your earlier statement that you had in our first segment where you talked about slowing down. And I think a lot of business owners, they feel as though that they can't slow down, right, because the business is moving. But this is where they get to reach out to professionals like you to help them slow down. So that way they know exactly what is coming into their business and how they can grow efficiently. Would you say that that's accurate?
[00:47:38] Speaker B: That is 100% accurate. And I think you brought up a really good point, because I think as business owners mature in their business, they start to think more strategically versus operationally. So I think that is the move that I think a professional can help them make and make that jump and become better at managing your business long term.
[00:47:55] Speaker A: That's amazing. So final question. What's the one metric you wish every owner watched monthly because you think it predicts both profitability and future? You know, no stress when it comes to the legal world.
[00:48:10] Speaker B: If I had to choose, like, probably one metric, it would probably be operating margin. And it's just how much of your revenue do you actually keep after covering your core expenses?
Operating margin is powerful because it tells you two things at once. First, it shows you whether your business model is truly profitable. And second, it gives you early warning signs of stress. Right. And when margin starts to shrink, owners can often compensate in ways that create the risk. And they delay payments, cut corners, or make aggressive tax decisions. And that's where financial pressure turns into complex issues.
On the other hand, when margins are healthy, you have flexibility.
You invest, you plan, and you meet your obligations without strain. So I think the key is not just looking at the number, but watching the trends.
Our margins improving, are they stable? Are they declining? The trend tells you where the business is headed.
[00:49:04] Speaker A: Amazing. Harsh. Thank you so much for making this very plain for all of us. Here's what I'm taking away. When owners build profit systems, they're not just building wealth, they're building protection. Clean books. Clear structure and consistent documentation don't just help at tax time, they reduce legal risk year round. Is that correct?
[00:49:23] Speaker B: I love it. Thank you, DNA. Thanks for having me here today.
[00:49:26] Speaker A: You're welcome. It was a pleasure. And to everyone watching in, plain legal is for general education, not legal advice. If you need guidance for your specific situation, talk to a licensed attorney in your jurisdiction. I'm DNA high. Easton, thanks for watching, and I'll see you next time.
