Common pitfalls when starting a business
Starting a small business is one of the most exciting endeavours an individual can take. According to surveys, up to a third of Canadians like the idea of owning their own business. In addition, up to 20% of Canadians are also considering starting one within the next five years.1
We think small businesses are great and they are indeed our specialty. We’ve serviced the accounting and taxation needs of small businesses for over 20 years. It’s from that pool of experience that we’ve identified a number of common mistakes in small business accounting and bookkeeping.
Here are some of those mistakes you can avoid:
- Incorporating too soon: Many entrepreneurs are so excited to get started that they think they have to incorporate right away. Sometimes it’s necessary, but you may be foregoing a big tax advantage from sole proprietorships. Incorporations cannot apply losses to the owner’s taxes from prior years. Since most businesses operate at a loss, this can lead to additional taxes that can be avoided.
- Activating government remittances like HST or payroll taxes too soon, improperly, or too late. For example, HST only needs to be set up and collected after the first $30,000 in revenues. In some cases, the extra hassle of capturing all that information is not needed, especially if you’re not going to be getting a big refund. Conversely, if you are spending a lot, it might be worthwhile to register sooner because then you can get refunds!
- Setting up the wrong reporting period for government remittances: If you’re starting a business and will be spending a lot initially, it’s better to set up a quarterly remittance for HST. All the HST that you are spending, you can get back in refunds. If you set up for annual filing, you won’t see that money coming back until a year later.
- Not gaining sufficient knowledge about accounting or taxes: We’ve often heard the excuse, “we didn’t know” or “it was the accountant’s fault”, when clients come to us with bad records. Indeed, there are many accountants who may be doing things incorrectly and the rules are quite complicated. Unfortunately, the CRA doesn’t care about that. If your taxes are wrong, it’s the owner who is ultimately responsible.
- Keeping bad records: We’ve found so many cases where business owners have lost important records or just don’t have enough. At the end of the year, your accountant or bookkeeper is going to need to know, when, how and where you spent your money (and the HST). Also, many banks do not seem to be providing any scans or returns on the cheques after disbursement.
- Setting up the accounting software incorrectly: QuickBooks and other accounting software are great. They can cover a wide variety of business types. That being said, they must be set up appropriately. While the walkthroughs are really handy, they’re not necessarily foolproof. It still needs to be set up according to proper accounting and government requirements to provide you with useful information. If not, handing over that data file to your accountant at the end of the year may be useless.
We’ve gone over all the issues you should try to avoid. However, what alternatives can you set up to provide a better solution? Here are some handy tips.
- Think about the end goal in mind. To do so, you’ll need to know what your accountant needs in terms of records and data.
- Set up your filing system. You’re going to be receiving and capturing a lot of data, sheets, notices and whatnot from your vendors, the government, and customers. Set up a system to keep track of all of it and make sure you can refer back to it. Make sure that the information you keep is what your accountant will need.
- Don’t just incorporate without getting advice. Talk to a lawyer or an accountant or read up on the various pros and cons and determine if that will suit your needs. We also have our own article about it you can read here
- Learn some basic accounting and taxes. There are no guarantees with any professional you work with. While designations help, it doesn’t mean for certain they’ll know what to do with your taxes. You must remain vigilant about making sure it’s done correctly.
Starting a small business can be a wonderful, satisfying experience. It can allow people to take their own destiny into their own hands. But it’s not for everybody. And without proper planning and knowledge, it can create big problems. It’s better to talk sooner about your accounting and finances, rather than at the end of the year when it will be harder to change. If you’ve already started your business, it’s not too late to fix these items, but the sooner the better.
As always, your situation may vary. Any one of these items we have discussed can be expanded on greatly. If you have questions or concerns, please do not hesitate to contact your accountant today or call us at (416) 495-1098 or email us at info@apbs.ca.
1. According to RBC Canadian Consumer Outlook Poll 2011 http://www.newswire.ca/en/story/726827/being-the-boss-of-me-appeals-to-canadians-rbc-poll
