According to statistics from the Small Business Administration, 30% of small businesses fail by the second year and 49% fail by the fifth year. While this suggests that more small businesses succeed than fail, the number successes can be greatly increased if business owners would just pay attention to the factors that commonly undermine the success of a business. Research by the SBA, the New York Times, the Small Business Chronicle and others all point to ten common mistakes that business owners make during those critical start-up years. Among the top ten mistakes are three that have a lot to do with financial management and record keeping. “If business owners would keep better records, and then routinely review both their financial and operating records, their business would run smoother and they would make better business decisions,” explains Miriam Wilson, President and Founder of M. Wilson Accounting & Bookkeeping Services, LLC. Three out of the top ten most common mistakes that business owners make are: (1) having unrealistic expectations about incoming revenues while underestimating the costs associated with start-up; (2) poor accounting practices and records; and (3) operational inefficiencies.
Wilson contends that business owners need to “think like an auditor” and if they can’t do that, then they need the help of someone who does. Having spent over twenty-five years in public sector auditing, including thirteen years auditing the accounting records for businesses contracting to do work with the state, she has developed a keen eye for those commonly missed items in the records of many business owners that cause havoc when the IRS shows up or an audit is required as part of securing a contract. “Everyone wants to avoid the auditors,” says Wilson, “and we can all relate to the spine chilling experience when someone says, ‘Hello, I’m from the IRS’.” However, these need not be anxiety producing moments if a business has clean records. In fact, clean records mean less problems overall.
It’s not just about being ready for an accounting audit or a tax audit, but rather being fiscally responsible and using good record keeping in making critical business decisions. Often, when an entrepreneur is starting a business it begins in their garage or at least in their home. While this is a realistic and cost effective way to get the business off the ground, it has its drawbacks. In the confines of one’s home it is often hard to distinguish what is being purely used for the business and what is also part of everyday living. This often results in over-looked tax deductions or worse yet inappropriately claimed deductions, as well as the tendency to compile a shoebox of records rather than a neatly and accurately maintained accounting ledger. Numbers are power and knowing your numbers is a real asset for a small business owner. If a business owner does not have a grasp of the financial aspects of the business, as well as the operational measures, then that owner is not in control of the business. Usually, small business owners have to manage every aspect of the business, including the finances, as they get the business established. Assuming that this can be done effectively without a solid financial background can be a disastrous assumption. Furthermore, a common mistake made by many entrepreneurs, is that they only need to hire an outside accounting firm to do their taxes. A highly skilled accountant, with the keen eye of an auditor and a detail oriented business acumen, can help a business owner avoid many operational inefficiencies. Now more than ever, lean and efficient companies have a competitive advantage.
When businesses maintain good clean records, then they are better able to manage expenses, understand sources of revenue, the return on investment in operating and marketing capital, the rates of conversion from leads to sales to retained customers, economic changes in the market, and the impact that tax and investment decisions have in the short and long term. In other words, they are able to make sound and informed business decisions. And even if an audit should happen, they are in a sound position to substantiate their records.
If you want to learn more about Miriam Wilson, an accountant who thinks like an auditor, go to http://www.mwilsonaccounting.com/.