A version of this article previously appeared on FrontDesk.
Typically, financial problems aren’t exactly foreseeable when you’re running a business. Otherwise, half of all new businesses wouldn’t fail in the first five years. So in lieu of that handy crystal ball, we’ve collected some commonly made money mistakes too many business owners and entrepreneurs make.
For small businesses, many of whom handle finances themselves or simply use a bookkeeping service, GAAP (Generally Accepted Accounting Principles) may not be an acronym they instantly recognize. However, as you might expect, sound financial practices can go a long way in achieving profitability and sometimes even solvency.
Here are some words from the wise for when you catch yourself uttering these phrases:
“That’s okay – it’s a write-off”
Have a good understanding of what is a true business expense and can be written off. There are many great sources on the web for common and uncommon business expenses. Check out the U.S. IRS website, American Express and this list compiled by entrepreneur.com. You should take advantage of as many as possible. Make a habit of keeping business expenses top of mind. It is amazing how the savings can really add up. However, you should definitely consult your Certified Public Accountant (CPA) for a final review of all the deductions you plan to claim.
“It all comes out of the same pot”
Keep personal and business funds separate. Many small businesses make this mistake. You can never have a good snapshot of your business finances with personal expenses and revenue co-mingled. Use separate checking accounts and credit cards and keep track of your receipts. Failure to do so will create a problem that grows over time, and straightening it out later can be a huge headache.
“But I never did anything wrong”
Don’t get behind on tax payments. Pay sales tax and payroll taxes as soon as they are due. Don’t be fooled into thinking that they are part of your cash flow. If you get behind on a payment and find yourself with liquidity problems, you could be subject to fines or even be charged with tax evasion. Be smart—and timely.
More from Avvo: The ins and outs of tax law
“Our checking account balance shows what?”
You never want to be surprised with a cash crisis. Keep accounts reconciled at least monthly, if not weekly. Good accounting software such as QuickBooks has built-in reporting tools to help you manage your finances. You can also negotiate favorable terms from your vendors to help extend your cash flow. Smart entrepreneurs always ask “Is that the best you can do?” You might be surprised how often that simple question will work in your favor. Also, you absolutely should build a cushion for unexpected expenses. They will occur in any business.
“Can I get a 0% interest rate on my business loan?”
Do you have small business loans or lines of credit? If so, you might want to take a closer look at those credit card offers you are throwing in the trash. You can take advantage of 0% balance transfer offers and put off interest payments for a year or more. That adds to your bottom line as well as your cash flow. Just be diligent about paying back on time to avoid the crazy high interest payments that could occur afterwards.
Still need help? Get assistance reviewing documents from a local business lawyer.
1 comment
London Management Centre
A good business owner of a small business will keep the personal and business accounts completely separate to the point where none of them overlap. This helps improve consistency and prevents numbers going missing from either. Good article with some solid advice.