Starting up your new business can be exciting and rewarding. There is nothing better than seeing your dream come to fruition and getting the overwhelming feeling of finally being in charge of your own destiny. Be cautious though, there are many complicated steps and situations that will challenge your sanity, financial freedom and knowledge base in ways that you had never dreamed! Too many start ups fail because of these 6 common issues.
Money Problems Many small businesses that fail do so because of lack of cash and a failure to plan for the financial drain a new business makes on your personal finances as well. Many small business failures begin with starting out with simply too little money, others fail because the owner simply was too optimistic about profitability and the timelines involved for it. Without adequate cash flow a new business is stymied with marketing and resources and simple slow sales or a downturn in the market can end the business before it has a chance to even gain momentum. Ensure that you have planned to adequately cover your personal expenses for a minimum of 12 months outside of the start up cash you have allotted for your new endeavor including personally making payments on the business financing in case the start up is not capable of covering them. Poor Marketing New business start-ups often make the error of rushing into going to print on advertisements and marketing materials before doing their due diligence. Print marketing and advertising is an extremely expensive venture to make a costly error on. Make sure to do adequate research on your target market, competition, hours, and pricing....you may find the market you thought you would be selling to are not the ones actually buying! Also make sure to get the website up and running and keep it fresh. A website has the potential to give more return if kept fresh and constantly being updated than print marketing will at a much lower cost. Keeping Work and Home Separate The stress of starting a new business can be overwhelming on relationships. You don't want to miss that call from a potential client because it could mean that you won't have to drag more money from your savings to cover the business, so you interrupt that romantic meal your spouse had planned. It's okay to step away and still keep your focus on your business. Let your voicemail take that call but make a mental note to ensure you call them back as soon as you can. Taking time for family and friends will enable you to adequately handle the stresses your new business will place on your shoulders. Going it Alone Most entrepreneurs is the belief that they can handle all of the start-up’s operations by themselves. It may be a cost-effective way to run the business, but operating the entire business on your own may not be a wise decision or the best use of your time. Many small-business start-ups may not require full-time employees but it's a good idea to have at least two teammates, a lawyer and an accountant, ready to help. With experienced, reliable assistance, you can avoid other common business mistakes. When it is time to hire staff, be careful in your choices. Employees are a crucial component in the success of your business, I like to call them your front line. The employee who does not reflect the values you are trying to achieve can tear down a business much faster than you can build it. You are the Tax Collector, NOT the Tax Man So many start ups forget that they are supposed to collect the sales tax from the customers, then remit it to the government agency. When the time comes to file the sales tax reports, they find that they have used that money to fund the day to day operations of the business. The tax man has some pretty far reaching hands and all too often, a start up and the entrepreneur ends up losing assets to the government for failure to remit or even worse, facing a litany of criminal charges. Starting with a good bookkeeper and proper record keeping your start up off on the right foot. Choosing someone with experience and knowledge that you trust is paramount to business building. Under or Over Pricing Although you may be competing with the big box stores, you will most likely not be able to price like these stores. The nationwide and international companies obtain products at rock-bottom prices because of the sheer quantity of goods they orders and thanks to exclusive supplier contracts. Pricing your goods and services too low can delay the process of turning a profit. Instead of erring in this way, list fair retail prices, and make sure your start-up excels in customer service. Set yourself apart by raising the bar that your competition serves by. Many consumers are trying to keep their money in their local community so make sure your print advertising reflects "Shop Local" and show your support after a few years by supporting local community organizations and events. You also should have a convenient location and hours. I received an email this morning through the Efile portal:
