Top 5 Mistakes Business Owners Make

Top 5 Mistakes Business Owners Make

by | Apr 23, 2015 | Articles, blog, Newsletter Article

3 minute read

Protect Your Business by Avoiding Five Common Mistakes

Mistake #1: Not knowing the difference between an employee and an independent contractor. Many entrepreneurs outsource to freelancers or independent contractors to get work done. As a small or midsized business, there may be many circumstances where utilizing an independent contractor might seem like a better idea than hiring a new employee. Just be sure that the IRS agrees that with your categorization of independent contractors. In the eyes of the IRS, many “independent contractors” are actually employees based on how you treat, pay and work with them. If you misclassify an employee as an independent contractor, you could face stiff penalties.

The IRS uses three characteristics to determine whether a worker is an employee or independent contractor:

  1. Behavioral control:If your business controls the way the worker does the job (through training, instruction or other means) that person is probably an employee. If you just tell them the results you want and leave the steps up to them, the person is probably an independent contractor.
  1. Financial control:Does your business control the financial and business aspects of the worker’s job? If the worker buys his or her own equipment, can make a profit or take a loss, and invoices you for work, he or she is probably an independent contractor. Conversely, if you provide the equipment and control the finances of the job in question that worker might be considered an employee.
  1. Type of relationship:Do you have a contract with the person on a per-project basis, or is the person working for you indefinitely? The former is probably a contractor; the latter might be an employee.

This can be a complex issue, but it is one that is important to get right. Visit the IRS website for more guidance or schedule a review with our office.

Mistake #2: Not doing a background check. When you finally find the perfect employee, you may be so excited to get them started that a background check is the last thing on your mind. Conducting background checks may cost you a little bit in terms of both time and money, but failing to do a background check could cost you much more in the long run. When employees steal, do something that cost you a customer, sparks a lawsuit or simply doesn’t work out, you may have been able to discover warning signs by conducting a background check up front. Your employees are often your most important assets. Don’t make a financial and organizational investment without knowing what you are getting.

You can conduct basic background checks internally or you could use an outside firm to handle more extensive background checks, saving you time, headaches and ensuring that you get as much information as possible before bringing a new employee into your company.

Mistake #3: Failing to manage cash flow.

As we discussed last month, cash flow is the lifeblood of your business. Understanding your cash flow and how it can affect your business will help you ensure that your business not only remains profitable, but also solvent and operational. Accounting software makes it simple to monitor your company’s cash flow, so there’s really no excuse for neglecting it. If your find that managing your cash flow is difficult, or if it distracts you from your primary business, consider outsourcing your bookkeeping and accounting functions. Outsourced accounting can often greatly improve your financial knowledge and therefore your decision making, allowing you to better plan ahead for demands on your resources. With the right outsourced accounting partner, you’ll have someone keeping an eye on your cash flow on a weekly or even daily basis.

Mistake #4: Failing to systematizing processes. As a business owner, your current success may be driven by your time, your creativity and your productivity. But what would happen to your business in your absence? What value would your business have to a potential buyer with you out of the picture? If you want to create lasting value outside of your own talents and will to succeed, you’ll need to develop repeatable processes. Systematizing processes in your business can provide consistency, help with scalability and can ensure that individual knowledge is monetized and converted into institutional knowledge. You can, and should, systematize everything you can within your business. This is how you will build lasting value and allow yourself to focus on new opportunities as they arise.

Mistake #5: Mispricing your services and products. Pricing your products and services can be tough when you are in the early stages of your business. Your need for cash flow can put a strain on your decision making, leading you to under or over value your services. Many businesses sacrifice profitability for short-term cash flow. In a few select circumstances, this may make strategic sense, but if you underprice your service over time, you will always be working harder than necessary just to keep up. You also run the risk of devaluing yourself, your services and your company. Be sure you understand the value of the service you provide to your customers as well as the market rates for your work.

If you are making any of the five mistakes above within your organization, we can help. Our team of accountants and business advisors specialize in helping businesses maximize organizational value through their financial and operational activities. Give us a call today to put our team to work for your success.

About the Author

Rob is a CPA and has been in public accounting since 1993 after graduating from Ball State University with a Bachelor of Science degree in accounting. Rob became co-owner of the firm in 2003. Rob provides services to many types of industries; including, manufacturing, trucking, construction, service, and retail.

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