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.
TBL Episode 19: What’s the Difference Between a Bookkeeper and an Accountant?
We’re so entrenched in the financial sides of our clients’ businesses that we forget not all online entrepreneurs are familiar with this stuff. That’s why in this episode, we make sure there is no confusion about the roles bookkeepers and accountants play in your online business.
TBL Episode 10: Why we love big tax bills and you should too
When entrepreneurs think about getting a big tax bill, it usually evokes a feeling of terror and dread. The reality is, all entrepreneurs should be crossing their fingers that every quarter (or year) they are shelling out big time bucks to the IRS. That’s why in episode 10 of The Bottom Line, we share some tough love about why no entrepreneur should be caught off guard by the size of their tax bill, why entrepreneurs have it far better than employees when it comes to taxes, and why a giant tax bill is a blessing in disguise.
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What’s the Difference Between a Bookkeeper and an Accountant?
When Corey and I talk to prospective clients for the first time, we frequently have to explain to them that Evolved Finance is not an accounting firm. This confusion is understandable, as most online entrepreneurs don’t engulf themselves in the financial aspects of running a business. The majority of entrepreneurs will hire an accountant at the end of the year and then hope for the best.
If you’re unclear about the difference as well, you are in luck! We want to clear up the confusion and explain how bookkeepers provide a much different service than your accountant.
What does a bookkeeper do?
Let’s see how Wikipedia defines bookkeeping:
“Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business. Transactions include purchases, sales, receipts, and payments by an individual person or an organization/corporation.”
This is a nice and concise definition of the role bookkeeping plays in a business, but it still might seem a little foreign if you’re not familiar with the financial side of your business. Here are the basics of what you need to know about bookkeeping.
- A bookkeeper collects and records all of your business’s financial data using accounting software like QuickBooks. These financial data include all of the transactions that occur in your various business accounts (checking, savings, PayPal, credit cards, etc.).
- Once your financial data are recorded into the accounting software, a bookkeeper will then organize these data so you and your accountant can more easily see:
How much revenue your business generates before expenses (your gross revenue)
How much money your business spends on expenses such as rent, utilities, software, advertising, etc.
How much profit your business makes (profit = gross revenue – expenses)
- A bookkeeper will also make sure that your financial data in QuickBooks match up with the transactions occurring in your bank, credit card, and merchant accounts. This is called “reconciling” an account and it’s usually done on a monthly basis.
- Once all of your accounts have been reconciled and your transactions organized, the bookkeeper can then generate a profit and loss statement (P&L), a basic financial report that shows your revenue, expenses, and profit.
Hiring a bookkeeper isn’t just for tax purposes. The financial reporting a bookkeeper can provide (like your P&L) can be hugely valuable for managing your business more effectively. It’s so much easier to make decisions when you have clear financial data to utilize.
What does an accountant do?
The main service an accountant provides is the actual filing of your taxes. An accountant will take the financial data your bookkeeper has compiled and use it to file your taxes.
Here are the five main ways an accountant can serve your business.
- An accountant will file all the necessary paperwork with the federal government and your state government during tax time.
- An accountant will provide advice and guidance around what expenses you are able to write off for the business.
- An accountant can help you estimate your tax bill throughout the year. They can also file estimated payments for you every quarter if you’d rather not wait.
- An accountant can provide general guidance around building a tax strategy that will limit your tax liability while also ensuring you stay within the confines of state and federal tax laws (very important when your business starts generating six or seven figure revenue).
- An accountant can help you through an audit with the IRS.
Accountants can provide some other services as well, such as helping you to create a business entity or setting up a payroll system for your employees. Not every business needs these extra services, but all businesses – making any amount of revenue – need a tax professional to make sure their taxes are handled properly.
If you have aspirations to grow your business in a significant way, establishing strong financial practices early on can make future growth so much easier to handle, especially as the business becomes more complex and the IRS starts to want a bigger cut of your profits. A strong financial team can significantly reduce stress around your taxes and finances while also freeing up your time to focus on driving revenue and managing your team. Don’t wait until you’re in tax trouble to get professionals involved in your business.
Ten Characteristics We See In Our Most Successful Clients
As the primary account managers for Evolved Finance, Corey and I have visibility into the businesses of many successful online entrepreneurs. On our monthly calls with our clients, not only do we analyze their financial data but we also have an in-depth discussion about how they ’re driving sales, how they ’re managing their business and what their long-term goals are.
Over time, it has become apparent what our most successful clients are doing to stabilize and grow their businesses. Although each business we work with has its own unique challenges and success stories, the entrepreneurs that run these businesses seem to share some common characteristics that are key to reaching their goals.
