We are almost at the end of this year, which means we are getting into tax mode. Being a Colorado business owner adds a lot of responsibility to your plate when it comes to finances. Throughout the journey, we all end up making a few financial mistakes. Unfortunately, little financial errors can lead to some serious cash flow problems if you aren’t careful. This is why we decided to put together six financial mistakes you can easily avoid and protect your bottom line.
1. Merging personal and business finances
As a new entrepreneur or business owner, often times personal and business finances end up going through the same accounts. In the short term it might seem like the easiest and most time efficient way to operate. In the long-term, however, it becomes cumbersome to track what is happening with your business. When you try to get an accurate picture of how your business is doing financially, you have to sort through a long list of deposits and expenses, separating manually what belongs to the business. Same goes for your personal finances. Leaving aside the wasted time, more importantly, a manual process of separating business from personal transactions increases the risk of making mistakes.
2. Not tracking business finances at all
Every business is a living organism, which requires a constant check of pulse. As your business starts to grow, you profits increase, but so do your expenses. If you wait until your operation grows to start tracking finances, you are risking to never catching up. If you are in the initial stages of your business, the very least you can do for yourself is start a spreadsheet and start populating deposits hitting your business account (revenue), number of transactions, as well as every expense that goes out.
You need to be able to see what comes in, what’s leaving and be able to track profit, so you can have an accurate view on your business’ health, but also know at any given time what your tax liability is. By creating this habit early on, you will be able to manage your business strategy for growth.
3. Late payments
Bills, bills, bills... It seems like a never-ending dance - by the time you pay everything, the new cycle starts and your mailbox if full again. Who can say they have never put bills off until the very last minute? This applies to us as people, as well as all business owners when it comes to account payables and receivables.
We tend to allow for extended windows of time to collect payments from clients. Of course we do it to help clients out and ultimately gain more sales, however, we walk a fine line of flexibility vs. crippling our cash flow. Don’t be too generous with your billing windows - if you’re providing quality goods and services customers should have no problem paying you within a shorter time window.
When paying your own bills, follow the same principle. This is crucial in the case of operating on loans. Paying an invoice late may result in a few unhappy emails, but when it comes to paying off your debts you need to always be on time. Even one missed payment can severely harm your credit score.
The best way to stay on top of these is to use an online payments solution that offers online invoicing and accounting features. This way all of your bills are organized and can be accessed anywhere at anytime.
4. Trying to do everything alone
As small business owners, we can be very sensitive to any types of expenses, especially when we are starting out. Trying to do everything yourself can be a double edged sword. Anyone who has ever run their own organization can probably attest that as a business, finances become complicated quickly and taxes are more difficult to file. Even easy software can allow you to make mistakes. If you cannot afford a bookkeeper, the first hire you should make is an accountant. They can provide guidance and file your taxes properly.
5. Not planning ahead
Living for today might be a very liberating philosophy, which, unfortunately, doesn’t support business health for long. By not setting a budget or forecast it is almost impossible to predict what your business is going to look like in the next 3-6 months. Developing a budget and sales forecast will allow you to have clear understanding of your revenue and expenses. From there you can determine if you are in the position to invest (spend money) and build a plan to support your goals and more importantly, how to get there.
6. Avoiding taxes until the end of the year
When you work for an employer, taxes are automatically taken out of each paycheck. As annoying as that might be, it protects us from having to take out a big lump sum at the end of the year, which we might have spent.
The responsibility with running a business increases tremendously.
As a small business owner, it is on you to make sure you have the funds to pay your taxes.
Without planning and tracking finances regularly, it is hard to know where you stand at any given time. Newer and smaller businesses are especially at higher risk, as money ends up being taken out, instead of allocated in a fund for taxes. Going back to the importance of tracking your finances, if you can’t forecast profitability, you cannot easily estimate taxes, which ultimately can lead to getting behind on tax liability.
A safe way to stay on top of tax liability is to pay your taxes quarterly. That way you don’t end up owning an unbearable amount of money at the end of the year.. A good rule of thumb is to allocate at least 30% of your revenue to your tax fund. Prepare so you are not surprised!
Southern Colorado Insurance understands businesses in the community. As an independent insurance agency in Colorado Springs, we take pride in reviewing your options with multiple insurance companies and comparing protection and prices to find the best value for your business. Have questions? Don't hesitate to contact us!