Los Angeles CPA and Former IRS Agent Reveals Top Mistakes Business Owners Make
by larry71 on Tuesday, October 11th, 2011
Top Ten Mistakes Business Owners Make And Why To Avoid Them
By Lawrence J. Danny CPA, JD
Hindsight is twenty-twenty. The purpose of this article is to give you some insight as to the mistakes business owners make, why to avoid them, how to lay a strong foundation, and avoid shortcuts that lead to costly mistakes. These mistakes are straight from my three and a half years of experience as an IRS Agent and eighteen years of running my own CPA practice.
1) The Most Pervasive Mistake Business Owners Make
Time and time again, I run across business owners who don’t keep good books, try to take shortcuts, and complain when push comes to shove when a taxing agency either audits them or requires that they provide supporting documentation to backup a tax refund, tax deduction or other claim.
Why Some Business Owners Let This Happen Perplexes Me …………The excuse list begins with I or we don’t have time to keep good books, paying a CPA or bookkeeping service costs money I don’t have, I don’t have time to learn QuickBooks or QuickBooks Pro, or I never took a class in accounting.
There are several stronger reasons why a business owner should and must keep good books and records. These reasons include: to manage your business by the numbers; to be prepared for an IRS, FTB or Sales Tax Audit; for divorce purposes, in case your soon-to-be-ex has a fantasy that you’re making a lot more money than you really are; for litigation purposes in case of a partner dispute; for valuation purposes in case of a buy-out offer or if you decide to sell your business; for exit strategy or retention purposes in case you wish to sell all or part of your business to your employees; and for estate and succession planning purposes to pass your business on to family members when you retire or pass away.
If this lack of good bookkeeping applies to you, you have choices. You can continue pulling two or three all nighters getting ready for your annual tax meeting with
your accountant, you can purchase QuickBooks or QuickBooks Pro (they aren’t expensive, are user-friendly and Intuit provides great support) and teach yourself or pay a bookkeeper or CPA to train you, or hire a bookkeeping service or CPA to keep your books so you can concentrate on marketing or running your business.
My advice is to do yourself a big favor and get over your mental block and take some action. There are reasons why large publicly held companies must keep accurate, up-to-date accounting records and manage their companies by the numbers (SEC reporting requirements and shareholder reports), so take heed.
2) Failure To Hire Professionals
Many business owners think they’re saving money by not hiring or not maintaining an ongoing relationship with professionals such as attorneys or CPA’s.
If you have a corporation, it’s essential to have an attorney maintain your corporate formalities such as corporate minutes. This is a must in case of an IRS audit and to defend oneself in a lawsuit so that a potential suitor doesn’t try and pierce the corporate veil. Additionally, an attorney is necessary to prepare a note for an officer loan and/or to review leases, business contracts and other legal documents or to prepare an employee handbook.
Hiring a CPA is essential to aid a business owner in entity selection, reducing taxes, and to help to decide which retirement plan is most advantageous for tax purposes. In addition, a good CPA can analyze your financial statements, adjust them for you and tell you what the numbers mean.
My advice is to get over the “it cost too much” hurdle since the benefits are likely to outweigh the costs of hiring a professional. Good professional advice costs money but the benefits can pay-off exponentially.
3) Falling Behind On Tax Filings
On numerous occasions, I’ve been retained to file multi-year tax returns for businesses who get behind in filing their taxes. For more on this topic, see my article entitled “What Happens If I Don’t File My Taxes” under articles written on my website at www.cpaformerirsagent.com.
Try getting a business line of credit, SBA or other business loan without tax returns. It just won’t work.
4) Improperly Financing Your Business
The worst way a business can finance their business is by borrowing from the government by not paying payroll or sales taxes. The IRS, EDD (Employment Development Dept.), and SBE (State Board of Equalization) look upon this as stealing since the taxes were withheld/collected from the employee or customer and the business owner was entrusted to make payments to the government entity. Don’t make this mistake as it can be devastating or even fatal to your business. For more on this topic, see my article entitled “How Not To Finance Your Business” under articles written on my website at www.cpaformerirsagent.com.
