If you own a business and don’t have a CFO… you ARE the CFO!

Running a small business can be a challenging yet rewarding experience. It can be very difficult to manage finances on top of everything else, especially if numbers have never been your thing. Many small business owners have what I like to call the “finance scaries”, and actively avoid any activity which could be perceived as financial management or planning.

This is so common, yet not talked about enough.

Since leaving the corporate world in 2021, where I worked for large corporations, I’ve been talking to small business owners to see how I can best serve them on a Fractional CFO basis. I’ve seen and heard a lot, and I’ve compiled a list of the 8 biggest mistakes I see small business owners make when it comes to their finances. Making these mistakes can have catastrophic impacts on your business so I urge you to reach out if you need help getting back on track.

Biggest Mistake #8: Not carrying proper insurance

Like finance, insurance is something that many avoid. Some even think that obtaining insurance is going to “jinx” you and cause you to suffer losses.

Many small business owners don't carry proper insurance to cover their business if an unexpected event should occur. The type of insurance that is often the most crucial is liability insurance. This insurance covers your business if someone suffers a loss or injury, due to the operations of your business. For example, someone getting injured on your business’ property.

More and more frequently, the losses your business might incur can be related to cyber security, or hacking events. Cyber crime is on the rise, and business owners must be diligent to protect themselves from them. Cyber security insurance can cover your business if you fall victim to one of these attacks.

Biggest Mistake #7: Not taking advantage of tax deductions

Business owners typically fall into one of two categories: those who put too much through their business and those who don’t put enough through. You are allowed to deduct any reasonable expenses incurred to earn your revenue.

Those who put “too much” through are putting items that are personal in nature through their business. Surprisingly, I’ve seen many business owners actually brag about this - as if putting personal expenses through your business is a flex, rather than an illegal activity that can get you in major hot water with the tax authorities.

On the flip side of this coin, those who are well aware that personal expenses can’t be deducted, often absorb expenses personally that could reasonably be deducted from their business. For example, if you use you cell phone for both personal and business use, you can deduct a portion of the cost through your business. Not understanding what can reasonably be deducted can cause you to miss out on deductions that reduce your business’ taxable income.

Biggest Mistake #6: Not having a budget or financial plan

Many small business owners don't have a budget or a financial plan in place. This makes it difficult to manage your cashflow and plan for future expenses. You need to make sure that you have a budget and a plan in place to ensure the long-term success of your business. Without this in place, it can lead to financial insecurity and uncertainty, which can be very detrimental to your business.

The best way to create a financial plan for the future, is to look at what has happened in the past. Refer to your financials from previous years, and from there, you build out any changes that you plan to make in the future. When you do it this way, you can also see where you've overspent, or perhaps underspent, in various areas.

This is something that I help clients with now, and I did this extensively in the corporate world. The importance of this process cannot be understated.

Biggest Mistake #5: Not separating business and personal finances

As soon as you create a business, you should be opening a separate business bank account and credit card for your business, even if you're a sole proprietor and your taxes are going to be filed on the same tax return as your personal taxes. You need to have separation of what is business activity versus personal activity.

If you have those separate accounts, it's much easier at tax time to determine what was involved with your business and what was personal. If it's all mixed together, it can be very difficult to separate the different types of activity and may raise questions with the tax authority if you were to get audited.

Any expenditures that you incur in your business must be supported by a receipt or an invoice from a vendor. If you're putting personal things through your business, your profitability is going to be skewed - and that is also considered tax evasion.

(Note: you can put personal transactions through a business account - but they cannot be classified as expenses. They must be classified as a “shareholder draw” or a “loan to shareholder” which are both balance sheet accounts not affecting your business’ income statement.)

Biggest Mistake #4: Focusing only on sales and not profitability

It's very common to see business owners focus on their sales numbers. You want to increase your sales, and there's no doubt that that is a very important aspect of your business. Without sales, you don't really have a business. However, you need to look at how much it's costing you to make those sales. Whether that be the cost to actually build the product (cost of goods sold), or whether you're overspending on marketing and advertising.

