As an entrepreneur, you’ve figured out by now that when you solve another person’s problem or provide value to them, you collect more money. The more knowledge you gain on how to do that, the easier it becomes. Money becomes abundant. 

But for many new entrepreneurs who are just starting their businesses, the topic of money may inspire fear or stress. While these stories can feel real, the best way to change this thought pattern is to gain more knowledge on money and your business finances. This often requires sitting down and facing the numbers, and going through the hard moments of not understanding something, but pushing through until you grasp it. 

Being accountable for every aspect of your business—even the ones that intimidate you—means being strong enough to ask someone for help even if you feel your questions are basic. Just like any skill, practicing habits and being responsible for your own knowledge can bring you closer to mastering aspects that once felt like a feat. In time, through knowledge gathering and experience, understanding the financial side of your business will feel easier and less stressful; and better yet, it’ll empower and excite you.  

No one likes to do things they don’t understand. So we just have to put the reps in. The first step is to understand the most common places where entrepreneurs slip up or turn a blind eye, and dissect misconceptions that run rampant in self-employment. Armed with the truth and knowing what to look for in your books, your accountant won’t just be impressed with your competence, but you can then get deeper into understanding your financials so that your revenue can grow even more. 

Most Common Pitfalls

The entrepreneurial journey is a thrilling pursuit marked by innovation, passion, and the relentless drive for success. However, amidst the excitement, entrepreneurs often find themselves navigating a financial maze fraught with common pitfalls that can jeopardize the prosperity of their ventures. These are four prevalent challenges that entrepreneurs frequently encounter, each serving as a cautionary tale about the importance of financial vigilance.

Only looking at your books once a year

Business owners don’t know their numbers because they don’t maintain their bookkeeping throughout the year. They tend to wait until tax season comes around to do their business books. At that point the information is old news and focused on the past.

Missing out on making informed decisions

Business owners can’t make data-driven decisions in a timely manner because they don’t know their numbers. They end up making decisions based on feelings, which are usually overly optimistic or pessimistic (read: just bad decisions). By the time they have the information available to them, it’s months after the fact (sometimes even a year) and so the information becomes useless. 

Deducting expenses that aren’t quite right

Business owners tend to lack an understanding of legitimate tax deductions and tax strategies available to them. Meanwhile, they can’t get proper help with this because many hired tax professionals are compliance-focused and are not trained on the strategies. This leads to deducting less expenses, which creates a larger tax bill and drains their cash. It can also lead to deducting expenses that are more personal in nature and not legitimately deductible, which can become a problem if audited and discovered. 

Not supporting the business as it grows

Business owners don’t reassess their business often enough as they scale the company. A lot of times as revenue increases, the situation becomes more complex. One of the biggest issues is that a business owner “sets up” their business in the beginning, and then never changes it. The most common example is they filed for their LLC, but many years later and after multiplying their revenue, they are still operating under the same type of entity. 

Top Areas of Misinformation

The entrepreneurial path involves traversing a terrain filled with a multitude of financial advice and strategies. Yet, upon closer examination, certain aspects of this guidance emerge as potential sources of misinformation. The following points dissect the complexities surrounding four prevalent misconceptions frequently faced by entrepreneurs. 

Myth: Save 30 percent of your gross revenue for taxes

If you’re able to put aside 30 percent of your gross revenue, good on you! But the truth is that business owners are not taxed on how much revenue they collect. Tax is always determined based on the profit of the company. The profit of a company considers all of their legitimate business expenses. If you’ve been putting 30 percent of your revenue aside, keep doing it—but just know that you most likely won’t have to send it all to the IRS. 

Myth: The net profit on your profit and loss report doesn’t mean that amount is in your bank account. 

As a business owner, you must understand cash flow along with financial statements. While your net profit is income minus expenses, some of your profit goes to pay off debt, like a credit card, and doesn’t get captured on the profit and loss report. You may also take money out of the company to cover personal expenses, which again is not going to be captured as an expense on the profit and loss report. 

Myth: Having 5-10 bank accounts doesn’t make running your business easier

In fact, having so many bank accounts can be a bookkeeping nightmare (and cost more!). 

While “Profit First” is a popular method to run finances, sometimes you’re better off finding a custom way that works for you. Whatever an influencer or book says doesn’t make it a fact—it’s an idea, an option. Create your own system that works for you, that helps you and solves your problem. You can easily implement a system with two or three bank accounts. 

Myth: Company revenue growth means you make more

While bringing in more revenue each year is very exciting, there are times in business where you could double your revenue, but shrink your profit when compared to the prior year. It is very important to focus on growing your company in a way that maintains a decent profit margin. You’ll want to consider how much labor and other overhead it takes to make a certain amount of revenue and how much profit each service or product makes. If you don’t know how profitable something is, you’ll want to determine this to ensure you aren’t losing money on it. Sometimes it is a clear indicator that you need to raise your prices or quit offering something of low margin and focus on the high margin items.

Money is such a complex topic. As business owners we have to lean in to the stories we tell ourselves about money. We have the ability to re-write the narrative surrounding money in our own life, and potentially that of other people. If you find yourself prioritizing learning and subjecting yourself to your numbers, your finances, and money in general, you’ll find yourself starting to untangle any inherited beliefs or views about money that have been instilled in you since you were a child. In time, money will become a concept that empowers you, your decision-making, and your business. 

Dollars and Sense – Your Financial Glossary

No need to grab your dictionary. Here are the definitions you’ll need to get started on your journey to financial empowerment.

Books/Bookkeeping: Think of “books” as the meticulous diary of your business finances. Bookkeeping is the artful practice of consistently recording financial transactions—a way to keep tabs on income, expenses, and the overall financial pulse of your business.

Expenses: Expenses are the essential bills that keep the business wheels turning. Think rent, salaries, and operational costs—the financial commitments that make up the lifeblood of any enterprise.

Tax Deduction: Tax deductions act as your financial allies in reducing the tax burden. They strategically cut down your taxable income by recognizing and leveraging qualified business expenses.

Revenue: Revenue, the more formal term for the money your business pulls in, represents the funds derived from selling products or services. It’s the financial fuel that keeps your business engine running.

Profit: Profit is the financial reward for savvy business management. It’s what happens when your business earns more than it spends—a tangible outcome of smart financial decisions.

Profit and Loss Report: The profit and loss report serves as a financial storyteller, offering a detailed account of your business’s financial journey. It captures the highs and lows, providing insights into your earnings and expenditures.

“Profit First”: “Profit First” is a financial management system introduced by author Mike Michalowicz. It advocates allocating a percentage of revenue for profit before addressing other expenses. 

Low Margin: Low margin indicates a business scenario where the profit slice is a bit thin. This might be due to high costs or intense competition.

High Margin: High margin is when your profit slice is heftier. It often comes from smart pricing or effective cost management.