Roundup: Conquering Common Money Mistakes
November 21, 2018
Most small business owners learn how to handle money the hard way… they make some money mistakes along the way. Read their advice…
Ask any small business owner about the biggest thorn in their side and “money”, “taxes” and “accounting” will undoubtedly be at the top of the list. Most service-based entrepreneurs are passionate about the work they do—and not so much about the mental gymnastics associated with taxes and accounting.
So, short of getting a quickie CPA certification, how do experienced pros handle the numbers side of the business? Trial and error, learning from others and investing in the right tools are just some of the secrets our panel successful small business owners shared with us.
Here are their hot tips for optimizing your accounting and avoiding disaster.
Understand Tax Obligations Everywhere You Work
Our hyper-digital world means you may have clients in far-flung corners of the globe. While this is good for business, it makes accounting a little more daunting, according to Andrew Campbell, workshop trainer and agricultural speaker.
“We work in every province [in Canada], which means a learning curve in what is taxable and what isn’t. And it’s different for different provinces. We also work in the U.S., which adds another layer of complexity,” said Campbell.
“I’ve talked to staff in finance departments in several provinces to learn what is and isn’t taxable. They can be great resources. As for the U.S., our accounting firm has experts in international tax law, which we’ve also used when needed.”
When it comes to taxes, his mantra is to never be afraid to ask an expert. “Tax law is one of the areas where it is much better to ask for permission first than for forgiveness later. They aren’t forgiving.”
Keep Your Taxes Separate From Your Income
A classic rookie mistake for many small business owners is to neglect to set aside the right amount for taxes from every single invoice. You only have to come up short at tax time once to understand the danger of this inattention to detail. (Read: a monster bill from your government.)
Graphic designer Joshua Speers doesn’t leave anything to chance when it comes to ensuring he’s tax ready. “I have three business bank accounts: a general holding account, an HST account and an income tax account. This might seem a little extreme, but separating your money as it comes in makes it much easier at tax time.”
Most small business owners start out as sole proprietors. It’s the simplest way to start a business and is usually okay for one-person operations that aren’t expected to expand enormously. Income and losses will be taxed on your personal income tax return, so you need to keep careful records of what you earn and set aside money for taxes.
Other entrepreneurs choose to incorporate, which means your business is a legal entity that is separate from you. In addition to shielding you and your investors from personal liability, incorporating also offers tax savings in the long run.
“I incorporated my business, so I pay myself a salary as an employee and remit withholding taxes every month. It’s clean and simple and I never have to worry about being caught short at year end,” said Paul Russell, writer and communications consultant.
Communicate With Your Accountant/Bookkeeper Regularly
Although online software like FreshBooks makes small business accounting simple and straightforward, some entrepreneurs choose to hire an accountant or bookkeeper to be sure their numbers are rock solid. If you go that route, the lines of communication need to be open wide.
“I once assumed my accountant had filed HST for me. That was definitely an eye opener to stay on top of things,” said Suzanne Colmer, image and style consultant.
Monthly or quarterly meetings to go over financials are the best way to know where your business stands with respect to profit and loss and to ensure your tax obligations are being met.
Invest in the Right Tools
It’s a no-brainer to invest in the equipment that you need to ply your trade. The same principle should apply to the tools you need to run your business. According to Campbell, the right software is essential.
“You need something that tracks your time, expenses, taxes, etc. All of it is crucial and can be a time suck if it isn’t done right. Just make sure you enter the information when it is fresh in your mind. My most embarrassing moments come from trying to remember what I did for who, and for how long. You are asking for trouble if you leave it to memory.”
The most important investment of all may be the computer you use to run your software. “We tried to cheap out when we started and regretted it about six months later when we had to buy new ones. So much of our business is run from our computers, even if it is just emails, spreadsheets, word processors and building slide decks. We can’t afford to have them crash.”
Watch Your Expenses
When you run a small business, expenses are inevitable. Common line items like equipment, supplies, education and meals with clients are essential, tax deductible expenses.
“As a writer, I don’t have a lot of business purchases day to day. There’s only so many ink cartridges you can buy. But what I don’t think you can overspend on is client lunches and drinks. My rule is that I always pay and I don’t worry about how much I’m paying. They are the client, they’ve trusted me, and if we’re in a social setting, or a mix of work and social, I want to let them know that I appreciate this trust. It can be hard to stick to the plan when cash flow is tight, but it pays in the long run. Be generous with your clients,” said Russell.
It’s important to think carefully about expenses that are automatically deducted from your credit card. “Subscriptions are ones to watch. There are some things we need temporarily, and others we need all the time. Make sure the ones you only need temporarily, you cancel as soon as you are done with them. Gradually adding them up can turn into a lot of money out the door that you don’t always notice,” said Campbell.
Colmer agrees. “I think my biggest issue for spending was on education. I loved the idea of buying online courses that could make me an expert on something I knew nothing about. In the end I think I could have just purchased a book on the topic!”
Automate as Much as Possible
There aren’t enough hours in the day for most small business owners. That’s why it’s critical to delegate or automate as much as possible. Look into apps and software that manage simple things like sharing files, storing online passwords and managing social media.
“Accounting and online scheduling are two tools that I literally couldn’t run my business without. I also love Google Drive for sharing documents with my team and clients,” said Colmer.
“Book like a Boss has cut down on all the back and forth that happens in trying to schedule a session. It also means I often get to wake up to a new booking email which is always fun.”
Of course, accounting software like FreshBooks can automate everything from online payments, recurring invoices, payment reminders and expenses. “I have used FreshBooks for years. It makes taxes insanely easy and allows me to store important information on clients. If they didn’t make it as simple as they do, I would probably never get paid,” said Colmer.
You don’t need specialized skills to conquer accounting and taxes. According to our experts, it’s all about the right outlook, stellar organization and the right tools.