Protect Your Business by Avoiding Five Common Mistakes
Mistake #1: Misunderstanding the difference between an employee and an independent contractor.
Many entrepreneurs outsource to freelancers or independent contractors to get work done. As a small or mid-sized business, there may be many circumstances where utilizing an independent contractor might seem like a better idea than hiring a new employee. Be sure that the IRS agrees with your categorization of independent contractors. In the eyes of the IRS, many “independent contractors” are actually employees based on how you treat, pay and work with them. If you misclassify an employee as an independent contractor, you could face stiff penalties.
The IRS uses three characteristics to determine whether a worker is an employee or independent contractor:
Behavioral Control: If your business controls the way the worker does the job (through training, instruction or other means) that person is probably an employee. If you communicate your expectations and allow the worker to complete the task on his or her own, the person is probably an independent contractor.
Financial Control: Does your business control the financial and business aspects of the worker’s job? If the worker buys his or her own equipment, reports a profit or a loss and submits invoices for completed work, he or she is probably an independent contractor. Conversely, if you provide equipment and control the finances of the job, that worker might be considered an employee.
Type of Relationship: If there is a contract in place communicating work on a per-project basis, than that person is probably a contractor. If he or she works for you indefinitely, that person is probably an employee.
This can be a complex issue, but it is one that is important to understand. Visit the IRS website for more guidance or schedule a review with our office.
Mistake #2: Not completing a background check.
When you finally find the perfect employee, you may be so excited to get them started that a background check is the last thing on your mind. Conducting background checks may cost you a little bit in terms of both time and money, but failing to complete a background check could cost you much more in the long run. Employees that steal, destroy customer relationships, trigger lawsuits or simply degrade the dynamics of your team, may be detected by conducting a background check up front. Your employees are often your most important assets. Don’t make a financial and organizational investment without doing your research.
You can conduct basic background checks internally or you can use an outside firm to handle more extensive background checks, saving you time, headaches and ensuring that you get as much information as possible before bringing a new employee into your company.
Mistake #3: Failing to manage cash flow.
Cash flow is the lifeblood of your business. Understanding your cash flow and how it can affect your business will help you ensure that your business not only remains profitable, but also solvent and operational. Accounting software makes it simple to monitor your company’s cash flow, so there’s really no excuse for neglecting it. If you find that managing your cash flow is difficult, or if it distracts you from your primary business, consider outsourcing your bookkeeping and accounting functions. Outsourced accounting can often greatly improve your financial knowledge and therefore your decision making, allowing you to better plan ahead for resource demands. With the right outsourced accounting partner, you can have someone keep an eye on your cash flow weekly or even daily.
Mistake #4: Failing to systematize processes.
As a business owner, your current success may be driven your creativity, your productivity and your time. But what would happen to your business in your absence? How much value would your business provide for a potential buyer on its own? If you want to create lasting value outside of your own talents and will to succeed, you need to develop repeatable and reliable processes. Systematizing processes within your business can provide consistency, help with scalability and can ensure that individual knowledge is capitalized and converted into institutional knowledge. You can, and should, systematize every process you can. This is how to build lasting value and allow yourself to focus on new opportunities as they arise.
Mistake #5: Mispricing your services and products.
Pricing your products and services can be tough when you are in the early stages of your business. Your need for cash flow can put a strain on your decision making, leading you to under or over value your services. Many businesses sacrifice profitability for short-term cash flow. In a few select circumstances, this may make strategic sense, but underpricing your services over time can result in working harder than necessary to maintain positive cash flow. You also run the risk of devaluing yourself, your services and your company. Be sure you understand the value of the service you provide to your customers as well as the market rates for your work.
If you are making any of the five mistakes above within your organization, we can help. Our team of accountants and business advisors specialize in helping businesses maximize organizational value through their financial and operational activities. Give us a call today to put our team to work for your success.