Popular Misconception #1: ------------------------- "We Only Need Our Books Done Once A Year For Tax Purposes." ----------------------------------------------------------- Are Your Accounting Records Adequate To Run Your Business? -----------------------------------------------------------

Although it is important to keep records for tax purposes, it is not only reason (or even primary reason) good accounting records should be kept. Another frequent reason clients request financial statement preparation is to obtain bank financing. Although important, this also is not primary purpose of keeping good records for your business.

Good recordkeeping will enable you to extract meaningful financial information for your business that will help you to manage it properly. If you can't access this information, you will not be able to manage your business properly. Bad management leads to business failure.

Yes, primary reason good accounting records should be kept is to produce periodic (at least on a monthly basis) financial statements for management information purposes. Only with this current financial information can you properly manage your business. This information can alert you to declining sales, excessive expenses, tax opportunities, cashflow problems, and many other vital concerns for your business.

To be of value, this accounting system should be set up with meaningful account categories and departments. It may be cost-effective to have an outside accounting service do monthly bookkeeping. However, with accounting software that is readily available, you don't have to be an expert bookkeeper to do your own books and extract meaningful financial information.

If you do your monthly statements yourself, it would still be prudent to have your accountant or business advisor help you set up your system and, as well review such information with you to discuss problems and opportunities.

Popular Misconception #2: ------------------------- "Writing My Hobby Off As A Business Loss ---------------------------------------- Saves Me A Lot Of Income Tax!" ------------------------------ Is Your Hobby A Tax Write-Off? ------------------------------

If your business has no reasonable expectation of profit, if it is a hobby and not really a business, you will ultimately fail in your tax objective. Since your losses are being incurred for a hobby and not a true profit generating business, tax authorities will take position that you aren't entitled to any deductions. This is a double blow. First, you're losing money. Second, you're denied tax deductions.

It is true, however, that if you enjoy what you're doing, you'll do better at it. You'll be willing to work longer hours and you'll be willing to put up with more hardships in order to make your business a success.

Rather than attempting to have tax system subsidize your hobby, why not turn that favorite pasttime into a real, profit generating business? This is a doubly rewarding. First, you make money at something you love doing. Secondly, tax authorities legally have to allow your reasonable expenses to earn your now substantial business income.

Prove that you're running a business by running a business. Prepare and follow a proper business plan. Keep good accounting records with at least monthly financial statements to give you information you need to manage your business. Above all, make money from what you do.

Popular Misconception #5: ------------------------- "Since we're not seeking financing, ----------------------------------- we don't need a business plan." ------------------------------- Do You REALLY Need a Business Plan? -----------------------------------

To obtain financing, many persons will prepare a business plan. Although entrepreneurs will go to great lengths to get their loan or capital, these same business persons will not bother to plan ahead very far or analyse their business. Even if you required no additional money, preparing a business plan can help you to succeed in your business.

Running a business without a plan is like going on a trip without a map, sufficient gas, money, or even a destination. Just as you wouldn't go on a vacation without some planning, no business can be successful without it. Putting that plan in writing helps you to think out a strategy for successfully operating and growing your business.

Where is your business today? Where will it be tomorrow? What is your mission statement? What product lines are profitable? Which ones aren't? What business do you think you are in? What business do your clients think you are in? Should you be in a different business? Is your product or service less attractive to your clients? How are competition, global commerce, technological and social changes affecting your company? What is your competitive strength? What are your weaknesses? Who are your biggest competitors? What are their weaknesses and strengths? What is your marketing strategy?

What are your projected income and expenses and cashflow for next year? How about next five years? Do you have a capital budget? What determines whether you buy an asset or not? Do you have an exit strategy? How will you manage growth? Do you have a financial plan? Do you have an operations plan? What definite sales and net profit targets have you set for this year and next five years? What factors could interfere with attaining of these goals? What contingency plans have you made to deal with such problems?

The purpose of these questions is to get you thinking and planning. If you fail to plan, you plan to fail. Although your accountant or business advisor can help you prepare your business plan, only you can set appropriate goals and follow through on them. Yes, you definitely need a business plan, not just for obtaining capital, but as a roadmap for your business.

Popular Misconception #6: ------------------------- "I like bartering with clients ------------------------------ because it saves paperwork and taxes." -------------------------------------- Are You Reporting Barter Transactions? --------------------------------------

Bartering is an excellent way of doing business. However, contrary to popular belief, some barter transactions are taxable, both for income and sales tax purposes.

Legally, you must maintain adequate financial records for your business. Barter transactions made by your business must be reported to appropriate taxation authorities and taxes paid. However, transactions between friends not engaging in business with each other may not be taxable.

If you are an auto mechanic and I am an accountant and I swap accounting services for your car repair services, transaction in this case is most likely taxable, even if we are friends. However, your accounting fees should be deductible as a business expense and so should business portion of my car expenses. Note also that sales and similar taxes may apply on this transaction.

On other hand, if I trade accounting services for a vacation for my family, I should really declare value of such services as income. The firm supplying vacation would be able to deduct that value as accounting fees. Any sales or similar taxes would have to be paid on such transaction.

Many persons don't record such transactions. For some, it may be a matter of wanting to believe that you don't need to be bothered with extra paperwork or taxes. Remember, though, that ignorance of law is no excuse. Legally, you must keep proper records and pay all taxes due.