Too often, young entrepreneurs make egregious mistakes that end up costing their business thousands of dollars. This is especially true when they’re focused on generating more leads and driving new business, a situation in which many tend to ignore their expenses and end up accruing a scary amount of debt. The average entrepreneur can be a bit cavalier with their financials: it’s easy to rack up thousands in “necessary” expenses without considering whether or not those bills are actually helping grow your business.
When it comes to filing taxes, you should be especially careful with your numbers. Unfortunately, you can lose thousands of dollars overnight when you fail to prepare for tax time.
If you’re thinking this can’t happen to you, then consider the ways in which you can go wrong with your taxes: you can underpay, which can lead to expensive IRS interest and even penalties, or you can neglect to take all the relevant deductions, meaning you’re paying more in taxes than you really owe.
If you’re looking to avoid such money management mistakes, then read on: this is how you need to handle your finances.
1. Know your five largest expenses by heart.
Start by answering a simple question: what are the top five things you spend the most money on each month? Then, think about how you can either reduce or eliminate superfluous costs.
For example, do you really need the Expert plan of that email marketing service, or can you afford to downgrade to a more basic plan (or get rid of it altogether if you’re not utilizing it)? Or, if you’re renting an office space, consider whether or not you’d be just as efficient working from your home office.
Take a good hard look at your biggest expenses. If you’re being critical (as you should be!), then you’ll find that you’re likely spending more than you need to.
2. Make sure each dollar spent is tied to a dollar earned.
Once you review your five largest expenses, it’s time to strategize. Going forward, you should think of each new expense as a strategic investment. How will each new expense help to grow your business? How will this expense bring in more revenue?
Ultimately, this should be your goal: for every $1 in business expenses you incur, your revenue should simultaneously increase by $1 (or more). If you can train your brain to get into this habit of thinking, then your business expenses will start to pay for themselves.
Susie Moore, life coach and bestselling author of What If It Does Work Out, has this advice for entrepreneurs getting their first business off the ground: “Sell first, build later. Focus on making money before spending money. Get customers and clients to buy into your concept, then you can give them what they actually want.”
We also reached out to best-selling author and private consultant Jeremiah Desmarais, who shared his insights on financial mistakes clients have made before coming to him for help.
What Desmarais found are three common errors new entrepreneurs make when trying to get their business off the ground that comprise what he calls "spray and pray marketing":
- Buying an ad in a publication using "branding" so you look like a big company building "awareness" - when what you really want are leads
- Buying a list of prospects and sending an unsolicited email that goes for the offer without adding value first
- Hiring expensive marketing consultants for a "strategic plan" that ends up not seeing the light of day because it's too complex
Instead of "spray and pray," Desmarais advises his clients on a leaner approach to business development that takes less time and money while resulting in more new deals.
He suggests entrepreneurs who desire more business look into hiring freelance consultants with specific skills in client acquisition, LinkedIn marketing to target key accounts and decision makers, and using cold email sequencing with tools like mailshake and getemail.io.
3. Use tax deductions strategically.
Based on the type of business you’re in, you'll qualify for certain deductions. For example, a real estate agent can deduct the cost of meals and entertainment for clients, and a salesperson can deduct the cost of fuel or take the standard mileage deduction. In order to take full advantage of the deductions that apply to you, consult your tax preparer at the beginning of the year, so you know what to look for.
Throughout the year, track all of your expenses by keeping your receipts. If you’re more old fashioned, you can use a spreadsheet to do so and print out your business bank account statement monthly. Or, if you consider yourself to be a more modern entrepreneur, then you can download a free mobile finance and accounting app like Hurdlr. The importance of keeping receipts (or digital records, if you’re going the app route) is to justify your deductions in the case that your accountant or the IRS requests evidence.
While this record-keeping may feel tedious, this is an important accounting strategy for entrepreneurs. After all, by maximizing your tax deductions, you thereby lower your taxable income, the number off of which your business taxes are calculated. In doing so, you end up with more money in your pocket at the end of the year.
4. File taxes quarterly, not annually.
If you anticipate owing $1,000 or more in taxes for the year, then the IRS requires that you file your taxes quarterly. Filing taxes quarterly (if you meet this threshold) is beneficial in two ways. For one, you avoid IRS penalties that you could incur from paying late.
And second, paying four times per year helps you to better budget your tax expenses; it’s much easier to spread out your tax payments throughout the year, as opposed to making one huge cash payment in April.