The Top 10 Mistakes We See Business Owners Make
There are only about a bajillion things that you need to know when you become a business owner. And typically, you don’t know what you don’t know. The truth? We understand that. No judgment here.
That’s why it’s so important to find and hire professionals who have your back to protect your journey as you go.
In our time working with clients, you could say that we’ve seen a thing or two. We curated this list to showcase some of the most common mistakes that we see business owners make.
If you find yourself on this list, don’t fret. It’s not too late to course-correct! Now you know what you don’t know, or know what you didn’t know…or something like that. 😉 Anywho…
Commingling
Good gracious alive, if you get nothing else out of this post, please remember this!
Your business bank account and personal bank account need to be separate accounts. Full stop. End of sentence. Do NOT pass ‘Go’. Do NOT collect $200.
When your business and personal transactions are commingled within the same bank account, you have ‘pierced the corporate veil’. That’s a fancy way of saying, “If you aren’t going to treat your business and personal life as separate entities, then neither will we.”
But why does this matter?
Many businesses form as LLCs or Incorporated entities. One of the major reasons for doing so is in the event of a legal situation. You want your personal assets to be protected in the event that your business is sued. When you commingle, you roll out the red carpet to your personal assets, saying, “Welcome.”
Also, the IRS doesn’t like it. If they can’t clearly tie business transactions to your accounting file because they’re too mixed up with all of your personal transactions just like your award-winning barbecue dry rub, you risk the IRS starting over and throwing out those business deductions...leading to back taxes and penalties owed. Bleh. ‘Nuff said.
2. Missing Receipts
Okay, this is a biggie. Stay with us on this one.
It is a common misconception that having bank statements only is sufficient proof of your business expenses.
I really hate to break this to you. It’s not. Keeping only bank statements and no receipts is not sufficient in an IRS audit.
The IRS cares about source documents, which is simply proof of a transaction (receipts, bills, invoices). Without these source documents, the IRS can ‘throw out’ your business expenses and disallow the deduction…leading to back taxes and penalties.
There are so many tools available to you these days to help you keep your receipts without having scraps of paper all over your house and office. Our personal favorite is Hubdoc. You can get a subscription to Hubdoc yourself and upload your receipts electronically.
3. Belief That Having a Bookkeeper is All You Need
First, we are so grateful that you have so much trust in us that you believe that having a bookkeeper in place is all you need to protect yourself in the event of a business audit.
Unfortunately, that is not the case. Yes, we will record all of your transactions and ensure their accuracy. But if the IRS comes knocking, the only way they’ll care about any of your business deductions is if they’re backed up by source documents.
What is a source document? It is proof of a transaction. Think receipts, bills, invoices, etc.
4. Treating Your Business Like Your Personal Cash Cow
Medical bills. Vacation timeshares. Plane tickets for personal travel. Boat repairs. Netflix subscriptions.
These are just some of the examples we’ve seen of personal transactions that hit our clients’ business bank accounts. And really, this ties back to commingling above.
You work hard in your business. And you deserve to pay yourself for the work that you do in your business.
Best practice is to either be on payroll and take wages (if you’re classified as an S Corp) OR to take an Owner/Shareholder Distribution.
Taking an Owner/Shareholder Distribution is accountant-speak, and we much prefer everyday language around here. What this really means is that you either make a transfer at your bank from your business-to-personal account, or you write yourself a check from your business account and deposit it into your personal account. Boom. Distribution made.
And you can return to your regularly scheduled programming paying those medical bills, vacation timeshares, etc…but from your personal account. 😉
5. Excessive Spending on Meals
We see this one frequently. Excessive spending on Meals and Entertainment. We’re talking thousands here, people.
We recently reviewed a prospective client’s accounting file, only to discover that they had about $20,000 in ‘Meals and Entertainment’ on their Profit & Loss. That. Is. A. Lot. And they were a husband/wife team. They didn’t have loads of employees, conference travel, business meetings, business retreats, etc. What I’m getting at is the fact that there wasn’t additional activity within their business that would substantiate the need to deduct $20,000 in Meals & Entertainment. Ya catch my drift?
Wanna know what the most common audited category is in the event of an IRS audit? Meals and Entertainment. Wanna know why? Because it gets abused. And the IRS knows it.
For the IRS to recognize your Meals & Entertainment deduction in an audit, they’ll first want to see a source document. (Remember those from a couple bullet points above in Receipts?)
You’ll not only need the source document (receipt) of your meal, you’ll need to document:
Who you met with
A clear business purpose for meeting
We see business owners having the mindset of, “Oh, I talked with so-and-so about my business while I was out, so this is a business deduction.” But ya gotta back it up, with a receipt. Do yourself that favor. It’s a gift to your future self.
