"Witchful Thinking in Accounting"

Debunking common myths in the accounting industry

It’s just about a week until Halloween, so we’re continuing with the theme of things to watch out for in business. This week, we’re looking at accounting and debunking a few myths that people have about it.

Accountants and Accounting Only Deal with Taxes

While taxes are an important part of accounting, accountants serve a far larger purpose and provide a wide range of financial services, including financial analysis, budgeting, and advising on business strategies. All of these help business owners and managers understand how the company is operating and can help with making decisions to improve the business.

Accounting Is Just Math

While math is a fundamental skill in accounting, the reality is that accounting is more about knowing the rules, regulations, and laws. This becomes very important when deciding whether to use contractors or employees, selling products or services over state lines, looking into entering new industries or territories, and many other issues. Modern accounting also relies heavily on software and technology for data analysis, automation, and financial reporting. Finally, communication and problem-solving skills are equally important.

All Accountants Are CPAs

Not all accountants are Certified Public Accountants. CPA is a specialized designation that requires passing a rigorous exam and fulfilling specific education and experience requirements. Many accountants have other certifications or degrees, but practical experience and a current knowledge of the rules and regulations are equally valuable. CPAs definitely have their purpose, but that leads to our next myth...

Only CPAs Can Do Accounting

Many business owners believe that all accounting must be done by a CPA; however, most of the day to day financial work like bank reconciliations, tracking expenses and revenue, payroll, sales tax, really requires a bookkeeper or lower level accountant. CPAs charge far more for their time than bookkeepers, so it’s best to reserve them for more detailed accounting issues such as long term strategy or dealing with investors.

Accountants Are All the Same

Accountants often specialize in various practice areas (e.g., tax, audit, forensic accounting, management accounting, public, and others) as well as industries. When operating in various industries (e.g., health care, government contracting, construction, real estate, retail sales, etc.,) it’s also important to work with accountants that have relevant industry experience as there are details and steps that must be followed for accurate financial reporting. This is why it's important to choose an accountant with expertise that aligns with your specific needs.

Software is a Substitute for Professional Accountants

While software has simplified the process of bookkeeping and accounting, it falls short on explaining accounting rules and business regulations. Further, unless used properly, the software won’t explain what is really happening with the business. Accountants help with accurately tracking the financial aspects of the company, ensuring compliance with regulations, forecasting, and tax planning. This ultimately results in saving money, time, and preventing costly mistakes.

Being a business owner and manager is difficult and time-consuming. Being able to rely on an accountant or accounting team that understands the needs and targets of the business can make a huge difference in achieving your company’s goals. Give Brightleaf a call to see if we’re the right fit for your business and let us help you reach your goals!

- John Thrush

4 Scary Financial Mistakes That Small Businesses Make!

It’s two weeks until Halloween, so it’s time to talk about some things that can keep small business owners awake at night! We explore four financial mistakes that small businesses frequently make as well as steps to take to avoid them.

Inadequate Record Keeping

The first mistake businesses make is not keeping accurate and organized financial records. Many small businesses, especially new business owners, neglect this aspect, leading to confusion and errors in financial reporting, especially around tax time. Inadequate record-keeping can result in difficulties in securing loans or investment, losing out on deductions on your taxes, and regulatory compliance issues that lead to fines or even inability to legally operate your business.

How to Avoid It:

Spend some time designing a filing system and getting your accounting software set up correctly. It’s generally a good idea to hire a professional bookkeeper or accountant to help with this as well as provide some training to make sure things are being done right… a small investment now will save a ton of time and money later. Keeping meticulous records of all income and expenses, maintaining a separate business bank account and debit card, and reconciling your accounts regularly will help immensely. This level of detail ensures that your financial records are not only accurate but also readily available for decision-making and tax purposes.

Neglecting Budget Planning

One of the most common financial mistakes small businesses make is failing to establish a structured budget. In their eagerness to jumpstart operations, business owners often bypass this process and run into money shortfalls such as overspending, misallocation of resources, and insufficient funds for critical business functions.

How to Avoid It:

Take the time to develop a comprehensive budget that includes all expenses - operational costs, marketing, legal, accounting, taxes and licenses, payroll, etc. If you’ve been in business a while, you can look at past expenses and tax returns; but, if you’re a new business, it makes sense to talk to a professional to think things. It’s important to regularly review and update this budget as your business evolves so you can plan your growth and have a good idea about financing needs. Having a clear financial roadmap will make you better equipped to make informed decisions and ensure that your business remains financially stable.