5) Paying Your Tax Penalties Without Trying To Abate Them
If a business or individual owes tax penalties, it’s worth determining if one qualifies for penalty abatement. Under the Internal Revenue Code, there are reasonable grounds for filing or paying taxes late. Such reasonable grounds include destruction of tax records due to an accidental flood or fire, death or serious illness in the family, serious illness of the taxpayer, bad advice from a tax professional, and a taxpayer’s drug or alcohol addiction.
In order to qualify for penalty abatement, the facts must tie-in with one or more reasonable grounds for penalty abatement and supporting documentation must be available to support your claim. Paying your tax penalties blindly without determining if you have reasonable grounds for abating the penalties can be costly.
6) Getting Too Large of An Overhead
If this recession has taught us business owner’s one thing, it’s to keep our overhead low and not be inefficient. I know several professionals who, prior to the recession, leased expensive and large offices only to now struggle and borrow just to maintain them. Don’t make this fatal mistake since once you’ve signed the lease, it’s legally almost impossible to get out of it.
I’ve heard many braggers boast that their business grosses $1 million or more but how much they net is what’s important. It’s the bottom line that counts. The days of “fluff on the bluff” are long gone.
7) Grinding Too Hard
I’ve made this mistake and have seen several other business owners do the same to the point that their business becomes their life. It’s easy to fall into this trap since it’s addicting to want to attain a certain lifestyle, maintain a certain lifestyle or have to pay-off debts due to various circumstances. To avoid this trap, schedule some time away, refresh and recharge so the picture will look clearer and you will perform better rather than working yourself to the point of diminishing returns.
No one on their death bed wishes they spent more time at the office. Find some balance.
8) Failure To Stay Connected With Your Customers
I’ve made this mistake until I discovered an email marketing newsletter service and now I send out weekly email newsletters filled with valuable tax-saving and financial tips and you should do the same or something similar. “Out of sight, out of mind” is a valuable statement that’s especially important in this recession where client retention is essential. If you would like to be added to my weekly email newsletter, just put “Add Me” in the subject line and email me at firstname.lastname@example.org. I’ve received numerous compliments on the content of these newsletters.
9) Lack of Internet Marketing Efforts
I’ve also made this mistake until I recently discovered that there are a multitude of ways to receive exposure from marketing one’s business on the internet. From a website to youtube videos, the possibilities are endless. However, some business owners are loathe to change and believe outdated methods still work. If they do for you, then stick with them but the google search is now the
yellow pages of today since that’s where most people go to search for something they need.
10) Failure To Identify And Implement New Profit Centers
We business owners all suffer from tunnel vision. The reason is we get caught up in the day-to-day grind of working in our business rather than on our business and it’s a very difficult balancing act.
I’m sure someone can observe my business and tell me how to run it better. I’ve discovered that I have a knack for seeing potential profit centers that business owners can implement once they consult with me. One example is a restaurant owner who remodeled and built a V.I.P. room. I asked him if he was doing catering. He replied, “No.” I asked him what the cost of catering equipment would be to allow him to do so. He said, “About $3,500.” Next, I told him to hire a woman, put her on the phone, and give her a script. The script I suggested was, “Hi, I’m so and so from XYZ restaurant. We are expanding our catering department and want to know if you would be interested in having us cater one of your future events? We would like to invite you and a few of your fellow principals for a free V.I.P. tasting in our V.I.P. room to sample various items on our menu.”
Example two is a sports trainer who trains high school athletes to get college scholarships in their particular sport. When interviewing him, he indicated some of the kids who obtained college scholarships come home in the summer and train with him. I suggested that he consider hiring the college athletes to train the high school athletes and duplicate himself to create an additional profit center. He liked my idea and signed up with me as a client.
Does your current business have an untapped potential profit center waiting to be discovered? Call me at (818) 632-2053 for an initial consultation and we can schedule a time when you can tell me more about your business.
It’s my hope that this article has provided some insight for you and can be used as a learning tool for either you or a friend. Feel free to pass it on and I hope you find much success and happiness in business and life outside of business.
Lawrence J. Danny, CPA JD Former IRS Agent, is a sole practitioner IRS Problem Solver and Business Consultant in Woodland Hills, CA. His website is www.cpaformerirsagent.com and phone number is (818) 632-2053.
POSTED BY: larry71
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