You have to look at how much you have left over after you deduct all of your expenses, otherwise known as your profit. Ultimately, that is what you pay tax on, and that is what you get to keep at the end of the day.

You need to be focusing on your sales numbers of course, but you also need to keep a very close eye on your profitability so that if your costs go up, you might either look into decreasing your costs or increasing your prices, to maintain your profit margins.

The erosion of your profit margins is what can cause your business financial hardship, and ultimately cause it to fail… if you don't catch it soon enough.

Biggest Mistake #3: Not understanding their financial statements

Many small business owners don't have a clear understanding of their financial statements, specifically their income statement and their balance sheet. Understanding these statements is crucial for making informed business decisions. You need to make sure that you educate yourself on the basics of these statements.

Your financial statements can give you some really great insight into your business and where there may be problems. However, if you don't understand how to interpret them, they don't do you much good. I do understand why some business owners don't gravitate towards their financial statements … because they mean nothing to them.

This is where having an ongoing finance professional assisting your business, helping you interpret these and keeping them accurate and up-to-date can really help you guide your business decisions.

Biggest Mistake #2: Not seeking advice from a professional

When you first just start your business, very likely there is no financial professional involved at all. Your business decisions are being made based on your gut feel. This can cause you to have great success, however your gut feel can only take you so far. Once you get to the point where you need to make important decisions surrounding outsourcing, scaling or moving into another market, you need to have financial data behind these decisions, and a projection forward to see if this is a smart financial decision for your business.

It's very easy to jump the gun and make decisions because they seem like they might be a good idea, without looking at the long-term financial ramifications of those decisions. Looping a finance professional in and having them take an independent, objective look, is your best bet to make sure that the decisions you make are sound ones.

Biggest Mistake #1: Not keeping up-to-date financial records

It is far too common that the only time a business owner looks at their finances, is when it's time to file taxes. At that time, their accountant needs them to provide receipts for various expenditures. From there, they compile the business’ financial statements and determine its tax liability.

This is the bare minimum that needs to be done for you to stay compliant, tax wise. If this is the only time you are compiling your financials and looking at your results, you might be in for some unpleasant surprises. For instance, you could have incurred losses or made a huge misstep along the way causing you to become unprofitable. You may not even realize that your business is in trouble, especially if you are operating on debt.

A corporation in Canada does not have to file taxes until six months after its fiscal year ends. This means that activity which occurred up to 18 months prior might not be reflected in financial statements until tax time. That is a lot of time, and a lot of opportunity for things to go awry without you realizing it.

If you catch these things too late, they might not be fixable. If it is fixable, it will be more difficult to fix than if you had caught these things when they happened. Identifying issues when they happen, before your business becomes unprofitable, is necessary for you to pivot and get yourself on the right track again.

This is where the large corporations have such an advantage over small businesses. Large corporations have dozens of accountants constantly monitoring the financial performance of the business. If anything goes wrong or doesn’t perform as expected, it's flagged immediately and the business is able to pivot. Small businesses can't do this if they're not on top of their finances. Therefore, all it takes is one or two wrong moves and they're sunk. This is why it's so important to not only keep up to date financial records, but to understand what those records mean and understand how to interpret them so that you can make the best decisions for your business.

Finance can seem scary - but it doesn’t have to be that way

My favorite thing about the corporate world was teaching non-finance people about finance and getting them to understand it by talking about it in a way that they would understand. I would often have relieved people sitting across from me who would say “oh, that's not as complicated as I thought, I understand now!”

You need a professional who is able to break it down for you in a way that doesn't make you feel inferior. If you're not a finance professional, these are not things that you should have an expectation of understanding. This doesn’t mean you don’t need to learn it.

If you want to work with me and have me take a look at your books, even if it's just like a one-time engagement to just give my advice, please reach out. If you want to have someone help you on an ongoing basis, but don't have the budget for a full-time accountant or CFO, I encourage you to check out my fractional CFO services.