Top 4 Tax & Accounting Mistakes Made by Entrepreneurs
Let’s face it – as a business owner, your time is a precious commodity. You’ve got a business to run and grow, and your time is not best served brushing up on the latest business accounting rules and regulations. But accounting is an important function in every business, and any one of these tax or accounting mistakes can be disastrous to the success and longevity of your business, if left unchecked.
To help you steer clear of the more common tax and accounting disasters, we offer the top 4 mistakes made by entrepreneurs, and how you can avoid them.
1. Tracking Income Without Proper Tracking of Expenses and Cash Flow
The term “cash flow” is sometimes used interchangeably when discussing profit; however, although they both relate to income, cash flow and profit are quite different. Cash flow pertains to the money ‘flowing’ in and out of your business, whereas profit refers to the surplus remaining after you’ve deducted all business-related expenses.
Confusing the two can lead you to over-estimate your profitability, causing you to commit to key expenditures, such as expansion, that may not be feasible in your current financial state. Furthermore, if you are not accurately recording your expenses, you may not be able to deduct them against your income, resulting in the overpayment of taxes, particularly if the expenses were paid for in cash.
When balancing your books, it’s important that your total income (gross) is tracked alongside associated costs. Meticulous record keeping can be extremely important in determining actual profit (net), which should take all business-related expenditures into account.
2. Counting Your Chickens Before They Hatch
No matter how certain you are that a sale is ‘as good as done’, do not make commitments until the sale is finalized and properly executed. This is particularly important for those who deal with items that are either currently in the development cycle or that have a long sales cycle.
Jumping the gun on a sale can lead to making financial commitments with staff and/or suppliers before your customers have committed to you. If the customer backs out of the sale for any reason, you may be on the hook for commitments that you can no longer meet.
Always ensure that major orders and project-related contracts are only committed to, once you obtain a duly executed purchase and sale agreement and/or written contract from your customers.
And finally, never view projections for costs and expenses as absolute, when calculating cash flow. Major projects often either experience or lead to unforeseen costs and delays.
3. Making Large Purchases Without Considering Tax Implications
There is a widely spread – yet mistaken assumption – that all business purchases lead to immediate tax deductions. While this does apply to certain expenses, many large purchases are considered ‘capital expenditures’ rather than immediate business expense deductions. This means you can only claim amortization pertaining to the relevant capital expenditure (meaning the depreciation of the item’s value, as opposed to the full cost of the item).
To avoid surprises when tax time rolls around, always consult with your tax advisor ahead of time so that you can plan your deductions accordingly.
4. Not Addressing Fires When They Occur
Running a business can be overwhelming, particularly for new business owners. The multitude of demands on a business owner can often cause fires to spring up around you that, if not addressed in a proper and timely manner, can grow to become catastrophic to the business.
One of the most common sources for these ‘back-burner fires’ is accounting. Accurate and consistent accounting procedures can be time-consuming; therefore many business owners find themselves pushing it to the side until a problem arises—at which point, panic mode sets in, and the potential for causing further errors increases.
To avoid this, some business owners attempt to delegate the accounting function to unqualified staff members. This can lead to further accounting errors, increased workplace stress, and greater vulnerability to fraud.
Mishandled accounting and poor practices, whether by human error or by neglect, can also lead to avoidable government audits and potentially major interest and assessed penalties.
To ensure that the business’ accounting function is performed accurately and on a regular basis, it’s always prudent to contact a competent and trusted business accounting and tax advisor before it’s too late. In addition to applying considerable expertise to keep your accounting in order, a business accounting and tax advisor can provide timely and effective tax planning.
We’ll Set Your Accounting and Tax Practices Straight
Regardless of the size of your business or the nature of your industry, your finances are a foundational part of your business. To keep them in order, your best bet is to bring in an experienced accounting and tax practitioner who will ensure that you’re getting an accurate assessment of your available capital for reinvestment, help you to better plan your business’ path moving forward, and ensure that your purchase decisions are in line with an optimal tax strategy.