Startups & Money: CPA Advice to Keep You in the Black

Creating a business idea is free, but turning that idea into a physical product or service, and then getting it to consumers, costs money. Aside from building the product and marketing your business, you also need to monitor your finances to keep your business afloat.

We interviewed CPA Gary Weiss on how to fund a startup and sustain it going forward. Gary Weiss is a certified public accountant that not only organizes his clients' records, but also offers unique financial strategies for his clients.

Common Financial Mistakes for First-Time Business Owners

According to Weiss, commonly-made mistakes made by new business owners are mostly money-related. The errors include:

A Bad Set of Books

The underlying issue of many problems with new business owners is a lack of responsible record-keeping. According to Weiss, “Small businesses need to have good records so they know if they are making money or not, and where their money is going.” Business owners were not keeping track of expenses and taxes, which later ate into their profits. They assumed that good sales would cover everything, but they did not know how much money was flowing out versus what was coming in.

They Went Big, Then They Went Home

Good businesses will certainly grow, but it is prudent to avoid growing too fast. Just as you were taught not to drive beyond the headlights at night, you should not push your business beyond its resources. As Weiss advised, “Stay small and work within your cash flow.” Growth will come, but you need to be patient and move forward when you are ready.

Overspending and Too Much Debt

These financial mistakes often go hand-in-hand, with overspending often leading to the business owner incurring more debt, either in the form of loans and/or credit cards. Some business owners spend more because they are betting on future revenue to cover the current expenditures.

Common extraneous expenditures include commercial space that is too big and/or expensive, new equipment that may not be needed, hiring more employees than necessary, and making unnecessary purchases (new office furniture, decorating, vehicle, etc).

How to Handle Finances in Your Startup

The best way to avoid making these mistakes when forming a new business is to be careful and responsible from the beginning. It really starts with a solid business plan that lays out the business idea and its goals, how you plan to achieve those goals, and how you will fund your venture.

Seek Start-Up Funding

Gary’s advice for starter capital is simple: “family, friends, and fools.” Of course, the “fools” he refers to are far from foolish, but also likely far from being personally connected to you (i.e. banks, financial institutions, venture capitalists, angel investors). According to Small Business Trends, 82% of funding for a startup comes from the entrepreneur himself/herself, and from family and friends.

Venture capitalists generally represent a company/group of investors who invest the necessary capital in businesses to either begin functioning or expand. The funds are not a typical loan, but must still be paid back through direct reimbursement or in the form of ownership percentage.

Angel investors are similar to venture capitalists, except that the investor is usually a person rather than a company and uses his/her own funds to help businesses in exchange for ownership in the business.

Keep Good Books

Even if you decide to use an accountant for your business (which is advisable), you still need to keep track of receipts and expenses. Essentially, know where all the money is coming from and going to. Sales do not automatically equal profits — keep track of the daily/monthly expenses. Another good idea is to create a budget for your business so that you stay on track financially.

“That's part of funding a business—making sure you have enough money for your day to day home expenses so it doesn't conflict with the business. Because if you start pulling money to pay your rent, then you don't have enough money to run the business,” says Weiss. “And that's one of the main causes for businesses to fail. They're under-capitalized."

File your Taxes Early and Correctly

Another area where Weiss has seen many businesses lose money is not paying taxes properly. Some business owners make assumptions on what they owe, and either do not check for any changes in tax requirements or miss something in their business where taxes must be paid.

Also, if you wait until it is time to file your tax return to make your books and figure up what you owe, then you are already several steps behind and will likely miss something (and possibly have to pay more). In addition to good record keeping, you should also be mindful of your business’s tax responsibilities and stay current on quarterly tax payments.

Your best bet is to let a professional accountant/preparer handle the tax part so you can focus on running your business.

"Asking for help is the best thing that small businesses can do."

Avoiding these business mishaps is fairly simple—stay within your business’s cash flow and know what is going on with the money.  Finally, consider getting professional help with your books; the investment in accounting and tax professionals will likely save your business more money than you realize.

“The best thing I can tell them is make sure you have enough capital run your business, keep a good set of books. A lot of small businesses in the first several years ended up getting audited, you know, their personal returns will audited, you'll have no set of books and it will not turn out favorably for them. So keeping a good set of books is paramount upfront. Getting financial health, ask for help in America. We see that as a weakness. Asking for help is the best thing that small businesses can do.”

Related Articles:

• IRS Compliance: Staying Out of the Audit Zone

• Turning the Tide on Your Cash Flow Crisis