Top 5 Financial Mistakes Made by Entrepreneurs 2016
I love entrepreneurship. I believe the determination, creativity, and ambition of America’s entrepreneurs to be largely responsible for the success of our nation’s economic engine. As I have had the opportunity to work with and advise several business owners (in addition to running my own), I have been able to observe what works and what doesn’t. Over time, I have come to identify some of the most common pitfalls that can trap you as an entrepreneur and inhibit your success. Here are the top 5:
- Trying to Do It All YourselfAll too often clients will come to me after they have made a large financial decision, asking for tax help or advice on dealing with the consequences of their decision. Just as preventative medicine keeps people healthier and lowers overall medical costs, preventative professional advice for business owners can help them to avoid costly mistakes that could inflict serious damage to their businesses.A few minutes or hours spent with a professional to verify the cash payback of an investment or to iron out the terms and timing of a deal before you put pen to paper can save huge chunks of time and money trying to clean up the mess left behind by a few missed details. Don’t hesitate to ask a professional – who is your advocate – to look over the details of a potential deal or big decision. Whatever upfront cost you may incur will likely be both insignificant compared to the overall value of the decision and a wise way to save yourself time, money and heartburn down the road.
- Bad or No BookkeepingHere are a few of the benefits of bookkeeping done right:
- Better decision making. Well‐prepared monthly financial statements allow you real‐time information on income and expenses that will help you make better‐informed decisions about when and how to expand, hire, order more supplies, or adjust the throttle on sales and marketing.
- Improved cash flow. The number one reason why businesses fail is lack of cash flow. Budgeting for the future is critical to properly managing cash flow, and quality bookkeeping is a key ingredient to good budgeting.
- Tax savings. The best way to save taxes is through quality tax planning before the tax year has ended. Better tax planning decision can be made throughout the year with an accurate and up‐to‐date set of financial statements. Well‐kept financial records are also critical if you are audited by the IRS or state tax agency.
- Corporate veil. Faithfully keeping separate financial records for each business helps protect both your personal and business assets from liability exposure by preventing the comingling of assets and maintaining the corporate veil.
- Sanity protection. When your books are a mess, you know it. It lingers over you day and night, creates stress, and consumes mental and emotional energy which could otherwise be spent doing what you do best – planning proactively to make money for your business.
- Not Keeping ReceiptsKeeping track of all of your receipts is a pain. I know. I get it. But the pain of this daily habit is nothing compared to the pain of an IRS audit when you don’t have organized financial records and/or receipts. Plus, it has never been easier to save all of your business receipts. There are several apps you can install directly onto your smart phone which allow you to take and save pictures of your receipts as you get them. If that doesn’t suit you, keep an envelope in your car dedicated to business receipts and just throw them all in. Once‐a‐month, run all of those receipts through your scanner and save the file to a backed‐up location.For my clients, I offer to do the scanning and keep your backed‐up receipt files free of charge simply because I know how much time and suffering this habit can save you down the road. Bottom line: Just do it! Saving receipts is a habit you will someday be glad you have.
- Not Planning for Income TaxesGetting behind with the tax man can be fatal for small businesses. Proper tax planning throughout the year to know and prepare for your end‐of‐year tax liability is the best way to prevent getting buried under a huge tax bill you are not able to pay. Get a good understanding of what you will owe, and proactively save and/or make quarterly deposits based on your estimated federal and state income tax.Always file your taxes. Even if you can’t pay; file. If you aren’t ready to file by April, file an extension. You don’t want to owe money to the IRS, but you really don’t want to face the penalties of not filing.
- Failing to Pay and File Payroll and Sales TaxIf you run payroll – even if your only employee is yourself – you must be sure to file and pay payroll taxes. If you have an S‐Corporation, you are required to put yourself on at least a quarterly payroll. State sales taxes are also due monthly or quarterly in most states. Here is what you need to know about these deposits:
- Deposit amounts add up fast. Don’t underestimate how quickly these tax bills – especially payroll taxes – can grow. There is a reason for the frequent deposit intervals. Tax agencies understand how easy it is for business owners to lose track of and underestimate the cash needs for these deposits. Keeping up with your tax deposits is like bailing water out of a boat. Take it seriously.
TOP 5 FINANCIAL MISTAKES MADE BY ENTREPRENEURS
Brian B. Basinger CPA, MBA Page 2
- You can go to jail for not making required deposits. The IRS can and does put business owners in jail for not making their payroll tax payments. I’m being intentionally redundant here: Take it seriously.
- Deadlines, forms, and rules can change and vary based on the size of your payroll. I strongly recommend you get help with your payroll. Tax rates, deposit schedules, and thresholds can and do change. Despite the best of intentions, most entrepreneurs simply have too much going on to keep tabs on all of this, and the consequences of mistakes can be so damaging to a business that cost of getting good help with payroll is usually money well spent.Thank you for taking the time to read this report. I have witnessed first‐hand the demoralizing effects of these mistakes on small businesses and their owners. My firm – Basinger CPA – is dedicated to helping clients nationwide understand and avoid these and other mistakes in order to remove as many of the obstacles as we can from the path toward lasting business and financial success.
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