Employment expenses review Each year, the Canada Revenue Agency reviews a number of returns to ensure that taxpayers are entitled to the claims that they have made, and that amounts claimed have been correctly calculated. These reviews are an important part of our compliance activities to maintain the integrity of, and Canadians' confidence in, Canada’s tax system. In the fall of 2017, the CRA began reviewing a small percentage of individual tax returns when we detected a trend in the normal course of our regular reviews. The review focused on “other employment expenses” claimed on line 229 of the T1 Individual Income Tax and Benefits Return by shareholder-employees. Based on the feedback we received from industry stakeholders in recent weeks, it became clear that there was confusion among taxpayers, who were the subject of these reviews, as to how they should be claiming “other employment expenses”. The Canadian tax system is based on self-assessment, which is in turn supported by clear guidelines for taxpayers and their representatives. In this case, the Agency agrees with our industry stakeholders that additional consultation and new guidance products are necessary. Effective immediately, the Agency will stop reviewing and disallowing “other employment expenses” claimed on line 229 of the T1 Individual Income Tax and Benefits Return by shareholder-employees. We will also reverse those reassessments specific to line 229 already issued during the review period September 1, 2017 to February 10, 2018. Specifically, taxpayers who were major shareholder and owners of a corporation and received a letter from the Special Assessment Program of the Canada Revenue Agency dated between September 1, 2017 and February 10, 2018 indicating that they were reviewed for “other employment expenses” claimed on line 229 of the T1 Individual Income Tax and Benefits Return. Taxpayers involved in these reviews will be contacted by letter to inform them of this decision. Consultation will be undertaken with stakeholders in the tax professional community to clarify the requirement of employer certification under Subsection 8(10) of the Income Tax Act as it relates to shareholder-employees. It is expected that clarification will be issued to take effect in the 2019 tax year. The Agency will issue guidance products on this issue well in advance of any future reviews to allow taxpayers, and their representatives, reasonable time to adjust to their tax filing requirements. Please call 1-800-959-8281 for more information. What this means to the shareholder-employee is that specific guidance will be issued regarding the employment related expenses and how they will apply to that specific situation. CRA will likely take the hit for these self assessed claims and allow them for the taxpayers under review currently from the time period stated, but will clarify the rules going forward for stakeholder-employees regarding the allowable expenses, if any, and non-allowable expenses. This could mean changes to your tax liabilities for the coming and possibly the past tax year, so be sure to follow this blog for further updates. Regular employees, whom are non-stakeholders, are not affected by this bulletin. As a small business owner, you now feel like you have the control to be successful. Many small businesses fail not because of a bad idea or mismanagement, but rather they get themselves into hot water with Canada Revenue Agency and then do not have the funds or the knowledge to dig their way out. You may be tempted to write off 100% of your vehicle costs or deduct that family vacation under travel costs for your business, but CRA is always watching and analyzing business trends, costs and profitability. Don't expect CRA to ignore the fact that you are living in a $650,000.00 house but only showing $30,000 in annual income. That is you, the small business owner, waving your wings at CRA is begging for an audit. A construction company centered in the Ottawa Valley would be hard pressed to justify a Jamaican holiday for two adults and two children for a week. It's not enough to say "I worked while I was there," just ask the many that have tried. A reversal of a deduction on your income tax forms will almost always trigger an HST audit, which is often more in depth AND more costly and that is because CRA knows if you wrote it off in your business expenses, you probably also deducted the Input Tax Credit from your HST filing as well. So now you ask yourself, how can I stay out of the auditors magnifying glass. The best business practice is to be honest. Don't try and write off your entire basement square footage, when all you use is the 8 x 8 room in the corner. If you only use your car occasionally for business, keep good records including mileage/purpose/people records to justify the expenses you do write off. When in doubt, ask a professional if the expense would survive an audit. Most importantly, keep good records! 7 year cycling out of records is the best practice. When CRA comes calling, you will be ready with proper record keeping and be able to answer all their questions and requests expeditiously. Michelle Gibson, AuthorSpending much of the last 35 years in business accounting and management, I have once again taken the entrepreneurial leap. My focus is on small business, especially start ups and has the direction and tenacity to teach newcomers to the business world how not to make mistakes. 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Michelle GibsonAfter over 30 years in business management roles, I want to help other businesses grow and succeed. If I can keep one small business from making common mistakes, I will have helped them immensely! Archives
October 2021
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