1) They are clear on their business financials
Every client we work with understands that wrapping their heads around their financials is an absolute must for their success. That ’s the primary reason they switched from their old bookkeeping practices to working with us. We wrote a separate post about the importance of financial clarity, which you can read here.
2) They focus on the most profitable aspects of their businesses
Part of growing a successful online business is knowing which revenue streams are paying the bills. Over time, many businesses will launch a variety of products and services in order to maximize earnings potential and create growth. Our most successful clients monitor their revenue streams closely so they can see which ones are providing the most financial benefit. We ’ve seen other online entrepreneurs grow their product and service offerings too quickly, spreading themselves and their teams very thin as they try to chase every dollar that comes their way. That ’s where utilizing the sales data from your CRM can be hugely helpful to focus your sales and marketing efforts on the revenue streams that support the business the most.
3) They plan ahead
Planning ahead is essential to take your business to the next level. It can be so easy to get caught up in the day-to-day operations that you forget to take some time to step back and think about what ’s next. Our most effective clients are always thinking ahead to their next product launches, marketing efforts, and financial goals. The ability to visualize and strategize the next move is a crucial skill set all entrepreneurs need to develop if they want to see their business grow.
4) They take advantage of opportunities, even if it means making a shift in how they operate their businesses
A savvy businessperson sees opportunities and takes advantage of them. For instance, we ’ve seen clients totally drop a product launch in order to shift their efforts to projects that provide a better return on their time and effort. Corey and I have run into this in our own entrepreneurial endeavors as well. Recognizing an opportunity that could provide huge results is half the battle; the other half is being brave enough and strategic enough to take advantage of the opportunity so that it provides tangible benefits to the business.
5) They take calculated risks
Most online entrepreneurs know that taking risks is part of the game. Going into business for yourself is a big enough gamble as it is, but most of our clients know that taking risks doesn ’t have to be a sink or swim situation. They never invest more than their business can afford and they take baby steps when moving into territory they haven ’t traversed before (new product launches, services, ways of running the business, etc.). Much of being an entrepreneur revolves around failing, but it ’s important to make sure those failures don ’t break the bank or put your current success at risk.
6) They invest back into their businesses
There is no doubt that you can have a low six–figure business just by utilizing effective sales and marketing strategies, but our clients who grow way past this range understand that you need to put money back into the business in order to grow, whether by hiring the right people, investing in infrastructure, or developing bigger and more robust product offerings. The confidence to invest back into your business almost always comes from having a clear vision and strategy around what you are trying to accomplish.
7) They understand the value of working with people who are good at what they do
The larger your online business becomes, the more you ’ll need to rely on the help of others. This can come in the form of hiring employees, contractors, consultants, or even partnering with other entrepreneurs. Our most successful clients understand that the people they choose to work with need to be great at what they do. Hiring the cheapest employees you can find, or partnering with people who do not share the same vision or passion for your business is a recipe for disaster. The old saying “you get what you pay for” is doubly true when it comes to bringing people on to work in your business.
8) They keep their personal and business finances separate
When you ’re running an online business, it ’s easy for your personal life and business life to intermingle, especially when it comes to your finances. If you ’re using only one bank account for both business and personal use, your financials become cloudy and complicated. This also makes your bookkeeping and accounting more convoluted, which can increase your accounting bill at the end of the year and make it easier to miss out on tax write-offs. It ’s amazing how much more focused and clear your business becomes when you separate it from the rest of your financial life.
9) They live within the means that their businesses provide them
If you don ’t think your personal expenses have an effect on how you run your business, you are mistaken. Our most successful clients understand this better than most, making sure to live within the means that their business provides them. This way, if they have a slow month on the business side, they aren ’t scrambling to pay their bills in their personal life. After all, the more money you take out of the business to pay yourself, the less money you have to invest back into the business to help it grow.
10) They think about their businesses… A LOT!
Every online entrepreneur we work with is constantly thinking about his or her business. They understand that if you ’re truly passionate about what you do, your business will always be top of mind, especially if you want a business with any sort of stability or longevity. That doesn’t mean they neglect the other aspects of their life, but they do understand that they need to not only be aware of what ’s going on with their business right now, but also have a vision for what their business will look like in the future.
There is no single way to get your online business to where you want it to be. Hopefully, by seeing how other entrepreneurs have created thriving businesses, you can learn from what they ’ve done and apply those principles in a way that makes sense for yours. After all, nobody knows the intricacies and unique challenges your business faces better than you.
Five Reasons Every Online Business Needs a Bookkeeper
When entrepreneurs start making money for the first time with their online businesses, the last thing they want to do is worry about bookkeeping. After all, they’re enjoying the high of finally generating revenue, so why ruin it with thoughts of balance sheets and income tax? It’s such a buzz kill!
