If you ask around, you’ll hear a lot of advice out there about how to run your business and handle your finances. And just armchair legal advice, most of it is wrong!
Here are the four biggest myths I hear all the time along with the truth you need to know:
You can do your own accounting
I suppose this one is true, in the same way that your client “can” represent themselves in court. Just because they can doesn’t mean it’s anywhere close to a good idea.
Unless you have a background in accounting, it’s unwise to take a DIY approach. You’re likely to run into issues and base your business decisions on inaccurate information. You could also run afoul of the IRS at tax time.
And, of course, it’s also just not a good use of your time. It’s likely to take you far longer to do your accounting than it would take an experienced professional and that’s time you should be focusing on bringing in revenue and serving your clients.
You only need to review your accounting at tax time
Many people want to let the bookkeepers and accountants deal with everything during the year and just review their financials at the end of the year in preparation for tax day. While those professionals are there to take care of your accounting, you are the one running the business.
You need to be aware of what’s going on in your business at all times and that requires you to review your financials on a regular basis. You should be reviewing your financial statements monthly to stay up-to-date on your financial position and anything that needs to change, so you can make wise decisions in a timely manner.
You should make a bunch of purchases at the end of the year to save on taxes
I can’t believe I’m still hearing this one but it just won’t die. And the worst part is, accountants are recommending it when they should know better.
If your business needs something, buy it when the time is right. There’s no magic to the end of the year.
If you’re scrambling to generate tax deductions and buying things you don’t need, that’s never going to help you. For example, if you spend $10k on office equipment because your CPA tells you that you need a tax deduction, and you’re in the 20% tax bracket, you just saved $2k in taxes and wasted $8k out of pocket for equipment you don’t really need. Doesn’t sound like a very good deal, does it?
The profit on your P&L is what you should be taking out of your firm
Although this is sometimes the case, it’s usually not. The bottom line on your Profit & Loss statement is rarely the same as what you should be drawing out of the business for your own profits.
There are two basic reasons: because you’ve already spent some of that profit in ways not reflected on the P&L and because you’ll need to save some of that profit for other uses.
If you have debt, for instance, your principal payments don’t show up on the P&L, they show up on the Balance Sheet by decreasing the liability. That means you’ve already used some of the profit you see on paper to pay down that debt. Pulling that amount out now would put your company in the red.
You may also need to use some of your profit to reinvest in your firm. If you want to build a cash cushion for rainy day (which I highly recommend), you’ll need to take that from the profit. If you plan to expand and grow your firm, you may also want to pull some of the profit to start saving for your expansion.
Create a solid profit and cash flow forecast with your accounting professional to see how your profit is being used and how you want to use it in the future.