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The 8 Biggest Financial Mistakes Online Entrepreneurs Make - As a CPA, I thought I knew it all when I first started my e-commerce business.
After all, I took exams after exams studying accounting principles, worked with fortune 500 companies, filed taxes, and audited financial statements of private and public companies. I know how to read, prepare, audit financial statements, meaning I know when things are not done right.
I also spent majority of my career stream lining business processes, implemented various process improvements within a company.
BUT when it came to my business, I took it for granted that I knew all this. I was focused on learning what I didn't know. Such as sales and marketing strategies.
As a solopreneur starting to learn the e-commerce world, it was overwhelming to learn sales funnels, social media strategies, make and design products. Basically, I was playing sales, marketing, social media, product development, safety compliance, accounting, finance departments within a company ALL BY MY SELF. All while adjusting to new mom life.
So the one thing I knew very well, accounting and finance, was always put on the back burner. I neglected it.
Until, the tax time came and I needed to prepare my own financial statements for the business. I did this for several years.
I was able to put together information and file taxes. But it was messy, and time consuming.
What I knew in my head didn't really translate into real actions of mine until I've had enough.
I started implementing processes and practices so that reviewing my own business finance is similar to how I would look at it when I was working full time as a CPA in a company.
There are so many things I knew I should've done earlier and I didn't.
And I wish you don't go through these mistakes. The following mistakes should be avoided from day 1 of starting a business and I highly recommend you start the process now.
This is especially true for online entrepreneurs, since it is so easy to start an online business nowadays. It's easy to make these mistakes until you start to make income and realize you need to do something about it.
If you are serious about making money online as your main source of income down the road, you might want to avoid the 8 biggest financial mistakes online entrepreneurs make.
1. Not separating personal and business expenses
Any business expense can be deducted against the revenue you make on your business, while personal expenses cannot.
If you are employed, you most likely receive W-2 for your tax filing. Your personal expense cannot be deducted on your tax return against the income you report from W-2.
However, business expenses can be deducted against business revenue. You want to easily identify these business expenses and keep track of them so that you can accurately report your net income (income after deducting expenses).
Going through your personal bank account and credit card statements and fishing out business expense is not a fun exercise to do.
2. Not setting up a business bank account and credit card
The easiest way to separate your personal and business expense is setting up a business bank account and credit card.
You can set up all your business revenue to be deposited into your business bank account. And you can charge any business related expenses onto your credit card.
Setting up a business bank account isn’t that difficult. You just need to visit your local bank after obtaining EIN (Employer Identification Number) from IRS. When you open a bank account, the bank will help you open a business credit card for you as well.
3. Not setting up a proper business structure
Many entrepreneurs don’t really think about setting up the right business structure, especially when it first starts out as a side hustle.
But it’s really important to set up the correct structure so that your personal assets are protected from the business liability.
And there are tax consequences based on what business entity you set up. Many small businesses start out as LLC, because of its simplicity in tax filing. And when the time comes, you can think about switching to S corp, which has a different tax structure than LLC. If you are already making 6 figures, you might want to think about whether switching to S corp makes sense.
4. Not reviewing finance on a regular basis
It’s too late if you are leaving to do bookkeeping until tax season rolls around. What I noticed is that successful entrepreneurs know their numbers and they look at their finance regularly. They also use the financials to make better financial decisions for their business, which in turn helps them grow their business.
When I first started out, I was so overwhelmed with all the sales and marketing strategies and left doing my own finance until the tax season. It was so painful to go through and try to remember what had happened.
If you are not an accountant or a bookkeeper, I suggest that you hire a bookkeeper to track all your business transactions and summarize. All books need to be reconciled on a monthly basis to account for all transactions. (Click here if you want to learn more about Know Your Numbers To Grow)
5. Not Budgeting
Planning your money right is one of the best ways to stay on top of your business growth. It’s also the best way to manage your cashflow.
Since I started a product based e-commerce business, budgeting was probably one area I made sure I looked at, so that I can manage cash flow. This was really critical since it allowed me to figure out how much money I can spend on marketing or manufacturing. It made me make better investment decisions and determine the correct pricing for my product.
Here is a great cash flow budgeting tool you can use for your business.
6. Not putting aside taxes
You don’t want to be in position where you don’t have any money left to pay to IRS.
When you are employed by a company, the company withholds tax from your gross pay. When you get on your check, it is after the company takes the tax withholdings. So you don’t really think about setting money aside for tax as an employee.
But with owning a business, it’s different.
Let’s say you made $100K from your business. While it’s so exciting to finally break the six figure mark, you need to understand that certain percentage of this earning is not yours. While 100K might have been deposited into your account, you can’t now go and use all $100K.
Normally tax is calculated based on net earnings, meaning you can deduct business related expenses and calculate tax on the remaining. But, even if you made a loss in your first year as you invested in your business, tax filing is a must to show that you don’t owe anything to the government.
This is why it’s important to do your monthly finance to see what your net earning is and set aside certain percentage as tax.
What I’ve done is set up a different checking account for Tax and I put away 30% (I’m LLC in California) in that Tax account so that I don’t even see it in my business main checking account.
7. Trying to do it alone
Being an entrepreneur is hard. It's hard because when you are first starting out, you are figuring out everything and you are most likely doing it alone.
As an entrepreneur, I truly believe that time is the most valuable source. Your focus should be on revenue producing activities. Hire a bookkeeper to track your transactions.
If you have been operating for many years without one, I suggest that you think about having someone take a look at your business to help you get organized and plan your finance.
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