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.
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.
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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In last week’s blog post, we discussed the perspective shift that online entrepreneurs experience once they realize they aren’t treating their online income like an actual business. We shared our observation that many online entrepreneurs spend so much time focusing on generating revenue that they neglect other aspects of their business that are essential for future growth and stability. When online entrepreneurs begin to truly see themselves as business owners, they inevitably start to think about their business differently as well.
They develop a long-term strategy.
In the beginning, generating any sort of revenue seems like such a difficult task that many entrepreneurs don’t envision what their business might look like years down the road. Whether you’re currently making money or getting ready to launch a new business, there are some key question that you should be asking yourself:
- How will your operations change as the business grows?
- Where will new revenue streams come from when you’ve exhausted your current channels?
- What is your role and how will it evolve? How large can the business grow before you reach your maximum capacity for managing clients and/or projects?
- What areas will require investments to help the business grow?
They track and organize their financials.
Bookkeeping and taxes are a big part of managing your business, and we’ve seen online entrepreneurs really stunt their potential by either avoiding this aspect of their business completely or handing it off to someone who isn’t capable of managing it properly. It’s difficult for an online entrepreneur to envision a bright future when their finances are a mess and tax problems are constantly looming.
They utilize financial data to monitor the health of the business.
Many online businesses wait until the end of the year to have their accountant sift through their bank statements and homemade spreadsheets for tax purposes. Although we commend these owners for taking their tax liabilities seriously, not maintaining the books on a monthly basis means they miss out on the opportunity to analyze financial data when it’s actually useful. It’s far more difficult to spot issues and opportunities if you have no grasp of the state of the business from month to month. For more on this, check out our earlier post about why every online business needs a bookkeeper.
They understand the importance of leadership.
Just because you’re running an online business from your home doesn’t mean your leadership skills are any less important. Your ability to make smart decisions, strategize effectively, manage contractors or employees, and develop a clear vision for the business are all important leadership qualities to cultivate. The business starts and stops with you, so your limitations and weaknesses will decide how far the business can go.
They get smarter about using their profits.
New online entrepreneurs (and even some seasoned veterans) focus so intently on how to make money that they don’t always know how to manage it effectively once it starts coming in. If you’re not sure what to do with your newly earned profits, we recommend the following:
- Save for taxes each month.
- Pay off your business debt (loans, credit cards, etc.).
- Create a savings account with enough money to cover 3-6 months of expenses.
- Establish a retirement plan for yourself.
They bring on professionals.
As much as some wish they could, it is virtually impossible for online entrepreneurs to effectively manage all aspects of their business themselves. There are three key people you’ll want to bring on once you can afford them.
- A bookkeeper to track your finances and provide valuable financial reporting
- An accountant to file your taxes and help you develop a tax strategy
- A lawyer to advise you regarding the creation and maintenance of your business entity and the protection of your assets in case of a lawsuit
Learning how to generate revenue is important. Knowing how to connect with your audience is important. Developing products and services that add value to your customers and clients is important. There is no question that mastering these things will be vital for your success, but as your income grows, it will only become more important to learn how to manage every aspect of your online business, not just the parts that generate your revenue.
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.
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.
