I’ve been listening to, and loving, The Mistake Podcast, hosted by Peter Shankman and Peter Keller. Each week they interview a successful business owner or C-level executive about their biggest business mistake and what they learned from it. Shankman and Keller started this podcast earlier this year and I’m really enjoying hearing about others’ experiences building their businesses. Ironically enough, I usually listen to The Mistake Podcast during my morning run.
Some of the mistakes featured on the podcast have been about poor money management. I wanted to share these people’s mistakes with you so you can learn from them instead of repeating them.
Now, I’m not a financial expert or an accountant, but I’m lucky that I had a fantastic business mentor who showed me how to read and analyze my financial reports during my first year in business. I also have an awesome accountant who takes care of me and my business from a tax perspective. So, I’ll share a little about how I manage my business’ financials.
Understand Your Business Cycle and Cash Flow Needs
Gary Kanning of 420 Science, a business that makes “stash jars” learned the hard way how important it is to understand your business’ financial reports. He’s in a business where there a cycle over the course of the year with periods of high volumes of sales and lower volume months. Lots of businesses have this type of ebb and flow and it’s important to plan ahead so you’re not short on cash or inventory when you need it.
One of the gems from Kanning’s interview is never assume that everything is OK. If you’re the owner, it’s your responsibility to check your financial reports like your profit and loss statement and cash flow report to see where your money is coming from, where it’s going, and watching for patterns so that you can be ready when there’s a natural drop off in business.
One of the benefits for me as a solo business owner is it’s all on me to do everything. The only work related to the business’ finances that I don’t do myself is my taxes. Every week, I pay my bills. Every month, I have a two-hour meeting with myself where I pull my reports from Quickbooks and analyze how the business is doing, look back on whether I achieved the goals set for the previous month, and make plans for the future.
More Profit = More Taxes
Amanda Steinberg is the founder of Daily Worth, a financial media company that educates women about personal and business finance. She’s also a serial entrepreneur. She had the fortunate experience of growing one of her businesses from $300K to $800K in one year, and she wasn’t ready for the $90K tax bill that came with it. She recovered from this mistake and learned a lot about the financial side of running a business.
If you’re an entrepreneur, there’s a good chance you pay quarterly taxes. That amount will be based on your financial performance the previous year. If you have a substantial jump in financial success, you could be writing a big check come April 15th despite paying your quarterly taxes. If you are having this type of success, you may want to talk with your accountant about what that will mean for you tax-wise so you won’t be caught off guard.
I meet with my accountant twice a year. I sit down with him when I drop off my materials for him to do my taxes and I meet with him every December to discuss how the business did for the year, to determine if I should do a spend down before the end of the year, and he gives me ballpark figures on what I can expect to pay in quarterly taxes and for my annual taxes the following year. Since I’m paranoid, I increase this amount on my projected financial reports and plan accordingly. If it ends up being less, I’m pleased; but I’d rather be prepared to pay more than worry about my cash flow.
I’ve said it many times – a good accountant is worth their weight in gold, and yes, every business owner needs one. But your accountant can only help you if you give him/her accurate information about your business, so maintain an open line of communication.
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