Episode 4

full
Published on:

15th Nov 2021

Run Your Business Like a Business

Not treating your business like a business could be costing you tens of thousands of dollars in taxes every year.

First, you need to separate your finances. Keep your business account separate from your personal account. Mixing finances is called “piercing the corporate veil,” and that can render your LLC protection essentially useless.

Also, if you aren’t keeping business expenses separate, you could be missing a LOT of tax deductions come tax time. If you can’t tell what expenses are personal and which ones are business, how can you deduct them? You can’t!

When making business decisions, are you looking at your numbers first? What if the one offer you weren’t excited about anymore turned out to be your #1 bestseller and you dropped it and lost all those sales? Do you understand where your profits are coming from?

Join our community at confidentmoneypodcast.com where we’ll share tips and resources, and you can suggest topics for future episodes.

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FTC/Affiliate Disclaimer: By using some of these links, at no extra cost to you, I may earn a small commission or referral fee, which helps me continue to produce content like this, support my business, and my team.

DISCLAIMER: I am not a financial advisor and this is not financial advice. My podcast is for educational purposes and is my personal opinion only. To make the best financial decision for your situation, please do your own research and if needed, seek the advice of a fee-based, fiduciary.

Music credit: Neon Fairies by Wolves 

A Podcast Launch Bestie production

Transcript
Katelyn Magnuson:

Okay.

Katelyn Magnuson:

So we're going to talk about how not treating your business.

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Like a business could be costing you tens of thousands of dollars a year in taxes.

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So let's talk about what goes wrong, what the opportunity cost is, how the fuck

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you're even supposed to be treating your business like a business and not a hobby.

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So what I mean by that is number one, separating your finances,

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whether you are a single member, LLC, a sole proprietor, a freelancer.

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I don't care if you are making money.

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From a business that is not a day job, a paycheck, you know, something

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that you're getting paid by an employer, you should be running that

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money through a separate account.

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Now it doesn't have to be a business account, but it needs to

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be an account that is dedicated to business, income and expenses.

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So a lot of my clients will use like a personal checking account that they have.

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That's laying around that they're not using for anything else.

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They might open a brand new one, like capital one has free checking accounts.

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Lots of banks do so, whatever you can use, whatever works, separate it.

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Why do you need to separate it?

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Number one, if your single member, LLC, there is a really common misconception

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that if you've set up an LLC, like it's limited liability company,

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your liability is limited, right?

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You're protected.

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That's not true.

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You lose a lot of the protection.

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If you do not treat your business like it as separate.

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From your personal and not an extension of yourself.

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One of the primary ways that you can do that is by keeping your business

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finances separate from your personal finances, like having a separate LLC

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checking account that you run everything through, because this is what's

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known as piercing the corporate veil.

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And this is part of that, like jargon that I mentioned.

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So we're going to break down some of this jargon.

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So what does piercing the corporate veil actually mean?

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It means that if you have a bubble or an umbrella around your business, that keeps

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it separate from you as a person, right.

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Piercing, that would mean popping it, breaking it.

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That's what happens when you co-mingle or mix personal with business.

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So let's give a real world example of this.

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Let's say you go to target, right?

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And you've listened.

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You've taken all the advice from here.

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You have a separate checking account set up for your LLC, you know, maybe

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it's Sarah's design agency, LLC.

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Right?

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You've set up a business account in that business's name with that.

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Business's EIN you go to target.

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You need to go get something, you forgot your personal card.

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You use your business card for a personal purchase.

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Maybe it's groceries or Starbucks, or you know, something for the house.

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Right.

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That right.

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There is an example of piercing.

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The corporate veil.

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It's a less severe example.

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Cause like, let's say that happens once or twice a year.

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You fuck up and forget your card.

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Generally not going to undo all of the protection that comes from the LLC.

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However, let's say you're an LLC.

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You don't separate your finances for your business and your personal.

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Or you have a business account, but you basically just treat it as an

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extension of your personal account.

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Right?

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You're withdrawing money from there.

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You're doing Amazon purchases that are personal.

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Like you were just treating it like another one of your accounts, not

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like a business account and you're not dedicating it to business use.

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That is a major mistake that I see a lot of business owners making and

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that is piercing the corporate veil.

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And what that does is it actually basically makes your

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LLC almost completely irrelevant.

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Like if you're not going to take the time to separate your finances and

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open a dedicated business account, then you might as well not have an LLC.

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You might as well be a sole proprietor with a solid set of contracts.

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So number one, The protection aspect is why you should have separate finances

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for your business and your personal one little caveat there that does not mean

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that you can't pay yourself personally.

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It means that everything in your business.

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account is business income and business expenses, everything in

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your personal account is personal income, personal expenses.

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You could still do a transfer or write a check from your business to

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your personal, to pay yourself money.

