Common Mistakes People Make When Starting A Business
You may have spent years studying at a business school, and while that serves as a strong foundation, the learning truly begins when you have to set up a new venture. All that you’ve learned will be put to the test when you have to ensure your business survives the real world.
This journey to starting a new business will be lined with all kinds of obstacles, such as lack of funds, unprofessional team, fatigue, and so on. As a new entrepreneur, your inexperience when handling such challenges may pressure you into a wrong or poor decision that could have counterproductive effects on your business.
However, with advice from qualified peers or business advisors, in-depth research and proper planning, you can foresee costly errors and eliminate them before it threatens your business. To assist you in this process, Clark Robinson Chartered Professional Accountants has compiled a list of the most common mistakes when setting up a business and how you can deal with them.
1. Failing to capitalize well. Many new business owners invest sufficient capital to start a new venture but fail to consider the cash resources necessary to keep the business running for subsequent months. For example, many industries take time to collect cash from accounts receivable or inventory, but creditors, suppliers, and employees need to be paid at present. Lack of money in the bank will prevent the new business venture from growing.
This mistake can initially be avoided through proper planning. Create a business plan to strategize ways to achieve your business goals. An understanding of the industry, competition, and customers paired with financial projections over the first three years will help identify cash requirements.
2. Prioritizing personal finances over business finances. We all have personal financial responsibilities and goals, but a business bank account should never be regarded as a personal savings account. Businesses have future liabilities to pay with cash that is currently in the bank, such as income and sales tax, source deductions, loan payments, payroll, suppliers, etc. Owners that treat their financial needs before those of the business will quickly see their business trend towards insolvency.
Updated financial reports will help a business owner understand how much the business can afford to pay in salary or dividend to the owner. For a new venture, the business may not be able to afford to pay the owner any salary or dividend for some time.
3. Not applying taxation to a business. Many business owners don't understand how taxation applies to their business which can lead to unexpected and expensive audits. For example, Goods and Service Tax (GST) or Harmonized Sales Tax (HST) and Provincial Sales Tax (PST) have very complex rules, where one transaction may not trigger a sales tax, but a slight variation to the same transaction could trigger multiple sales taxes. Further, new business owners may be unaware of the source deduction withholding and matching requirements that come with employee payroll.
Establishing and maintaining an advisory network will help business owners understand how taxation applies to their business and how to minimize those liabilities.
4. Not maintaining a record. Many business owners are not used to keeping documentation and receipts, which can put business expense deduction or GST input tax credit claims at risk of being denied. For example, many business assets are used personally by the business owner, to some degree, commonly a business vehicle. To substantiate the way a business vehicle is personally used, a mileage log must be kept. If no mileage log is kept, the Canada Revenue Agency could deny any vehicle expense claims due to lack of documentation, which would result in higher income tax, GST and even Canada Pension Plan (CPP) liabilities.
Business owners must take the time to understand their recordkeeping requirements and stay diligently on top of their responsibilities. When it comes to record-keeping, it is all or nothing; there is no in between.
If you’re looking for professional chartered accountant services in Vernon, BC, consult Clark Robinson Chartered Professional Accountants. We are a full-service accounting firm with more than thirty-five years of experience providing personal, corporate, estate and trusts, accounting and tax services to clients across North Okanagan, such as Lake Country, Armstrong, Lumby, Enderby, Salmon Arm and other communities like Nakusp and Kamloops. We ensure clients make the most of the current tax laws and help them plan for future tax situations.