Monday, February 24, 2014

Mistakes that entrepreneurs make

I was asked to give a presentation recently and one of the topics was what are the most common mistakes entrepreneurs make?  There are a number of them and I will address them over the next few weeks.

The most common and most dangerous mistake people make is not planning properly.  This can manifest itself in a number of ways.  The entrepreneur may not put enough time into the business plan.  A business will need a plan if it is getting a bank loan but if the start up is self-funded, many owners skip this step.  All start-ups need a business plan and neglecting to create one often results in failure.

The process of writing a business plan forces the entrepreneur to deal with all the potential problems the start up may face.  Who will their customers be?  How will they find them?  How long will it take to reach break even?  How much money will the business need before it is self-supporting (at break even)?

All these questions are answered in a well crafted business plan.  The marketing portion will address all the customer issues and the pro-forma financial statements (budgets) will address the break even and capital needs (money needed to support the business until it reaches break even).  These are important issues and they need to be answered even if a bank loan isn't needed.  The entrepreneur may find that a bank loan is needed when completing the financial projections for the start-up.  Business owners often underestimate the costs of starting up a business and overestimate how quickly they will generate a profit.

If you are considering launching a new business, take the time to plan properly and create a business plan.  If you have already started your business, it isn't too late to write a business plan.  There are software programs to help you do this, SCORE can help you do this or you can hire someone to assist.  Just make sure that you do your planning so you don't fail do to a failure to plan.

Tuesday, February 11, 2014

You don't have to be an expert to be an employer, just ask for help

Today's generation has no idea what the world was like before the invention of the internet.  You know, when you had to go to the library to look things up?  Before you could google the subject and get then answer from Wikepedia?  Hopefully the easy access to information will train this generation that there is no shame in not knowing the answer to a question.

I was foolish enough to think this was expected of me when I left college, that my fine education should be given me the answers to all the questions which were put to me in the working world.  This created a great deal of stress for me in the early years as I struggled to figure things out on my own and to hide my presumed "lack of knowledge" from my supervisors. Thankfully, I am now older and wiser and have learned that saying "I don't know the answer to that, I will have to look it up" is not shameful.

Business owners need to learn this as well.  They obviously have an area of expertise which is what led them to open the business.  They are not expected to be experts in other areas, such as accounting, marketing, IT or human resources.  Trying; to master all these areas on your own can sink many a new business.  Knowing when to ask for help is the sign of a savvy business owner.

Becoming an employer for the first time is a complicated matter and guidance is always recommended.  Making sure you have completed and filed the proper paperwork, you are paying employees within labor laws and you are paying payroll taxes and filing forms correctly and promptly is tricky.  Failing to do so can cause a business to fail.  Being an employer is very different from being an employee so find an expert in your area to help you establish payroll policies, hire and train your employees, process payroll and file and pay payroll taxes.

We have seen far to many cases where a business owner just hires someone and writes them a check for wages without calculating the payroll taxes.  Or, they consider an employee to be an independent contractor when they should be an employee.  This link provides some clarification to the independent contractor vs. employee question.contractor or employee?

Wednesday, February 5, 2014

How a year end review with your accountant can save you money

Most small business owners are careful to watch where they are spending money and avoiding accounting bills is common.  We like to sit down with our clients at the end of the year and review their financial statements with them.  We go through each account on their Balance Sheet to verify the accuracy and then we talk about the Profit & Loss and where/how they can make improvements.

I was meeting with one client recently and as we worked our way through the Balance Sheet, I went to the Accounts Receivable Aging report to see if it agreed to the Balance Sheet.  It did, but most of the accounts were over 90 days old.  I asked my client about it and was told that the invoices had been paid so they weren't outstanding. They were still new to the accounting system they were using and hadn't followed the process accurately.  I verified that the income for the invoices had been properly recorded and removed the invoices in question.  I explained that the invoices had doubled up the revenue for the business so their net income was $25000 higher than it should be.  That meant they could have paid taxes on $25000.

We continued the review and determined that there was additional revenue which wasn't accurate as they had put some personal money into the business checking account and had classified it as income instead of owner contribution or a loan.  We corrected that as well which reduced their income by another several thousand dollars.

We accomplished all of this in an hour which means she paid me a relatively modest sum of money to save thousands of dollars in taxes.  Tax accountants usually don't have the time or ability to drill into the details when they are preparing tax returns so these errors likely would not have been detected.

This client isn't likely to repeat this error, but we are all humans and having a second set of eyes double check your accounting efforts is always a good idea.