Popular Business Misconceptions Cost You Money!

Faulty information costs you money! Which of these

popular business misconceptions do you believe?

Popular Misconception #1:

“We Only Need Our Books Done Once A Year For Tax Purposes.”

Are Your Accounting Records Adequate To Run Your Business?

Although it is important to keep records for tax purposes,

it is not the only reason (or even the primary reason) good

accounting records should be kept. Another frequent reason

clients request financial statement preparation is to obtain

bank financing. Although important, this also is not the

primary purpose of keeping good records for your business.

Good recordkeeping will enable you to extract meaningful

financial information for your business that will help you

to manage it properly. If you can`t access this information,

you will not be able to manage your business properly. Bad

management leads to business failure.

Yes, the primary reason good accounting records should be

kept is to produce periodic (at least on a monthly basis)

financial statements for management information purposes.

Only with this current financial information can you properly

manage your business. This information can alert you to

declining sales, excessive expenses, tax opportunities,

cashflow problems, and many other vital concerns for your


To be of value, this accounting system should be set up

with meaningful account categories and departments. It may

be cost-effective to have an outside accounting service do

the monthly bookkeeping. However, with accounting software

that is readily available, you don`t have to be an expert

bookkeeper to do your own books and extract meaningful

financial information.

If you do your monthly statements yourself, it would still

be prudent to have your accountant or business advisor help

you set up your system and, as well review such information

with you to discuss problems and opportunities.

Popular Misconception #2:

“Writing My Hobby Off As A Business Loss

Saves Me A Lot Of Income Tax!”

Is Your Hobby A Tax Write-Off?

If your business has no reasonable expectation of profit, if it is a

hobby and not really a business, you will ultimately fail in your tax

objective. Since your losses are being incurred for a hobby and not a

true profit generating business, the tax authorities will take the

position that you aren`t entitled to any deductions. This is a double

blow. First, you`re losing money. Second, you`re denied tax deductions.

It is true, however, that if you enjoy what you`re doing, you`ll do

better at it. You`ll be willing to work longer hours and you`ll be

willing to put up with more hardships in order to make your business a


Rather than attempting to have the tax system subsidize your hobby,

why not turn that favorite pastime into a real, profit generating

business? This is a doubly rewarding. First, you make money at

something you love doing. Secondly, the tax authorities legally have to

allow your reasonable expenses to earn your now substantial business


Prove that you`re running a business by running a business. Prepare and

follow a proper business plan. Keep good accounting records with at

least monthly financial statements to give you the information you need

to manage your business. Above all, make money from what you do.

Popular Misconception #3:

“I Don`t Make Enough Money to Incorporate!”

Will Incorporating Really Benefit You?

Some persons resist the idea of incorporating themselves because

the tax savings may not justify the added costs of incorporation,

annual minutes, and extra tax returns. However, incorporation gives

advantages that go far beyond tax savings.

Insurance may give you some protection against loss. However, you

may suffer business losses and lawsuits that may not be covered. For

extra protection, consider incorporating yourself. The limited

liability of your own corporation alone may justify the additional cost

and complexity.

Corporations may also be used for income-splitting with your family,

as well as estate planning and retirement planning objectives.

Additionally, corporations lend some credibility to smaller businesses

and may enhance your image and prestige in the eyes of clients or


Lower corporate tax rates will generally apply on small business income.

Even in loss years, wages can be paid by the corporation to you so that

you may utilize personal tax credits available. If unincorporated, these

credits might be lost forever. The now larger corporate losses can be

carried forward to future (hopefully more profitable) years.

A full analysis of the advantages and disadvantages of incorporation is

beyond the scope of this report. However, being incorporated may give

you more flexibility and advantages than you originally anticipated.

Certainly, it is not prudent to reject it as an option simply because it

is more complicated and costly. In fact, it may be one of the best

investments you ever made.

Popular Misconception #4:

“I really need an office out.

Being home-based makes me look amateur!”

Is A Home Office REALLY Professional?

Many times small business persons make the mistake of generating

unnecessary overhead in order to impress clients and prospects. Often

this attitude leads to escalating debt and business failure. One such

example is getting an impressive, but expensive, commercial office


Customers aren`t stupid. They can see when such outside space is

necessary or advantageous for them. They can also see when it is a

waste of money and designed to fuel your ego. What matters most to

clients is whether they are getting cost-effective results or not. If

your product or service delivers such excellent value, your customers

will be impressed and come back. In contrast, if one allows his ego to

get in the way of satisfying the customers` needs, they will go


With the move to telecommuting, downsizing, networked communications,

and home-based businesses, operating from your home office is actually

smart and trendy. Can you think of a more appropriate location for a

consulting firm specializing in home-based businesses? They of all

businesses should set the example in cutting unnecessary expenses and

operating efficiently.

This is not to say that there aren`t any disadvantages to being

home-based. One certainly must be well organized, disciplined, and

willing to follow good time management principles. This alone could

mark you as more professional than other businesses, home-based or not.

Expensive office space is not the answer to reflecting a professional

image. If you are truly concerned about your image, offer quality

service. Make sure that all your corporate communications (telephone,

websites, printed materials, et cetera) reflect the professional nature

of your business.

Popular Misconception #5:

“Since we`re not seeking financing,

we don`t need a business plan.”

Do You REALLY Need a Business Plan?

To obtain financing, many persons will prepare a business plan.

Although entrepreneurs will go to great lengths to get their loan or

capital, these same business persons will not bother to plan ahead very

far or analyse their business. Even if you required no additional

money, preparing a business plan can help you to succeed in your


Running a business without a plan is like going on a trip without a

map,sufficient gas, money, or even a destination. Just as you wouldn`t

go on a vacation without some planning, no business can be successful

without it. Putting that plan in writing helps you to think out a

strategy for successfully operating and growing your business.

