Running a small business may sound easy, but anyone who’s done it knows how hard it can be to wear every hat at the same time. Whether you’re too busy to catch every detail or you simply have knowledge gaps, it’s common to lose time and money addressing administrative mistakes. For example, companies that fail to meet their workers’ compensation insurance obligations can face fines of $10,000 or more in many states.
The last thing you want is for administrative mistakes to take a bite out of your profit margins. That’s why it’s important to both get good processes in place and find ways to address your blind spots. Here are three big steps you can take to get everything right the first time.
1. Know how you’re going to be taxed.
Your taxes are much more complicated when you run a business. This is why it can be so important to get professional advice on all your tax and accounting measures. For instance, according to OnPay’s report on The State of Small Business in 2020, 52% of companies took advantage of the government’s Paycheck Protection Program (PPP) loan. Nearly the same number of organizations accepted the benefit of tax deferrals or credits through the federal CARES Act.
Here’s the problem, though: Lots of business founders weren’t sure how their choice was going to affect their tax returns. Yes, many outlets touted the benefits of the PPP loans. Yet as noted by the Tax Foundation, some states treated the “forgiven” loans as taxable income. Under those circumstances, it’s easy to see how fast a tax situation can turn complex. Using world-class automatic accounting software and working with a knowledgeable accountant can avoid major surprises at tax time.
2. Earmark your income types appropriately.
If you’re like most business owners, you have several funnels that send cash into your coffers. For instance, one funnel could come from all the individual sales you earn through your e-commerce site. Another funnel could come from annual membership subscriptions. Though both streams count toward revenue, you’ll want to designate them differently. Otherwise, you may end up poorly allocating your marketing dollars.
For example, perhaps your balance sheet shows you earned $100,000 last quarter. So you assume your marketing is working. What you may not realize is that only $1,000 came from memberships. Consequently, you would want to tweak your marketing dollar allocation accordingly. Remember that looking at your income as a whole can be valuable but doesn’t give you the whole story. So be sure to delineate between those various income streams to ensure you’re making smart money decisions elsewhere.
3. Stay on top of bad debt.
Bad debt is bad news, especially if you’re not aware of it. In general, bad debt comes from customers not paying their bills on time or at all. Though you can write off a portion of your bad debt, you’re much better off trying to collect on it if you can. And if you really want to reduce it, you’ll need to conduct a deep dive into where it’s coming from.
Let’s say you’re one of the 93% of organizations struggling with late payments from customers, per TSI’s research. You’d be wise to focus your attention on what attributes some of those late payments have in common. Are late payments more common from first-time or repeat customers? Do they tend to accompany purchases over a certain amount? Knowing when you’re most likely to incur a late payment can help you come up with clever ways to get your dollars faster. Something as simple as payment reminders could whittle away the finances you’re losing.
Everyone knows how exciting it can be to find a quarter when you’re walking down the street. As an entrepreneur, you might be surrounded by hundreds or thousands of “unfound” money. Take a look at your workflows, documents, and spreadsheets. Digging below the surface could unearth a modest treasure in re-claimed profits.