249: 5 Financial Mistakes Made at Year End

Michele Williams:

Hello, my name is Michele, and you're listening to Profit is a Choice. On the podcast today, we're going to be talking about the five mistakes that business owners make at the end of the year. I want you to listen in and see if you are finding yourself falling into any of these traps so that you still have time to do something different.

Every day, empowered entrepreneurs are taking ownership of their company financial health and enjoying the rewards of reduced stress and more creativity. With my background as a financial software developer, owner of multiple businesses in the interior design industry, educator, and speaker, I coach women in the interior design industry to increase their profits, regain ownership of their bottom line, and to have fun again in their business. Welcome to Profit is a Choice.

Welcome to the podcast. What I want to talk about today is the mistakes that business owners tend to make with their financials at the end of the year. This is probably going to be pretty quick and pretty short. I'm going to give you some information about it, but the bigger time suck, if you will, is going to be you going back to look at your own financials to see if you are at risk in any of these areas.

What I tend to see at the end of the year, and I would suggest most accountants and bookkeepers do as well, is business owners doing this dance of, oh, my gosh, I made money, help me hide it so that I don't have to pay taxes. I don't mean that in a bad way. I'm not suggesting that everybody's running around trying to cheat the government, but what I am saying, and rightly so, we don't want to pay taxes on money that's not really ours. That's not what we want to do, because now we're overpaying. One of the things that I want to suggest to you as we're looking at our financials for the end of the year, is we want to, at least from my viewpoint, is we want to put our financials in the best position to be able to handle the tax implication for the current year, but not to tie our hands, from being able to move forward in the new year, because cash flow is a problem. There's kind of a delicate balancing act sometimes between how we spend our money and what we do in one year and how it affects, at a minimum, the first quarter of the next year. Keep that in mind as you're looking at all of these things. All right, jumping in.

Number one, the very first thing that I would tell you is a big mistake that business owners make as they're wrapping up their year and they're looking at their finances, and not using or sticking to a budget. Either they didn't make a budget for the year to give them kind of that pre-planned guide for spending their money, or they built one and then they didn't manage to it, which means in some cases, they probably overspent. I would say nine times out of ten, we're more likely to overspend a budget than to underspend a budget if we're not watching it and being accountable to that budget. I am seeing people that get to the end of the year, and they're like, oh, my gosh, where did my money go? Why is this happening? The other thing that I see in that conversation around budgets is maybe not having it aligned to the strategic plan or not managing expenses so, they're not doing the expense management kind of comb-throughs twice a year that we talk about doing. If you think about it, the way that we do it differently is to create a budget that is manageable, creating a budget that aligns with a strategic plan and then managing to the budget by combing through those expenses, getting rid of the things we don't need or don't use or finding other ways to spend our money. So that's the number one business mistake, is not using, sticking to a budget, and not having it aligned properly.

The second big business mistake that we make financially is not managing cash flow properly. What I mean by that is not managing when the money comes in and how it goes out. Money flows just like water, in, out, in, out and if we're not managing not just the amount of money coming in and out, but the timing of when that money comes in and out, we could find ourselves in a big problem or with a bigger challenge. Sometimes it might be things like managing prepays and down payments. I know back in the day, 20-30 years ago, when we were doing business, a lot of us would ask for 50% down, and that felt reasonable. It also gave the impression that 50% was maybe product-based and 50% was labor. We all felt very comfortable with that, and perhaps we're still doing that. But what we're also finding these days is that more often than not, we are either requiring a 100% down payment or we're needing to pay some of our vendors early for those more custom items. I want to suggest to you that you start considering, when you're looking at down payments, and prepayments, how to get money in advance of the work instead of always after the work, move more to the beginning of the project than to the end of the project. Think about getting a 100% down payment or 100% paid, or at least moving it up to 75% if you're in a more labor based, environment and you think you can't do 100%, but looking at the timing of those things, the other part of that is looking at the timing of when you're paying your bills. What are your terms? Are they 30 days? Are they 60 days out? Are they due immediately? Are they pre-pay? The whole goal here in keeping your business kind of fluid is managing when the money comes in, and how much comes in. When the money goes out, how much goes out. Profit First is also a money management system. What we try to do in a Profit First environment, or in a Profit First application for your company, is to look at how the money comes in, look at how it goes out, look at what needs to come out of each of those income amounts if you will. How does money need to be dispersed? How much do we need to keep and save so that you always are in a cash flow-positive situation? If you find yourself in a cash flow negative situation, remember, that you always have to get cash flow neutral before you can go cash flow positive.

