Top five tax and 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 missteps can significantly impact your profitability, cash flow, and long-term success

To help you steer clear of the more common tax and accounting disasters, we offer the top four 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 overestimate 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 gross income is tracked alongside associated costs. Meticulous record keeping can be extremely important in determining actual net profit, which should take all business-related expenditures into account.

Many businesses now benefit from cloud-based accounting systems and automation tools that can reduce manual errors and provide better decision-making insights. By contrast, relying solely on manual spreadsheets increases the risk of errors and limited visibility.

2. Overcommitting based on unconfirmed revenue

No matter how certain you are that a sale is likely to close, do not make commitments until the sale is finalized. 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 or delays, 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. This is especially critical in uncertain economic environments, where deal timelines may shift and financing conditions can change quickly.

3. Making large purchases without considering tax implications

There is a common misconception 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). In Canada, this typically falls under Capital Cost Allowance (CCA) rules, which determine how and when assets can be deducted over time.

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. Weak internal controls and increased exposure to cyber threats and payment fraud have made this risk more significant in recent years.

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 your 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.

5. Overlooking indirect tax and compliance obligations

Many entrepreneurs underestimate the complexity of indirect taxes such as GST/HST. Common issues include failing to register on time, incorrectly claiming input tax credits, and misunderstanding obligations for e-commerce or cross-border transactions.

Proactively managing compliance requirements and seeking professional advice can help avoid costly penalties and cash flow disruptions

How Fuller Landau can help

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.

Reach out to our Outsourced Business Services group to see how Fuller Landau can help you keep your books in order.

About the author

Ellis Orlan is a Partner in our Outsourced Business Services group. He can be reached at eorlan@fullerllp.com.