One of the Biggest Mistakes Made by Small Business Owners and the Solution
It Doesn’t Have to be that Hard
Small Business Mistake that Cost You $
As a self-employed accountant, I realized how many small business owners have no clue what they are doing. I am an accountant who ventured out into the world as an independent contractor about five years ago. Most of my clients are through word of mouth. Other than filing their taxes, I do their bookkeeping and some have astounded me. How has their business survived without a proper accounting method in place?
One question I get asked a lot is, “why do I pay so much taxes and yet do not have enough money to pay myself?”
Some of the biggest mistakes I see from self-employed individuals are never reconciling their accounts, use of a personal account for business expenses, use of a business account for personal expenses, no proper mark-up on products sold, not paying themselves, not paying self-employment taxes, failing to invoice for months, and failing to apply incoming payments to open invoices. How do they survive or how does their business succeed? It doesn’t. They don’t have a clear picture of what their earnings are vs expenses incurred.
Their Technique did not Work
A couple, Larry and Hannah, who runs a custom-cabinet shop, recently solicited my services. They have been in business for the past 3 years and claim it has been great for them since they are profiting over $300,000+ per year. But could not understand why they did not have a positive cash flow to pay their vendors on time, let alone pay themselves.
“Let me look at your books. What accounting system are you using?” I asked.
“We use Excel to post our income,” Larry said.
“And your expenses, I suppose,” I responded.
“No, we keep the receipts in an envelope. We file them by month,” Larry responded.
“How did you come up with a $300,000+ profit per year if you use Excel for income and file your expense receipts?” I asked.
“Because Excel allows us to add our income and gives us a total,” he responded.
“Do you subtract your expenses from the income?” I asked.
“There has been little. We only purchase wood for the cabinets,” he responded.
“You don’t purchase nails, glue, paint, sandpaper, etc? Do you not use electricity, equipment, supplies? Do you not account for your time spent working on them? Your wife’s time in the office? Office supplies, woodshop supplies, rent, etc?” I asked.
I continued to list all the things that need to be taken into consideration to get the finished product. Larry and Hannah just stared at me with a clueless look on their face. They realized what a huge mistake they made skimping on paying a person to do their books.
A Bookkeeper’s Nightmare
Once I worked on their accounts, it was a pure nightmare. Three years of business. For starters, they never reconciled their accounts. It was a mess. They were even paying more taxes than they had to because they never wrote off their expenses! At their request, I set their account up since the beginning of their business endeavor three years ago. It turns out; they did not have a $300,000+ profit as they claimed. They actually had losses! To top it off, their markup was that of 2%. Sure, they had plenty of clients, but their profit was actually a negative balance.
There is a Solution
Their case is just one I’ve seen like this. What I have noticed is that small businesses consider a lot of things for their business except for a bookkeeping system. And that is where a business can go wrong. Bookkeeping is not an expense you should put on the back burner. It should be one of the primary things to budget for. The cost of keeping your books balanced is one of major importance in a business -big or small. It is not even that expensive to have someone keep your books on a monthly basis depending on what your needs are.
My advice to small business owners is to always make sure you hire a reputable bookkeeping company to keep your business books. It’s a matter of working smart, not harder.
