Three Big New Year Resolutions for Small Businesses and the Self-Employed

Tis the time for resolutions. As an attorney specializing in the financial woes of small businesses and the self-employed in DC and MD and drawing from my 22 years of experience, here are three tips to consider as you draw up your list for 2012:

1) Keep books. It’s that simple. So many of the financial problems of small business could be solved simply by keeping regular books, including:

  • Cash flow problems. This is almost certainly the leading factor causing a bankruptcy filing. Often, the business will actually be profitable or have positive net value, but because the managers have not managed the finances to maintain liquidity, they cannot pay bills on a current basis. This, in turn, leads to the debt enforcement actions that force the business to seek bankruptcy court protection so that it can reorganize its finances. It might have been avoided if the managers kept regular books and knew where they stood in terms of cash, account receivables and payables.
  • Tax problems. Without keeping books, business may rely solely on what is in the bank account as a gauge of how they’re doing. Unfortunately, the balance in the account does not take into account non-cash accruals that have built up during the year, the most critical being taxes. At year end, they don’t have cash enough to pay the tax bill.
  • Getting loans or selling your business. Persons evaluating the business as purchasers or lenders will not give you financing or top dollar unless there are regular books showing the business’ performance over time or its ability to service the debt. (By the way, as a business owner you need to look at your business as a asset for eventually sale and not merely as a job provide you solely with income.)
  • Also, keep separate bank accounts for your business and personal life. This is a corollary to the first rule. If you’re keeping books for your business to track your business’ performance, you will have to create a separate business bank account.

2) Watch how you pay the people who work for you. Again, this is near the top of the list of small business problems seen by our DC-based tax and bankruptcy law firm. Know how the tax law distinguishes “independent contractors” from “employees,” and how that law requires the business owner to withhold taxes and contribute to Social Security and Medicate for the latter, or face personal fines — basically equal to that amount — for NOT doing so. It’s not fun.

3) Get help from professional accountants and business lawyers. No one wants to pay for advice at the front end, but when the problems hit, the cost can be much, much more. It’s a cliche, but true: An ounce of prevention is worth a pound of cure.

If you are looking for an accountant who will give you such all-important business advice, as well as accounting services, we recommend Business Wise Consulting, Inc., led by Dave Parikh, an MBA and CPA, based in Silver Spring, MD and serving small businesses in the Washington, DC area.

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