Common Money Mistakes

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Seasoned entrepreneurs know there are a few painful mistakes you  can make when starting a business. If you are starting a business, it’s most likely you haven’t put much thought into you plan on exiting. And its no wonder, there are countless decisions to make as you get started, which could range from applying for a business license, setting up a website, or developing  a prototype.

October 13, 2014
Author: NCH

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It’s important to remember that if you ever plan to bring on investors to expand or even sell your business, how you run it from the start is just as important.

Luckily, it’s not difficult to get started the right way. Consider  these four tips that most start-up entrepreneurs overlook.

1. Prepare Your General Ledger

Whether you are a seasoned entrepreneur or it is your  first start up, setting up your accounting books may seem tedious and bland.  Many start ups will really on off the shelf accounting software, which provide  templates and general guidelines for you to get started. While these are ok and  completely acceptable for most start ups, if you want a true understanding of  the financials of your company and to be able to provide the evidence of the  value you have built, you may want to give your start up careful consideration.  Hiring a professional to help get you started may be a little pricey, but it  could greatly benefit you in the long run.

2. Keep Business and Play Separate

It is perfectly acceptable for entrepreneurs to pay for  various expenses with company funds, provided those expenses meet the generally  acceptable accounting standards (GAAP). However, far too many entrepreneurs use  company funds for personal use and then try to justify it with liberal  interpretations of the GAAP or by improperly reporting the expense.

Doing this can open you up to a great deal of liability and  get you in hot water with the IRS. It will be difficult to separate these expenses  when valuing your company in the future. From the beginning, it is best to just  keep all business and personal expenses separate.

3. Report all revenues

It is not difficult, and for many it’s extremely enticing,  to skim money from the business at the start, especially if most of your  business is done in cash. Not only will this get you in trouble with the IRS,  but you would be actively lowering the value of your business in the long run. Proving  value and growth will be difficult if you are not reporting real numbers from  your business.

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4. Keep careful records and receipts

It would seem reporting all of your revenue just means  handing over more of your hard-earned money to Uncle Sam. This isn’t  necessarily true. If you fully understand what you can expense and, more  importantly, keep all records of your activity (this helps with due diligence  of potential buyers and investors along with audits), you can work down your  taxable income without hurting the value of your company.

It’s not uncommon for investors looking to invest in a small  business to meet an entrepreneur whose only proof of success and value was a  shoebox full of money. Some would even stress that the company was paying auto  expenses, personal utilities, or even groceries and that investors should  consider those expenses as part of the value of the company.

The problem is that most of these entrepreneurs couldn’t  prove those expenses because of poor book keeping, and as a result the company  loses valuation and leverage during negotiations. Most entrepreneurs are not  thinking about an exit when they are in startup stages of a business. If you  plan to divest or grow your company through investment, how you run your  business before you start is something you can’t overlook.  

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