Every year thousands of people leap into entrepreneurship. I was one of those people. Six years ago I decided to start a small business. I set up an online shop through eBay. I figured this would be cheaper than renting a brick and mortar location. And plus my customer base would not be limited to the folks in my area.
I called my store Orange Blossoms. My product line consisted of designer perfumes and colognes. I figured I would keep it basic to start. But eventually, I added more items like perfumed soap and shimmery, scented powders. Sales orders began coming in faster than inventory. I was actually turning a decent profit. Sounds good, right?
Well I thought so too, but unfortunately, I ended up in another group of people… those entrepreneurs who tried and failed. So where did I go wrong?
I’ll get to that part in a minute. But first I’d like to say… yes I am going to spew out some advice to ya’ll. And you may be thinking… how is she qualified to give advice when she failed? Well… I’ll tell you.
While is it advisable to take suggestions from people who are successful in their entrepreneurial endeavors, it is also sensible to take suggestions from those who failed as well.
Those successful entrepreneurs can tell you what to do to succeed. But you also need to know what not to do so that you won’t fail. Successful entrepreneurs can’t tell you that, because apparently they did every thing right.
So… it is ok to seek advice from those who made it… they can teach you what to do. But it is also ok to seek advice from those who did not make it… they can teach you what not to do. (And here is where I fit in.)
Alright now that I’ve convinced you to listen to what I have to say… I’ll continue.
Where did I go wrong? I was a horrible record keeper.
I had invoices, sales orders, purchase receipts, fee bills and all kinds of little pieces of paper coming out the wazoo. And all I did was toss it all in a big box. I was too busy doing something I enjoyed… buying and selling perfume and other frilly foo foo stuff. Who had time to track every nickel and dime of every expense and sale? My plan was to sort through it all at the end of the year.
And for three years, my plan worked for me. When it was time to file my taxes, I’d grab the box. Then I separated the contents into two piles… a revenue stack and an expense stack… totaled them up, figured the profit or loss and threw the number on a tax form.
In addition to reporting my business income, I also itemized so I could maximize all the typical business deductions… like asset depreciation, mileage, home office, yada, yada, yada.
Well after the third year in business, I got a notice in the mail. It said… this is nothing to worry about it…but your tax return has been selected at random for further review and verification. All we need you to do is send copies of this, this and that.
So I made copies of this, this and that and sent it off. Nothing to worry about, right? (Here is where I scoff at that idealistic notion.) A week later, I get another notice saying that based on the documentation I provided, further investigation is warranted, i.e. I’m about to be audited by the IRS!!! (Here is where I scream.)
I scheduled an appointment with the auditor. On the day of my appointment I moseyed on down to the IRS office with my box of papers. The auditor asked me a few questions… like how I got that number and where are the records to substantiate this claim. I answered as best I could and left her with my box.
She called me a few times over the next couple of weeks to ask more questions. I did my best to answer. And then for nearly a week… nothing. The calls stopped. Next thing I know… I received a registered letter in the mail detailing the amount of unpaid taxes, interest and penalties that was due. The total sum… over $5,300!
Well that put a quick death to my entrepreneurial days.
I agreed that I owed the money. But the thing is, I was not trying lie or be deceitful on my taxes. All of the deductions I had taken were valid. The only problem is that my record keeping system was so screwy that I could not corroborate any of it.
So here is my advice to those who want to brave it in world of entrepreneurship… keep good records so you’ll be prepared when tax time rolls around.
Here are some things you can do to help ward off failure:
Categorize your receipts, bills, etc. using a logical filing system
Reconcile your books at least once a month
Document all of your business related expenses (and if you plan to claim mileage as an expense keep a notebook in your glove compartment and use it to log all of your miles)
Report all income whether it is taxable or not… if you are an independent contractor, make sure you wait for all of your 1099′s to come in before you file your taxes
Make sure every thing adds up – and I am not just talking numbers here. Let’s say you use a calendar to keep track of your busy schedule of business meetings or trips. Then on August 9th, you log 43 miles in your mileage book for a business trip. However, August 9th in your calendar is blank. That does not add up.
Taking on a new business venture can be exciting. Enjoy the process. But don’t let the fun be foiled if the IRS comes snooping. Keep good records, keep the man off your back, and watch your business grow.
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