Have you ever looked at your business finances and thought, “Ugh”?
When I became a small-business owner, I decided to put all that hard math I did as a kid to work. I could do my own books and taxes. After all, using me was free and I needed to keep expenses in check. Then I started getting letters from the IRS. The state. I couldn’t figure out where my money was going and why I made money, but didn’t have any.
After five years in business, I finally decided to ask for help. As a result, I nearly doubled my revenue for 2013 over 2012, bought a house, know my P&L (profit and loss) statement line-by-line, and for the first time, am caught up on my taxes and my business has cash reserves.
I never have to worry about money. When’s the last time you were able to say that about your business?
Let’s take a look at the five biggest financial mistakes small businesses make—and how you can start fixing each one today.
Matt Swan, CPA, Swan & Gardiner: A CPA since 1985 with Peat Marwick and Deloitte & Touche, he started his own CPA firm in 1990. He works with individuals, small-business owners and corporations.
Greg Ellis, Bookkeeper, Ellis Bottom Line Bookkeeping: Ellis BLB is a privately held, family-owned small business founded in 2001 by Greg's mom, Gail Ellis. Greg joined in 2006 and took over as sole member in 2013. They specialize in startups and small businesses.
Scott Gregory, Business Finance Specialist, Better Bottom Line: A CPA who has worked in business finances for over 25 years and QuickBooks software for over 12 years, he helps small to mid-sized businesses develop internal systems.
Mistake #1: Thinking you can handle your business books yourself.
Quick question: Why did you start your business? It was likely so you could do something you loved doing and earn a living doing it. Odds are, you didn't start a bookkeeping business. “Question your motives behind wanting to do it yourself,” Gregory says. “Is it to save money? Because you love accounting? Make sure a DIY approach is for the right reason. There is far more to handling business finances properly than downloading information from the bank—many owners find that out too late.”
Why not find more time to do what you love instead of what you don’t?
For DIY-ers, if you’re dead-set on doing your books yourself, hire a bookkeeping professional to get your books set up properly. They can train you on your chosen accounting software and teach you how to properly reconcile your accounts each month. You’ll also have a trusted resource to call with questions.
For everyone else, the advice is the same—hire a bookkeeper. There are plenty of bookkeepers that work with small and growing businesses. Gregory and Ellis offer these three practical tips for choosing the right one for you:
- Time in business: Your business finances should not be left to someone who’s brand new to bookkeeping.
- Make sure the firm/person is licensed and bonded: This will help you engage only with professionals who are in this business full time.
- More than one person in the office: Several aspects of your business finances are time-sensitive. Make sure someone can act as backup when your main contact isn’t around.
Mistake #2: Co-mingling funds.
Do you treat your personal and business accounts as one and the same? Big mistake. Massive. Ellis and Gregory agree that co-mingling funds—not separating your personal and business finances—is one of the biggest mistakes you can make. And if you continue to do so, and the IRS starts poking around, you could be facing some serious tax ramifications. It’s imperative to keep an arm’s distance between your personal and business spending.
- Establish a business bank account: You’ll need to have your business formation documents and an EIN assigned by the IRS. This keeps you from having to sort out your personal account, deciding what’s business-related and not.
- Dedicated credit cards: If you have more than one credit card, designate one that’s strictly for business.
- A business debit card: Find a bank that offers business debit cards. If you’re credit card-averse (or simply prefer to pay cash), this will keep you from whipping out your personal card and muddying your financial waters.
- Speak to a CPA: A CPA can advise you on the IRS guidelines for sole member LLCs, S Corps and corporations and how to handle separation of funds.
Mistake #3: Not keeping up with your tax obligations.
Head-in-the-sand isn’t a sound tax strategy, and ignoring your taxes won’t make them go away. “Not knowing what taxes you need to pay and the various due dates to avoid late payments and IRS penalties—we see that happen all the time,” Swan says.
Smart small-business owners understand their tax obligations each month, each quarter and each year. If you don’t know what taxes you need to be paying and when, ask for help.
- Meet with a CPA: It’s never a bad idea to get a tax professional’s help with your business finances. Review your current practices and make sure you’re meeting all your obligations on both your state and local level. Then put systems in place to make sure you’re meeting obligations on time.
- If you’re behind on your taxes: Call the IRS and ask for your complete tax picture. You can’t fix it unless you know what you’re dealing with.
- Have a CPA go to bat for you: “With a power of attorney, we can act on a person’s behalf,” Swan says. “If it is a large tax issue, it is well worth the price to have someone who deals with the IRS to go to bat for you. The IRS can’t bully someone who knows what they can and can’t do. The outcome is usually much better than what the individual can work out for themselves.”
Mistake #4: Not understanding where your money is going.
Have you ever looked at your business bank account and thought, “Where did all my money go?” You’re not alone. As small-business owners, we’ve been trained to automate. We have services and fees automatically deducted each month and pretty soon, we’re automating ourselves into financial oblivion.
A great bookkeeper can give you a crystal clear picture on exactly where your money goes each month. When I asked Ellis, who is my bookkeeper, for a concise accounting on where I was spending each month, boy, did I get a surprise. He runs my ship so tight that I was able to—in a single afternoon—eliminate nearly $500 a month in recurring expenses that I’d just let accumulate (and had completely forgotten about). That’s $6,000 a year!
Want to run a tighter ship?
- Track your expenses for three months: Gregory offers this as tip number one for small-business owners: “You’ll be amazed at what you learn.”
- Run a P&L statement: This will itemize your expenses by category. When you see the categories costing you the most, you know where to look when you want to run a leaner ship. Gregory recommends running a P&L monthly so you can identify negative trends early and make corrections before they become problems.
- Cancel low and no-use services: Have a piece of software you only use once in a blue moon? Stop paying for it every month and find an on-demand service that lets you pay-as-you-go.
Mistake #5: Asking for help too late.
“Many people think that bookkeeping is a hassle and put it off until it's out of hand,” Ellis says. “When you do this, you lose historical data that can be useful in making decisions about the future.”
He adds, “It's usually cheaper to hire a bookkeeper from the beginning than it is to pay someone to fix the books once things are out of sorts."
- Get a second opinion: Even the savviest DIY-ers know the value in an outside perspective. It’s imperative to have people you trust to offer an outside perspective as your business grows.
- Build a network of trusted advisors: You get paid to be awesome at what you do. The same is true for business financial professionals. Even if you’re the Turbo Tax wiz kid, it pays to have a team of professionals to follow your business. This way, they have context when you call and can help you steer your ship in the most profitable direction.
- Schedule quarterly and annual reviews: Too many business owners only look at their finances come tax time. When you set scheduled review meetings, you’re pulling your head out of the sand and becoming a true financial partner in your business. No matter who handles your bookkeeping and taxes, you can always make better decisions when you’re working with better data. As Gregory says, “Better data means the opportunity for better decisions.”
Read more articles and see exclusive videos in OPEN Forum’s special section on Managing Your Money.