6. Not Charging Correctly for Change Orders
We’ve seen clients fail to charge correctly for change orders…or fail to charge for them at all!
Look, we get it. The scope of the projects you’re on tend to change…more often than you’d prefer.
You’re on site, and your customer comes up with something else to add to the project “while you’re already here”. Or you start demo and find a whole host of issues that need to be corrected before you can even dream of moving forward with the project. Or your customer decides that they don’t like that color and are hoping you can rip out what’s already been installed and swap it out.
Too many times, we’ve seen our clients begrudgingly say “okay” and do the work, either for a minimal charge or no additional charge at all. There’s guilt attached to this. “It’s so fast, I feel bad charging them for adding this.” “If I charge too much, the project will be over budget, and they won’t be able to afford it.” “Oh, this color was pretty bad, I hate to charge them for something that doesn’t look right.” (Even when the customer is the one who chose the color in the first place!)
It is okay to have boundaries in your business. We are not saying that you need to start price gouging your customers. Not at all! But ultimately, you are running a business. You are the one behind the steering wheel, ensuring that you stay on the road and not falling off the bridge under water.
7. Not Setting Up Your Payroll Accurately or Right Away
When you start a business, you tend to be scrappy, wear all the hats, and do all the things. That is a great quality and is likely what led you to start a business in the first place.
Payroll is an area that can have devastating consequences if you don’t get it quite right while in ‘scrappy’ mode.
We highly recommend paying for the help to get payroll set up correctly. And we also suggest using a payroll software or service that will handle all the payroll tax filings for you. Missing a filing comes with steep penalties and hate mail from the state and IRS. No fun.
We prefer Gusto for payroll software. It is easy to use. And you can actually reach a real human if/when you encounter issues.
While QuickBooks does offer payroll through their subscription model, it is not our favorite at this point in time. When things go wrong, it is extremely difficult to get in contact with an actual human who can help you resolve the issue or even understands what the issue is in the first place. Ask me how I know.
8. Misclassifying Employees as Contractors
Oof. This is a tough one, especially in the construction and trades industry.
You have to pay attention to 3 key areas to help you determine if the worker is an employee or a contractor:
Behavioral → Does your business control what the worker does and how they do it?
Financial → Is your business controlling any aspects of the worker’s job? (How the worker is paid, reimbursing expenses, providing tools/supplies)
Type of relationship → Are there written contracts or employee type benefits? (Insurance, vacation pay, etc). Is the work performed a key aspect of the business?
If you answer with a bunch of “yes-es”, then you need to be careful here! You might have an employee on your hands.
Ultimately, you need to evaluate how much control and direction you have over the worker. And once you evaluate, document how you came to that decision should you ever need to defend it.
Misclassifying an employee as an independent contractor will earn you the right to be held liable for employment back taxes and penalties. And really, no one wants to win that prize.
9. Improper Controls
You’re building your business, and you trust your people. That is the way it should be. However, it is wise to be savvy and limit your employees’ access to your company’s funds. And it’s important to know the other risks that your business can encounter, too.
Not having proper controls in place leaves you exposed, and you won’t necessarily know there’s a problem until it’s too late. Here are 3 examples of controls you can put into place now:
Employee Credit Cards: We recommend using a service like Divvy if you need to issue company credit cards to key employees within your company. There are spending limits, and you can deactivate employee cards quickly if needed.
Bill Pay Services: We always recommend that you are the final approver before any funds leave your bank account. There are many bill pay softwares available that help with this. Our current favorite is Corpay One.
Changing Account Numbers for Paychecks: Anytime an employee wants to change their bank account/routing number on file to receive their paycheck, pick up the phone and speak with that employee. Never accept only an email request to process this kind of request.
10. Putting Off Your Bookkeeping
Look, we get it. Your bookkeeping isn’t exactly sexy or exciting. And that ‘To-Do’ list only seems to grow; it never shortens. While your bookkeeping likely isn’t the last thing on your mind—hello, panicked wake-ups at 3am, hoping that your business is financially thriving; and did you ever collect on that invoice; and shoot, you’ve gotta remember to pay that bill tomorrow—it likely is the last thing on your ‘To-Do’ list. There are simply too many other things to do.
But now you need to go to the bank to get a loan. You need a new piece of equipment or a vehicle because your business is expanding. Go you!
Or you want to pay a visit to your tax preparer so you can talk tax strategy and ways to save on your tax bill, but you don’t have clear, accurate numbers compiled for the year. Your tax preparer talks to you about general ideas, but the meeting isn’t as productive and insightful as you hope because he/she is missing key details about your performance so far.
As you can see, we’ve seen some things in our day. And it is our hope that learning about some of these common mistakes that business owners make highlights some areas where you can course-correct…or give you the confidence that you’re already knocking it out of the park!
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