Six Strategic Mistakes Business Owners Make And How to Avoid Them
While it’s true that you only learn through your mistakes, you don’t want to encounter miscalculations that could clear out your bank account and shut down your business. Although you’re careful with your finances, understanding the specifics of taxes and financial procedures can take a great deal of your time away from actually managing your business.
Besides, without professional help, while trying to manage your finances, as a business owner, you may inadvertently commit some significant errors that could prove to be costly. To help you devise a better financial strategy, Cusimano Professional Corporation has put together a list of five of the most common mistakes business owners make with their finances.
1. Not optimizing the use of low business corporate income tax rates.
Some business owners do not know the difference in income tax treatment between unincorporated and incorporated businesses in the province that they operate. The high marginal income tax rates of not being incorporated make it difficult to grow a business. To the extent that a company can incorporate its business, the tax rate is only 15.5% in Ontario on the first $500,000 of ‘active business income’ profits. These low tax rates allow companies to have more after-tax money to grow and finance their businesses as well as help business owners better save for retirement.
2. Not properly protecting your business assets from creditors.
By not correctly protecting your assets, you can suffer severe financial damage in the event of either lawsuits or business downturn. What may have taken years of hard work to develop, may disappear in a very short time. This can lead to financial, family and even health ruin. To protect oneself, consider incorporation, to separate your business assets from personal assets. Investment assets can also be separated from business assets by properly setting up a holding company potentially owned by a family trust. Be careful also about giving “personal guarantees” against corporate borrowings. Consider having your spouse own your principal residence (but beware of family law issues) and finally always try to have written documentation for loans and obtain some type of security when lending funds.
3. Lack of proper planning and control.
Those who fail to plan, plan to fail is a common business proverb. Knowing your business and current financial position is crucial to managing growth. As your business grows, being aware of the various business aspects becomes essential. An owner needs meaningful, timely, and accurate financial information to manage the business effectively and efficiently. Properly set up and used accounting software is critical, and the inputs must be carefully entered. Another common accountant expression is“garbage in/garbage out”. This is why it is important that whoever enters the information is diligent with respect to the information they enter into the software program used. Managers and owners should review the output information on a timely basis, in order to be able to react proactively to the situations presented.
Business owners should also have short and long-term narrative and financial plans. Moreover, qualitative data should include a SWOT (strengths, weaknesses, opportunities, and threats) analysis. Projected balance sheets, income statements, and cash flow statements will also help a business owner develop an effective strategy to follow for future years.
4. Not understanding penalties from improper employee classification.
Misclassifying employees as “self-employed” versus “employees” could lead to interest and penalties from CRA and the Workplace Safety and Insurance Board. If the company has many employees, the problem is compounded. Since CRA penalties and interest are not deductible for income tax purposes, such mistakes are even more expensive.
5. Not having a proper “involuntary” or “voluntary” exit strategy.
The business owner will not get optimal dollars for his business. For involuntary exits, they should carry disability and life insurance. For voluntary exits (i.e., the sale of a business to fund a retirement) - the owner should have a realistic goal as to how much money they would like to have upon retirement and how to reach it. The difference between the current value and future value or the business value gap is something that has to be in focus and worked on continuously. You need proper measures and ways to minimize this gap.
6. Not knowing the four ways to grow your business.
By not focusing on these, it will take longer to grow your business. Companies should:
a. Attract more customers of the type you desire (i.e., their “ideal customer”).
b. Create an incentive for customers to return and buy again (it is cheaper to keep customers rather than attract new ones). Reach out to your clients as often as you can, provide an enjoyable shopping experience and encourage repeat purchases with incentives.
c. Encourage increased spending, i.e., offering a cash discount if a customer spends above a certain limit or cross-sell complementary products or services.
d. Increase internal efficiency - ensure that your company has quality assurance to minimize defects, returns, and wastage of material, labor and time. Also, know the profitability of each product or service so as to be able to better focus on the ones yielding the highest returns.
To avoid these and other mistakes, reach out to the experts at Cusimano Professional Corporation, Chartered Professional Accountants serving Toronto, Vaughan, Richmond Hill, Markham, Mississauga, and Brampton. We are the financial experts with the sole goal to eliminate your troubles with tedious finances and taxes. We guide you through the financial side of your business and offer advice at every stage so you can make the right decisions towards growth and security.