If you’re an online entrepreneur and your business is starting to generate revenue, it’s really important that you get your finances in order as soon as you can. Good bookkeeping practices are the foundation to accomplishing this. It might not be as sexy as managing your sales funnel or running your social media campaigns, but establishing good financial practices in your online business can mean the difference between thriving and simply getting by.
If bookkeeping is a new concept to you, or you’ve never really understand the full benefit to having good bookkeeping practices in your business, the five reasons we’ve shared below should make it very clear why bookkeeping can make running your business less stressful and provide some real benefit.
1) You shouldn’t be spending your time doing bookkeeping
As an online business owner, there is enough work to do as it is, so why add bookkeeping to your list? The best thing you can be doing for your business, no matter what stage you’re at, is focusing on driving revenue, which is why reconciling your bank accounts every month is hardly the best use of your time. Plus, unless you have previous experience doing bookkeeping, you’re probably making mistakes that will need to be fixed by your accountant, which means more billable hours they’ll ding you for when tax time comes around.
2) Monthly bookkeeping makes your accountant bill cheaper at the end of the year
Hiring a bookkeeper is actually going to make your accounting bill at the end of the year cheaper. By working with a bookkeeper every month, your finances are organized and ready to go for your accountant when it comes time to file your tax return. That means he or she doesn’t have to round up all your bank statements or sift through your homemade spreadsheet to try and figure out how much your business made. Additionally, when a bookkeeper is maintaining your books throughout the year, the data will be much more organized and accurate. Having your accountant try to get everything done right at the last minute (especially when they’re trying to do the same things for numerous other businesses at the same time) leaves a lot of room for mistakes and missed tax write-offs.
3) It’s easier to estimate your taxes during the year
Does the thought of your tax bill keep you up at night? If you’re one of the many entrepreneurs who stress about what they will owe the government at the end of the year, it’s because you don’t have accurate financial data for your business! When a competent bookkeeper reconciles your accounts every month, it becomes ridiculously easy to look up how much profit your business has made. With that kind of visibility, estimating your tax bill is something you can keep track of month-by-month instead of waiting until the very end of the year.
4) Real financial data helps you make better decisions for your business
A lot of online entrepreneurs think that bookkeeping is just for tax purposes. This is a perception we’re trying to change at Evolved Finance, because although bookkeeping is definitely a way to keep yourself out of trouble with the IRS, it’s also the most valuable tool for monitoring the health of your business so you can make better strategic decisions. When you’re able to clearly see how much revenue you generate every month, and exactly how you’re spending your money, it becomes obvious where potential problems and opportunities lie. If you wait until the end of the year to have your accountant compile all of your financial data, you’re missing out on an opportunity to utilize valuable information that can help you make smarter and more informed decisions.
5) You’ll be better prepared for an audit
The “a” word is any business owner’s worst nightmare, but it really doesn’t have to be. The IRS performs audits on business owners and corporate entities all over the country every year (around 1-1.5 million audits), and if you’re one of the unlucky chosen, there is really no reason to stress if you have good bookkeeping practices. When your books are clean, organized and properly maintained, it becomes far less grueling and painful for the IRS to see the state of your business and make sure you are not underreporting your income or overstating your expenses. Any bookkeeper worth their salt is going to have organized financial data on your business that will show the IRS that you’re playing by the rules.
Remember, the need for a bookkeeper is good! It means your business is making money, and that’s a beautiful thing! Don’t wait until your finances are a mess or the IRS is knocking at your door. You’ll not only sleep better knowing tax time will be dramatically less stressful, but you’ll start thinking like the CEO you need to become in order to make your business more stable and reliable.
The Five Biggest Mistakes Online Entrepreneurs Make With Their Finances
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.
Seven Financial Practices Online Entrepreneurs Overlook
There’s no business without revenue, but too many online entrepreneurs fail to realize that managing their income is just as important as generating it. Most are simply not prepared for the extra complexity that comes with managing the cash flow and controlling the expenses of a quickly growing business.
That’s where Evolved Finance can help!
In this post, we review seven crucial financial practices to adopt so you can manage your financials more effectively. The sooner you start thinking about these aspects of your operations, the more profitable your business will become, and the better prepared you’ll be for future growth.
1) Putting money aside for taxes
We’ve said it before and we’ll say it again: it never ceases to amaze us how many entrepreneurs just don’t prepare for taxes until it’s too late. The bottom line is that any profit your business generates will be taxed.
The easiest solution is to automatically put 20-40% of your profits into a savings account that will be used to pay your tax bill at the end of the year. This way, you won’t be tempted to spend money that will eventually have to go to the IRS.
Calculating your estimated tax bill can be complicated because there are so many variables to take into consideration, so talk to an accountant if you have concerns about how much money you’re going to owe the IRS. Your accountant can also provide additional advice about where you should be on the 20-40% savings scale.
