1. Mixing business with personal finances
One of the most common mistakes is not having a separate business account for your business. It is important to keep the accounts separate to keep an accurate record of transactions and to understand where the money is coming from and where the money goes to. Otherwise, there is no separation of business from your personal finances and it becomes a jumble of information. It is good practice to pay for your business expenses from your business account, and pay yourself on a regular basis through salary, dividend or a mix of both.
2. Falling behind in bookkeeping
Another common mistake is getting behind on your bookkeeping and reconciliation. It is really easy for business owners to neglect bookkeeping as it is a dreaded task. Once you fall behind, it creates a cycle of falling even more behind. It's a cycle that needs to be broken. Without useful and up to date information, business owners can't make the right decision or evaluate the performance of their business. They keep struggling from month to month to pay suppliers, rent and pay for other costs. A system needs to be put into place to ensure bookkeeping, filing and reconciliation is done on a regular basis without fail. This system will help business owners to monitor their cash flow and the profitability of the business on a regular basis.
3. Not utilizing monthly reports
Speaking of reports, once the bookkeeping system in place, the next step is utilizing the reports properly and on a regular basis. The two most useful reports business owners should know are the income statement and the cash flow. The income statement outlines how much sales were for the period as well as the expenses. It's a good indicator of the profitability of the company and also gives you idea where the business could improve. Perhaps you find that you spend too much on supplies or tools, then you work hard the next few months to lower those expenses.
The second report is the cash flow statement. This report shows how much cash is coming in from customers and how much cash is going out for expenses and major purchases. This report could yield some very important information. For example, on the income statement, the company could look very profitable as the sales are quite high. The cash flow statement might show a completely different picture, because a majority of those sales were not collected but the expenses kept coming in. At this point, the business owner might want to review his or hers collections policy as well as follow up on accounts receivables.
4. Not keeping receipts
When CRA knocks on the door and wants to review the books, they will always ask for original receipts. There is a misconception that credit card statements are an allowable form of receipts. It is not. For example, if you go to the gas station and spend $100 on lottery tickets, which is not an allowable business expense, unless it was as a gift to a client or employee. On the visa statements it will show $100 at a gas station, but it does not show what was purchased. CRA will not accept that as proof of business eligibility and will deny the expense. Thus, keeping all original receipts is a must for any business, small or large.
5. Not writing off the allowable expenses
Another common mistake is to under declare eligible business expenses. Some owners are unsure what is deductible and what is not. As a result, they over pay taxes and have less cash flow for their business and personal use. Work with your accountant to understand what is a business expense and what is not. CRA also has a lot of information for business owners to what they can claim as an expense. Don't leave any money on the table, maximize your expenses.