When most online entrepreneurs make the jump into the world of self-employment, the areas of business that they typically prioritize are the development of their product or service and the sales and marketing strategies that will help connect their offerings with potential customers. They spend hours developing their sales funnels, honing their brand identities, and building their promotional machines, but the one thing we have seen over and over again is that they aren’t prepared to manage their money.
Very few online entrepreneurs are truly ready to manage the flow of money into and out of their business. Until they’ve had the chance to actually do it, it’s difficult to know what to expect and what to look out for. Even seasoned entrepreneurs can experience huge hiccups in this area.
At Evolved Finance, we work with many amazing and talented entrepreneurs and small business owners to help them successfully manage the financial aspects of their business. Over time, we’ve identified five frequent financial mistakes that online entrepreneurs can easily avoid. Learn from these mistakes and you’ll be miles ahead of the game.
1) Combining business and personal finances
The perfect way to make your finances as confusing and difficult as possible is to only keep one bank account. Luckily, this is a very easy problem to fix! Simply open a new checking account/credit card and use it only for your business. Any revenue you generate should be deposited into this account and any expenses that can be attributed to the business should be paid out of this account. If you have incorporated already and received an Employer Identification Number (essentially a social security number for your business), you can open a checking account and credit card tied specifically to your business entity.
There are three main reasons why it is important to separate your business and personal finances. First, it’s dramatically easier to keep track of your business’s finances, because you do not have to sift through numerous personal expenses to find your business expenses. Second, it makes things much simpler for your accountant during tax time. Your accountant will be able to clearly separate your tax-deductible business expenses from your personal expenses, which means fewer billable hours and more money saved. Finally, it makes the IRS happy when your accounts are separated. The more your personal and business finances are intermingled, the more murky things become if you get audited (knock on wood!).
2) Failing to track business finances
Many of our new clients come to us without a clear picture of their business’s financials. They might be running a healthy six-figure business, but don’t know what their biggest expenses are or how profitable the business truly is. This is typically due to a lack of monthly bookkeeping.
When a bookkeeper reconciles your business accounts (including checking, savings, credit cards, PayPal, etc.), they categorize all the income and expenses that your business generates on a monthly basis so you can see exactly how much money is earned and spent. This report is known as a profit and loss statement. Once you have this type of information at your fingertips on a monthly basis, you will gain new insights into your business that are based on quantifiable data, not just guesswork. This not only elevates the quality of your business decisions, but it also enables you to make them much sooner.
3) Trying to do it alone
When you’re in the very early stages of building a business, you have to wear many hats to ensure everything gets done. Bookkeeping and taxes tend to get sorted into the “I’ll just do it myself” category for many entrepreneurs.
We encourage entrepreneurs to learn as much about all aspects of their business as possible, but doing your own bookkeeping is generally not a good use of your valuable time. Plus, chances are slim that you’re doing your books properly, which means a bigger mess for your accountant to clean up at the end of the year.
Even with simple bookkeeping software, there is still a huge learning curve before you can effectively and efficiently reconcile your business account every month, sucking up hours of time that could be better used to drive sales for your business. Do what you do best and pay experts to do the rest.
4) Not planning ahead
When we say, “plan ahead for your business,” that doesn’t mean having a plan for what you want to sell and how you’re going to sell it. Most entrepreneurs are pretty clear on those points. What we mean is putting together a budget so you can map out your expenses and forecast the sales you need to support that budget. Taking the time to proactively think about how much your business will cost to run will help you make needed adjustments sooner and avoid expensive mistakes.
Because most businesses start out fairly simple, it should be relatively easy to figure out what expenses will be needed to launch the business (start-up expenses) and what expenses will recur monthly (fixed expenses).
Start-up expenses can include things like the cost to create a web site, develop sales materials, coaching and educational programs, accounting and legal fees, etc. Recurring expenses are things like your mobile phone, Internet, virtual assistants, advertising expenses, insurance, payroll, etc.
Once you’re able to anticipate your basic expenses, you can more accurately forecast how much revenue you need to generate every month. Knowing that magic number you need hit in order to keep your business thriving can be extremely liberating. It provides a clear target to shoot for, allowing your sales and marketing efforts to be much more focused.
5) Avoiding taxes until the end of the year
Few things put the fear of God in an entrepreneur like tax time. This fear tends to do one of two things to business owners; it either motivates them to be hyper vigilant around anything tax-related, or it causes them to put their head in the sand and hope the IRS isn’t paying attention.
As soon as your business starts generating revenue, you have to file a tax return. Even if your business is not making a profit, it’s important that you file a return to show the IRS where the business stands. And, this can actually be a benefit if you make a profit the following years.
If your business is already making a profit, bookkeeping becomes much more important, especially when it comes to estimating your tax bill. By looking at your profit and loss statement every month, you can begin to estimate your taxes for the year and set money aside to prepare for your tax bill. Even better, you can make a quarterly tax payment to make the financial burden a little easier to bear.
We’ve talked to many entrepreneurs who are behind on their taxes. When they ask for advice, our answer is simple: pay your taxes! If you want to move forward, get on a payment plan and start chipping away at what you owe. The IRS is not going to forget about your debt, so it’s best to address the problem head on with the help of a tax professional.
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