The third big financial problem that business owners have at this time of year is overpaying the owner. I know some of you are probably thinking, heck, I'd like to get paid once. But here's what I see, and I see this more often than not, is, as owners, we're maybe not always aware of how much we're being paid that could be considered owner's benefit. What that means is not only are some of you getting paid through W-2, maybe you're a business running as an S Corp, but you're getting paid through draws or disbursements. Then some of you are also running through some of your personal items, which we don't want to do that's commingling of funds, and remember, that pierces the corporate veil. So, we don't want to do that. If we're not careful, we're being paid in things like writing off a portion of our home or being paid by covering our car insurance or covering our cell phone. Those are perfect business write-offs, if your company is set up properly, it's not a problem to do that. But just recognizing that money comes in a lot of ways. What happens is at the end of the year, a lot of times, business owners who are not up to date on their financials and where the money goes, read the P & L as if it were a bank statement. They see this huge number at the bottom, and they think, heck, I can go take some of that money out and so they bring it into their home. Or it could be that you're not managing the money, you're not looking at it, or your reconciliations come three months after the event. I've seen some business owners take money out all year long that ends up being more than the business even made in profit. All of those are red flags, commingling funds, taking out too much money, and paying bonuses that aren't there. What that also does is it leads to something called lifestyle creep. Think about scope creep that we've talked about numerous times in business. Lifestyle creep is where every time you make a little more money, your lifestyle raises, and then you need more money, and then your lifestyle raises versus keeping your lifestyle where it is and letting the money be made and then letting it be saved. The higher the lifestyle creep, the more the demand on the business is, and the more responsibility the business has to meet that lifestyle need. Check your lifestyle creep. That's something to look at and consider at least. If you do creep your lifestyle, we're all probably going to creep a little, at least do it with intentionality, knowing what it's doing. Ask yourself, is this a one-off or do I need to sustain this going forward?

The fourth big financial problem that our business owners are facing these days is neglecting a strong cash reserve and emergency fund. I talked about this a few minutes ago when I mentioned Profit First and knowing how to save money, move money around, and manage money. We even touched on it when we talked about lifestyle creep and having a savings plan, but businesses that get themselves in trouble don't manage that money properly, which means that they don't have a strong cash reserve. There is always the suggestion that three months of expenses is the minimum. The minimum, not the maximum, the minimum. I would suggest that as many do in the accounting and bookkeeping and financial space, that six months is where the breathing room comes from. So, creating this plan of what is our monthly spend to keep the doors open and keep people paid times three to six and so you understand the only way to get that is by having profits and not taking them out, and using them for personal gain or using them in some other way. Being careful about managing and prepping and planning, then, yeah, go get a line of credit, but you also get to be your own line of credit to your company, which means there are no interest payments to that.

Then lastly, is paying off the wrong debt first. That’s our fifth big mistake that business owners make. They might get to the end of the year, they've got some extra cash, and they're looking at debt, and they're paying off the wrong things first. There really does need to be some type of plan for managing and paying off debt. We want to start looking at things like, which are the debts that have the lowest, APR, and what is the debt that's costing us the most. Is there one debt that is stopping us from making another decision in the business? There is a strategy for how you pay off debt. At the end of the day, I want to share this with you.

We have a couple of other podcasts that touch on each of these areas independently, and we'll link those podcasts in the show notes. But this really comes down to us as business owners taking full and complete ownership of our business, which includes financial strategies, and financial money management. Again, none of this means that you, as the owner, have to do all these things. Nobody's asking you to be the task rabbit in the middle of this. What we are saying though, is that you have to be the one that sets the tone, guides it, and creates boundaries around how money in your company will be used.

I really want to encourage you, as we're wrapping up this year and moving into a new year, that you let that be top of mind for you. That you make a decision, if you have let some of that maybe be a little more lax than you're comfortable with, and that you make the decision to put your arms back around it and pull it back in.

We can help you with that here at Scarlet Thread Consulting, we have a new offer that I would love to share with you. So excited about it. It's called CFO2Go and you can find out more by going to Scarletthreadconsulting.com/CFO. What we do there is we jump in with you on a short basis and help you look at your financials, look at your strategic plan, look at your budgets, look at all of these things, talk to you about a Profit First opportunity in your business that fits the way that you work, not just here are your five bank accounts, and you have to do it this way. Then we help you get set up in Metrique Solutions so that you can constantly monitor, and I'll tell you, if you're a company that does the CFO work that we have, and you do the Metrique review and planning, you will not be a company, you will not be a company that has these five mistakes at the end of the year.

Maybe you're sitting here thinking, darn, it's too late. It's never too late. It is never too late. So, I beg you, if you are struggling, if you don't know how to do this, if you need assistance, reach out to us, and let us talk to you. Let us see if we can help you for a short engagement, jump in, understand, show you the holes, help you have educational content around that, get you into Metrique, and then put you back in your business on your own, managing it and feeling so much better at the end of the year that you know what to do when to do and how to do for all things financials.

I want to also encourage you with this, profit doesn't happen by accident. It is a choice, and we can help you make the right choice, so call us and let us do that. Have an awesome end to your year and a great start to the next.

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