2) Planning for future expenses
It is always important to understand your business expenses, but it is even more critical when you’re business is starting to grow. It’s not very fun to get sideswiped by new costs that you just weren’t expecting.
This is why it’s important to understand early on how you want to grow your business and where you think that growth will come from. This way, you can forecast which expenses will increase and where new expenses may pop up. A little bit of planning with a simple spreadsheet can go a long way in helping you to support an influx of new business, so it’s no surprise that our most successful clients are often the most effective planners.
3) Creating the right business entity
Creating a business entity can be a great way to limit your legal liability as the owner. It can also provide some pretty big tax benefits once your business gets into the six-figure range.
Thanks to the Internet, it’s now easier than ever to create a business entity. We’re big fans of CorpNet, mainly because their customer service is phenomenal and their pricing is competitive.
However, despite the ease of creating a business entity, it’s always safe to talk to an accountant and/or lawyer first to make sure the business entity you choose is right for your situation. Depending on the size of your business and your long-term strategy, the entity you choose now can cause big headaches down the road from both a tax and legal perspective.
4) Having an accountant who understands your business
Believe it or not, making money online is still a relatively new concept. Although there are some online entrepreneurs who got an early start and have been actively generating income for the past ten to fifteen years, many accountants still don’t understand how this world works.
If you are running an online business, any accountant should be able to file your taxes for you, but not every accountant will understand what your business does and know how to maximize your tax write-offs. Things like affiliate income/expenses, merchant accounts, and digital products may feel like commonplace concepts to you, but be totally alien to an accountant who has dealt primarily with personal tax filings or brick and mortar establishments like restaurants, retailers, and dry cleaners.
If your accountant has to spend extra time trying to understand your PayPal statements or figuring out all of the affiliate payments you’ve processed for the year, that’s going to mean a larger accounting bill for you. We feel that you shouldn’t be charged more money because your accountant doesn’t understand how your business model works. Do some research and find someone who gets it. For a more general overview of the services an accountant provides, check out our August article, What’s the Difference Between a Bookkeeper and an Accountant?
5) Setting revenue goals
During my time in Corporate America, I got to work with a world-class sales team. One of the commonalities I saw among the best sales reps in the company was the setting of clear sales targets.
Once a rep set their sales target for the year, they would then break that down to more achievable monthly targets (and sometimes even weekly targets). By doing so, they made their goals much more achievable and easier to track. This type of revenue forecasting isn’t very common with online entrepreneurs, especially when so many businesses lack the financial data to keep track of their monthly progress.
To illustrate, let’s look at the following statements:
“I want a six figure business this year.”
“I’m going to have my first $10,000 month 12 weeks from now and I’m going to do X, Y, and then Z to make it happen.”
See the difference? Having clear revenue/sales targets will help you visualize a clearer path to achieving your goals, leading to much more deliberate and focused actions. This type of clarity is tremendously useful whether you’re aiming for your first thousand dollars or your first million.
6) Creating a budget
The way the owner of an online business manages their expenses not only decides how much profit they get to keep, but how much fuel the business has for continued growth. The best way to keep your expenses under control is to create a monthly budget.
Driving big revenue is definitely an accomplishment, but it doesn’t mean much if your expenses are out of control, resulting in little or no profit to show for all of your effort. We rarely see our clients creating budgets on their own and feel this is a very undervalued exercise in the online entrepreneur community. If you desire longevity and stability for your business, wrapping your head around your budget is vital to accomplishing this.
7) Start a business savings account
We regularly see entrepreneurs take all of their profit out of the business every single month. This leaves the business with no savings buffer for unexpected expenses or for slow months when there is less revenue generation. Without a business savings account, owners are forced to use their personal funds to cover basic expenses until things pick back up again.
Once you stabilize your business to the point where you’re able to pay yourself a consistent salary, use your extra profits to build a business savings to cover 3-6 months worth of your expenses. For example, if your business has $10,000 in expenses every month, you’ll want to build up a savings of $30,000 – $60,0000 in case you hit a slow period.
This savings nugget can also come in handy as you start to strategize for the future growth of your business. Maybe you need to hire a new employee? Perhaps you need some cash to create a new digital product? Or, you might want to try a new advertising strategy and need to kick up your add spend. You now have the cash to invest in these ventures, eliminating the need to take out a business loan, rack up credit card debt, or front the money personally.
We hear from entrepreneurs all the time how stressful this side of their business can be for them, but it really doesn’t have to be. Taking some time to plan ahead and getting the right people involved in managing your finances and taxes is the biggest battle. If you’re capable of creating a business that is actually making money, you’re more than capable of getting the financial side of your business under control as well.
