Costly Bookkeeping Mistakes Small Business Owners Make and How to Avoid Them: Part 2

Bookkeeping mistakes that are costly that small business owners make. Failing to plan for taxes. This is probably one of the biggest areas that I see issue. I'm an accountant. I deal with the tax filing. But a lot of business owners just want to deal with taxes after the year is over. Instead, what we should be doing as a business owner is proactively planning what our tax liabilities look like. So let's say, for example, our tax rate is going to be 20%. If we've made $100,000 in the first six months of year, we should be planning out that we have a $20,000 tax liability at that point in time. If we're not sure what our tax rate is, reach out to those that actually know because we don't want a huge surprise at the end of the year that we owe $40,000 when we thought maybe it was going to be 10. Always applying the ideas of understanding what your tax liability is going to be will help eliminate those surprises and help you proactively plan your cash outflow resources. Not understanding payroll taxes. Now, as a business owner, we've got multiple ways that we can pay ourselves really to. One is to put ourselves on payroll, and two, is to pay ourselves as a shareholder. Now, there's a difference between the two, and part of the understanding is what payroll taxes actually mean. So when we're paying ourselves on payroll, there's required deductions that come off. If we're in Canada, it's Canada pension plan employment insurance, potentially. But income tax withholdings in the US it's very similar. Similar. You've got pension contributions that need to go in. You've got employment insurance that comes off. So ultimately you get a net paycheck. All of those deductions have to be remitted to the government. So if we're not tracking those properly, or if we're not understanding the mechanism that triggers when we have to pay these, like a lot of businesses have to pay this monthly, we need to remit that amount to the government on a monthly basis. This could be costly from a cash flow standpoint. It can also be costly from having to contribute these expenses throughout the year. So we want to understand one, what those payroll liabilities are if we're on payroll. But to understand that there's other ways that we can compensate ourselves that maybe doesn't involve payroll liabilities so that we can get money out a little bit more efficient from a cash flow and from a tax basis. So make sure you understand what those payroll liabilities are and, and when they become due, overlooking tax deductions and other available credits. So one of the pieces that's really important in good bookkeeping is tracking some of those items that maybe should be expensed or maybe shouldn't. And we really want to focus on the deductibility of all items. One area where there's bookkeeping mistakes is that anything that has an appearance of personal nature, whether it's maybe an Amazon purchase or it's a coffee shop purchase, something like that, might end up going through a shareholder or an owner's draw account, which ultimately makes it not deductible for business purposes and likely taxable to the individual for pulling those monies out. If your bookkeeping is not accurate, you miss out on opportunities to have those items deductible inside your business, and you end up paying not only more business tax, but more personal tax related to those. At the same token, the. The classification of these categories is very important as well, because if you classify an item or an expense that's in a category that's not deductible for tax purposes, you miss out on those opportunities as well. So we want to make sure that all of those expenses are being put in maximize deductibility so that we can pay the tax man a little less money. Failing to budget this is probably the greatest tool that you can use in your business. If you don't know where you're headed, how do you know how you're going to get there? If you do not have expectations or goals inside your business of what you're going to earn from revenue, what that profit margin on that revenue is, and what your overhead expenses are, how do you know how much funds you can allocate and how you're going to continue to track your level of success? Budgeting is a framework and a benchmark for you to track and essentially reflect on the progress your business is making and see if you're still on track to achieving your goals. Again, if you don't know where you're headed, if you don't have an expectation, how do you know if you're winning the game or if you're heading in the right direction? So we want to make sure for every small business that you have a budget expectation of what you want to accomplish, the financial outcomes of that in your business so that we can track the progress and see that you're on track to success. Not reviewing financial statements regularly, this would be one of the biggest problems I see with businesses. One, we have to make sure that the information is up to date. And it's accurate. But when that information is in there, it is so powerful for a business owner, for business owners to have all of the financial data that shows how the business is performing. It empowers you with all the information you need to make informed decisions. In fact, it should give you extra confidence knowing what decisions you need to make in your business because of the history of what's been happening. If your business is profitable, you need to make those same decisions to say, hey, how do we recreate this? How do you know if your business is profitable if you're not reviewing your financial statements? It gives you the power one, of knowing how the business is doing, but two, the power of understanding the progress you continue to make. Because progress keeps us in momentum, it actually helps from a psychology standpoint, helps us stay happy as well. Progress makes people happy. So make sure you're reviewing, make sure you're looking back to see how your business is performing, but to how much progress you're making. It'll make you feel in momentum and it will continue to boost the productivity of your business and maximize the financial performance. Not leveraging technology effectively. Listen, we're in a time of increased technology and advancement. We now know that there's cloud accounting solutions in there that can support your business on a daily basis. We can actually bring in data on a live basis. So all of your transactions are coming in daily. This empowerment allows you to have access to so much financial information on your fingertips that you're going to be able to make all the informed decisions you need. All of the information you need is accessible through the use of good new technology. We're huge fans of QuickBooks Online. We're a great partner with QuickBooks. They are the most advanced technology that you can get related to bookkeeping. They're the number one company in the market. They are a cloud based solution that again allows you to be up to date and live on a daily basis. It pulls all your transactions in and allows you to have the power of that information all in front of you. So if you want to have up to date, accurate, reliable information to make informed decisions, utilize and leverage technology to make your life easier and to give you access to that data so you can make those informed decisions. And I just want to talk about the importance of seeking professional guidance when needed. So recently we just brought a new client on. They've been working with a bookkeeper for the last couple of years, but they have not been getting the financial information and the financial statements on a monthly basis. And unfortunately that business owner when they came to us, we noticed that they were actually really struggling. They knew that they were running short on cash frequently, but they didn't understand why. So within moments we were able to analyze their financial information and realize that their pricing strategy needed to change. They weren't charging enough for their services and not only weren't they at market value, but they were essentially pricing themselves out where they couldn't actually make money. That business owner had to make that change. They did. So it didn't impact any of the satisfaction related to their clients. It just adjusted some of the new pricing that they had to implement in their business and now that business is thriving. So if you are a small business owner, you don't have up to date financial information. It's not accurate and you don't know how to interpret it. Seek professional guidance like our team at Govro to help support you to understand that information so you can make informed decisions and ultimately achieve financial freedom in your life.