August 3, 2016 by Speakers' Spotlight
How To Count Your Money
He’s opinionated and ruthless, and he hungers for big deals. Yet he made millions helping children learn how to read. Nothing if not a polarizing force,Kevin O’Leary pulls no punches when it comes to the good, the bad, and the ugly as it pertains to markets and economic opportunities. A judge on Shark Tank and a contributor to CTV, as well as the author of the two bestselling books entitled, Cold Hard Truth, Kevin is also previously well-known as the former co-host of The Lang & O’Leary Exchange and as a former panellist on the wildly popular program, Dragons’ Den. Here, Kevin shares his tips on operating a small business:
Nothing gives me greater joy than cashing a check or watching a client’s direct deposit land in my account. I know that anytime this happens, the world is rewarding me for adding value. If you want to run a successful small business, you also need to take pleasure in counting your money or, at the very least, find someone else who does. Otherwise, you will not be contributing as much value to the world as you are capable of. That would be a shame.
I always say that business is war, and money is the soldier. I cringe every time I lose a soldier without a good reason. Taxes are not a good reason. As a small business owner, there are all kinds of people that want your hard-earned cash – like suppliers, consultants and angry customers looking for a refund – so there is no need to give the government more than necessary. Taxes are very complicated but they are a fact of life and you need to create a proactive plan to deal with them instead of hiding like a frightened child. Do you hide from taxes, like a frightened child? If so, this chapter will help.
I am going to start with some stories about what will happen to your small business if you do not take my words seriously. Two words: bad things. This might seem hyperbolic, to you, but I cannot exaggerate how important this is. If you ignore everything else I say, you should read this and follow it to the letter. Many small business people ignore this advice. There are two major reasons why:
- Accounting is boring. Really boring. To that, I say: Yes. Business is tough. You will need to do hard things if you want to succeed.
- They do not think it is a priority. This is extremely dangerous. As I will show you, the longer you wait, the more painful your life will be. Accounting is like the medicine that may not taste good but will help you feel better. Take your medicine.
I used to have an accountant who fit every stereotype: He spoke in incomprehensible jargon, looked like Einstein after being dragged through a sewer and had the social skills of an orangutan. But you know what? I kept him around for a long time because he saved me lots and lots of money.
What Will Happen if you Ignore Accounting
If you ignore accounting, you risk complete failure. It is that simple. Want some evidence? A New York Times piece, about the top 10 reasons small businesses fail, cited poor accounting as reason #4. Need additional evidence? Pull up a chair and get ready for story-time with uncle Kevin.
Imagine that your friend, Bob, has a day job as a marketing manager at a large, Fortune 500 company. Bob likes his job and does not intend to leave tomorrow, but he has always been an entrepreneur at heart. He also loves to build living room furniture and he is really good at it. A few neighbors like his work and purchase furniture Bob built in his garage. Like the rest of us, Bob hates paperwork so he negotiates prices verbally and accepts payment by cash or check, in person. There is no paper trail.
He assumes that since he knows everyone for which he is building furniture, the IRS will never find out. But because he does great work, other people ask Bob for kitchen cabinets and living room chairs. To him, it still feels like a side gig. But the truth is, Bob is running a business and he cannot ignore that fact any longer. Let me tell you what the problems are.
First, he has a day job. Like other people with day jobs, he receives a W2 reporting his income, for tax purposes. Unlike the other people with day jobs, his W2 does not provide a full picture of his income. He can try to hide his earnings from the IRS, but that is very risky business. And I am all about helping you avoid unnecessary risks.
Another problem Bob will encounter: the commingling of funds – he is depositing the checks or cash into his personal account. He is going to start to get confused – which money came from the business he is hiding and which money is legit? The simplest answer is the best answer: He should create a business bank account and make sure that his books are in order.
Let’s say that Bob’s business takes off and he is now in a position to consider quitting his day job to focus on what he loves: building furniture and working for himself. His brand is now well-known in the area. He cannot keep up with the demand unless he raises additional cash to purchase new equipment, new materials and hire his first couple of employees.
It is hard to raise money from banks if your business is new, so debt financing is tricky. But Bob has a few nearby friends who invest in small businesses so he offers them an equity stake in his company. That sounds great, but how do you think those investors will react to a business owner who does not have any accounting to show them? Do you think they will be chomping at the bit to invest?
We know the answer is no. If investors cannot keep track of where your money is going, they will rightly believe that you cannot keep track of where your money is going and an entrepreneur who cannot keep track of where his money is going is not running an investible company. I do not want to be associated with someone that could be busted by the IRS, tomorrow. If an entrepreneur like that approached me for an investment…. Well, you can imagine what I would say.
Let that story serve as a hard lesson that you need to know how to count your money. So what do you need to know about counting your hard-earned money? You should start by understanding the importance of, and the difference between, bookkeeping and accounting – the two important aspects of keeping track of your finances. Then you need to consider the different approaches to tax planning – using do-it-yourself software, or hiring outside help.