Ignoring Cash Flow Management

Cash flow management is the lifeblood of any small business. Many entrepreneurs and small business owners underestimate the importance of maintaining a positive cash flow, which can lead to severe financial difficulties. This is especially true when you have employees and payroll to meet. It’s also absolutely critical in businesses that have long payment terms between when the products or services are delivered and when the payment is received.

How to Avoid It:

Implement a robust cash flow management system and keep a close eye on who you owe as well as who owes you. If you identify an issue with paying suppliers, reach out and let them know sooner rather than later as they’ll be more likely to extend payment terms. Likewise, be proactive in following up on overdue invoices and sending friendly reminders. It may also be sensible to establish a line of credit to provide a safety net during cash flow fluctuations. Working with a professional to help understand the impact of cash flow can give tremendous peace of mind.

Overlooking Tax Planning

Taxes can be a significant financial burden, especially LLCs and S-Corps that pay business taxes on personal returns. Many small businesses and entrepreneurs only focus on their tax obligations during tax season, which can lead to costly mistakes. Failing to plan for taxes adequately can result in unexpected expenses, large payments or fines, and missed opportunities for tax savings.

How to Avoid It:

Work with a firm that’s experienced in structuring your operations in a tax efficient manner. Create a tax strategy that can structure your expenses, optimize deductions and credits, and find ways to reduce taxable income while remaining compliant with tax laws. Regularly review your financial statements and consult with your advisor to ensure that your business is well-prepared for tax season.

In conclusion, small businesses can thrive when they avoid common financial mistakes. By diligently planning their budgets, managing cash flow effectively, prioritizing tax planning, and maintaining accurate financial records, entrepreneurs can build a strong financial foundation for their businesses. Steering clear of these errors is crucial for long-term success and growth.

- John Thrush

Got a “million dollar idea”? Turning a patent into a business…

Have you or someone you know ever had an idea for a new invention? Have you thought about getting a patent? The US Patent Office receives an average of 500,000 applications per year, so it’s safe to assume that many people are in the same boat. And as fascinating as creating something new is, the possibility of becoming rich from it may be even more exciting. But how do you get from the idea to the money?

There are television ads for companies that offer to help you get your invention made; however, these kinds of services aren’t free. Before you contact either a patent attorney or the people advertising, it’s important to realize that the patent process is not easy, is not quick, and is not cheap. More importantly, please know that having a patent is no guarantee that an invention is going to make money.

When a large company comes up with an idea for a new product, they do a great deal of market research to see who will buy it and estimate how much money they can make. This will determine how much they’re willing to invest in research and development (R&D), production, marketing, advertising, etc… or determine if they bother making it at all. Most inventors don’t have the expertise or time to do this, but this doesn’t mean they can’t get the same help.

If making money is your goal, doesn’t it make sense to run your idea past someone who can help explain how to make money off of your idea?

Brightleaf Consulting Group has been trusted by inventors to help evaluate the value of new inventions and other business ideas before they invest a great deal of money in completing development, protecting it legally, and bringing it to market. Before hiring a patent attorney to file the patent, work with Brightleaf to help you figure out what kind of return you’ll get on that investment.

- John Thrush

What qualifies as a business expense?

A challenge for many new business owners (and more current business owners than you’d think) is knowing what qualifies as a legitimate business expense. While it is possible to use company funds to pay for many things, it may not always be deductible for tax purposes and, in some cases, may actually count towards an individual’s income.

One example of this is clothing. Clothing can be tax deductible if it must be worn as a condition of your employment AND that clothing cannot be suitable for everyday wear. So, while you may be required to wear a jacket and tie at the office, you are not legally allowed to deduct it from your taxes. What would make it deductible is if that clothing was a uniform with the company name printed or embroidered on it. This makes it a promotional item and an advertising expense.

Another example is gifts given by the business. While gifts are generally deductible, only $25 of gifts given to an individual can be deducted by the company each tax year. So if a gift basket of snacks to a client costs $60, the company can only deduct $25. This doesn’t prevent the company from giving the gift, it just means the additional $35 spent will still be taxed as though the money wasn’t spent… as will any additional gifts bought for that person for the rest of the tax year. There are some exceptions to this rule, though. Items that have your company’s logo permanently engraved or otherwise attached can exceed this limit, again, as an advertising expense. Another example would be an item that would be given to a client’s company to help with their own operations, such as a specialized tool that might relate to your company’s products.

Confused? You’re not alone. But this is why it helps to have people who deal with these issues regularly to help you understand the regulations and how to use them to your advantage. If you have questions or just want to understand things better, please reach out and let Brightleaf help you!

- John Thrush