Top accounting and tax mistakes entrepreneurs make and how to avoid them

Credit to Author: Shalini Dharna| Date: Mon, 31 Jul 2023 22:12:33 +0000

You decided to join the wonderful world of entrepreneurship. Congratulations! You’ve got your product/service ready to go and then it dawns on you… you’re now responsible for that one thing you never enjoyed…. accounting and taxes!

Understanding and complying with accounting and tax rules in your business is an expectation and just one of the many hats you must now wear as an entrepreneur. In this article, I am going to go over some of the common mistakes entrepreneurs make when it comes to managing the accounting and tax side of their business.

Not seeking the right professional help

This mistake is often in two areas.

a) Tax filing vs. tax advice

Most entrepreneurs understand that tax filing is a requirement as a business owner. They seek out an accountant /tax filer but often tax advice is not included with the tax filing services. Some accountants do not offer consultations and are just focused on compliance, others do but it is a separate service. Unfortunately, entrepreneurs who don’t understand this difference assume that both are included in the tax filing.

When you are accountant hunting, you need to have a list of what you are hoping for from the relationship and ask very pointed questions about what is or isn’t included – can you call them all year round, at what fee, do they review information with you before filing, etc.

b) All CPAs are accountants but not all accountants are CPAs

In Canada, the word accountant, bookkeeper and tax preparer are not regulated. Meaning that anyone can offer services under these categories regardless of what formal training they may – or may not – have. There are two designations in the industry – Chartered Professional Accountant (CPA) and Certified Professional Bookkeeper (CPB). Working with a member of a professional organization offers you – the entrepreneur – some comfort because this means they are subject to the rules of the professional organization; most organization have oversight and professional conduct rules they subject all their members to in order to protect the public. If you want to specifically work with a designated professional, then you need to do your due diligence. Most active members are listed on the membership directories of professional organizations.

Outsourcing the task and responsibility

Unfortunately, you can outsource the task, but you cannot outsource the responsibility. If your accountant/bookkeeper makes mistakes the interest/penalties will be levied on you, the entrepreneur, not the firms. Yes, in cases of extreme negligence you may be able to seek damages through court but the onus would be on you to show negligence.

So, what can you do when you are relying on a professional to help you?

Ask questions. If you are working with a professional who is not willing to spend a few minutes explaining the why behind whatever you are filing, that is a red flag. No, they will not be able to explain the technical behind the scenes – that took years of learning – but they should, hopefully, be able to break it down into layman’s terms for you to understand the basic guiding principles behind it. Then, if it sounds too good to be true, or you are not comfortable with the risk associated with it, you can make informed decisions on how you wish to proceed. Always review and ask questions before signing off on anything!

Take a course/consultation. You went into business to offer your product/service, all this accounting/tax stuff was an unfortunate add on. Taking a course or doing research will help you understand the basic elements you are expected to know. Becoming familiar with simple concepts – like proper write-offs, deadlines, bookkeeping basics for your type of legal set up – will help you have conversations with your hired professionals to ensure you are aware of what they are doing.

Stay up to date. You found yourself a trusty bookkeeper/accountant, wonderful! Now ensure you’re staying up to date. Your financials are used for more than just tax filing so staying on top of your bookkeeping and current with your tax compliance will help you run your business better.

Know your numbers! This is one of the biggest struggles for a new entrepreneur. Your financial statements tell you what is working and not working in your business – but you need to know how to read them. This is where working with your finance team or financial advisor comes in. You may know how to price a job, but do you understand your cash flow? You may know how many hours a project will take you, but do you know what your break-even is? Do you know how much to set aside for taxes? These are the areas entrepreneurs struggle with because they are hustling hard but not seeing the rewards. Often, this falls under the “Advisory” or “fractional CFO” scope but whether it’s the same person doing both or different professionals helping you with different elements of your business, knowing how to use your financials to advance your business is a critical step in the learning process, even past the start-up stage.

You went into business because you had a passion for your product/service. Your financials are a part of that passion – after all, you went into business to make money, right? Finding the right team to help you not only set up, but stay on top of everything, is the difference between a business thriving and not just surviving.

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