Where is your business today? Where will it be tomorrow? What is your

mission statement? What product lines are profitable? Which ones

aren`t? What business do you think you are in? What business do your

clients think you are in? Should you be in a different business? Is

your product or service less attractive to your clients? How are

competition, global commerce, technological and social changes affecting

your company? What is your competitive strength? What are your

weaknesses? Who are your biggest competitors? What are their

weaknesses and strengths? What is your marketing strategy?

What are your projected income and expenses and cashflow for the next

year? How about the next five years? Do you have a capital budget?

What determines whether you buy an asset or not? Do you have an exit

strategy? How will you manage growth? Do you have a financial plan? Do

you have an operations plan? What definite sales and net profit targets

have you set for this year and the next five years? What factors could

interfere with the attaining of these goals? What contingency plans have

you made to deal with such problems?

The purpose of these questions is to get you thinking and planning.

If you fail to plan, you plan to fail. Although your accountant or

business advisor can help you prepare your business plan, only you can

set the appropriate goals and follow through on them. Yes, you

definitely need a business plan, not just for obtaining capital, but as

a roadmap for your business.

Popular Misconception #6:

“I like bartering with clients

because it saves paperwork and taxes.”

Are You Reporting Barter Transactions?

Bartering is an excellent way of doing business. However, contrary to

popular belief, some barter transactions are taxable, both for income

and sales tax purposes.

Legally, you must maintain adequate financial records for your business.

Barter transactions made by your business must be reported to the

appropriate taxation authorities and taxes paid. However, transactions

between friends not engaging in business with each other may not be


If you are an auto mechanic and I am an accountant and I swap accounting

services for your car repair services, the transaction in this case is

most likely taxable, even if we are friends. However, your accounting

fees should be deductible as a business expense and so should the

business portion of my car expenses. Note also that sales and similar

taxes may apply on this transaction.

On the other hand, if I trade accounting services for a vacation for my

family, I should really declare the value of such services as income.

The firm supplying the vacation would be able to deduct that value as

accounting fees. Any sales or similar taxes would have to be paid on

such transaction.

Many persons don`t record such transactions. For some, it may be a

matter of wanting to believe that you don`t need to be bothered with the

extra paperwork or taxes. Remember, though, that ignorance of the law

is no excuse. Legally, you must keep proper records and pay all taxes


Popular Misconception #7:

“All My Workers Are Self-Employed, So I Don`t Need

To Bother With Payroll Or Workers` Compensation.”

Do You Need To Pay Payroll Taxes?

To save on payroll taxes and workers` compensation premiums, many

employers arrange their affairs in such a way that those working for

them are self-employed, independent contractors. This is good tax


On the other hand, some employers take the position that all those

working for them are self-employed, whether they are or not. Although

it is tempting to eliminate payroll taxes and workers` compensation

premiums, care should be taken to do so legally.

Whether those working for you are employed or self-employed is a

question of fact (which can be determined by the Courts). Do you supply

the tools and vehicles? Do you determine the working hours? Do you

have the right to control how the job will be done? Do you pay a

flat-rate or by-the-hour or a salary? Does your worker have other


By asking several such questions, a pattern will emerge as to whether

your worker is employed or self-employed. If it turns out that your

worker fits all the criteria of an employee, don`t say he`s

self-employed. On audit, you would still be responsible for the payroll

taxes (and penalties and interest as well).

Even if your workers are considered independent contractors by the

Income Tax Department, it is still possible that they will be considered

to be “workers” for purposes of Workers` Compensation legislation.

Thus, it is the responsibility of the employer to determine whether such

coverage is necessary or not. Failure to obtain proper coverage could

subject you to substantial (and unnecessary) costs.

In review, calling someone self-employed, doesn`t necessarily make them

self-employed. If you have a dog, call it a dog. Your position that

your dog is really a cat will not be successful. Likewise, make sure

that your position regarding your workers is legally correct.

Popular Misconception #8:

“My Accountant Charges Too Much.

I Can`t Afford It Anymore.”

Is Your Accountant Worth His Fee?

Many business persons view bookkeeping, accounting, and tax preparation

as necessary evils. In their view, accounting fees are an expense to be

reduced, deferred or even completely eliminated.

A good accountant, however, can give you benefits far in excess of the

fees charged. Well-designed accounting systems will enable you to

extract meaningful financial information for your business that will

help you to manage it properly, avoid business failure, and alert you to

declining sales, excessive expenses, tax opportunities, cashflow

problems, and many other vital concerns for your business.

Your accountant can save you lots of money with the advice you receive

on tax and other business matters. As well, a competent accountant can

be a valuable resource in discussing business problems and opportunities

with you.

Popular Misconception #9:

“Nobody Makes Money On The Internet.”

Can You REALLY Profit From The Internet?

Many people feel that the Internet is all hype. Many others feel that

it is overrated. Still others are of the opinion that it may be good

for some types of business, but not theirs.

Typical comments heard include: “I`ve lost money on the Internet…Major

corporations have lost millions…Do you personally know anyone who has

made money from the Internet?”

However, if you check out the list of recent billionaires, a high

proportion of these are Internet-related, and many of them under

forty years of age. As well as the very rich, you can find many cases

of more modest financial prosperity resulting from Internet commerce.

It is true that many are losing money on the Internet. It is also true

that many don`t know what they`re doing. However, with the proper

assistance, you, too, could profit from the net.

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