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Right?

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Cause we're in business to make money that does not count as

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piercing the corporate veil.

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What counts as piercing the corporate veil is co-mingling mixing your finances

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and using your business bank account, like it's an extension of yourself.

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So the other major thing, and this is what can literally end up costing

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you tens of thousands of dollars.

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And so many hours of time is if you do not keep your business finances separate

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from your personal finances, you could be missing out on tax deductions.

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You may not know your profitability during the year, right.

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Because Hey, there's money in the account, but like how much

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money am I actually making?

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How profitable am I?

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What did I actually spend on subcontractors or office

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expenses or computer stuff?

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You won't necessarily know if you've got it all mixed in, right?

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So that's treating your business like a hobby, treating your business, like

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a business, running those transactions through that separate or dedicated

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business or personal checking account.

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That lets you at any time, pull all the transactions from that

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account and immediately see what you've brought in for income.

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What you've sent out for expenses and lets you see where you're at.

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Additionally, you're not going to wonder if you were missing things that you

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should be taking as tax deductions.

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At the end of the year, I have had clients in the past that have had business

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transactions spread out across 10 or 12 different accounts between savings

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accounts, checking accounts, credit cards, PayPal, and at the end of the year.

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Not only are they scrambling to go through every single one of those

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accounts and try and highlight all the business transactions.

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But if they don't have receipts for things like Target.

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How are we to know that it's business or personal?

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They don't remember because it's a year, sometimes even 16 months

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ago, if you're, doing your taxes in April of the following year.

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So you're most likely missing out on tons of deductions that

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could be lowering your tax bill.

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And you're also not able to make financial decisions from an educated place, from

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an empowered place, because you don't have a real grasp on your profitability.

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So, if you're wanting to go full-time, if you're wanting this business to

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grow, if you're wanting your taxes to be so much less stressful, because I

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can tell you if you have a couple of business accounts, like a checking, a

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savings and a credit card that you run everything through, it is going to be.

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Like night and day, when you go from one tax year of having things mixed to

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the next tax year of having everything separated out, because all you need to

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do is pull reports from those accounts.

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Even if you don't have bookkeeping set up, you know, if you want to do

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this, like as bootstrapped as possible, running things through a separate account

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will make such a massive difference.

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And.

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We're all about confidence, right?

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Confidence around your money, confidence in your business.

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How are you supposed to know what you should be doing?

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What you should be growing?

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What services are profitable?

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Because I cannot tell you the number of times that I have worked with clients

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and they're like, oh, you know, I really, I think I'm going to get rid

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of X, Y, Z product or X, Y, Z service.

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I just feel like it's stale or I'm not excited about it.

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And that's, that's all well and good.

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Right.

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But.

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I had a client who sold swimwear she had told me, you know, Katelyn, I

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really want to get rid of the style.

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I've had it forever.

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I just, I feel like it's overdone.

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Is that okay?

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Great.

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Let's go look at the numbers first and we're just getting started and she

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hadn't been tracking this in years past wouldn't you know, that swimsuit sold.

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It was her number one seller year over year.

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So she sold the most of it.

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It was her cheapest to manufacture because she sold the most of it.

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So she had a better price on it, and she was able to buy more of her fabric

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in bulk, which meant she had a better price, which meant her profit margin

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was the highest, which when we looked at everything, she was making the bulk

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of her money on that one particular style that she was going to get rid of.

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If we had not had the numbers to back that up, So where in your business are

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you making decisions that are not actually aligned or supported by the numbers?

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In our, service-based business?

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I am always tracking where our sales are coming from.

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You know, what type are they?

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Are they in group programs?

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Are they courses, are they one-on-one, are they taxes so that we can measure

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the amount of effort and time that we, as a team are putting into those services

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and what our return on investment is, you know, what's most profitable

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for us, where should we be focusing?

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Because that's very much the pareto principle, which is the 80 20 rule.

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If you know what that is.

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So 80% of your results come from 20% of your efforts and that swim

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suit case that I just gave you.

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80% of the results came from 20% of her efforts.

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Think about that product that she was going to get rid of all of her other

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products had smaller profit margins.

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So instead she got rid of a couple of other.

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Lines that weren't selling as well.

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That costs more to make that we didn't do as much volume in.

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And she rolled out that top seller and some additional colors to keep it fresh

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and it continued to be a bestseller.

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So don't fool yourself or allow yourself to be fooled because you don't have your

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numbers up to date to be able to back up your gut feelings or your hunches.

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That is the whole point.

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Of doing this is running your business.

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Like a business means you're making empowered, confident decisions that, you

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know, at the end of the day, you feel good about if you have a team, your team

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feels good about your clients are excited because at the end of the day, if your

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clients aren't buying what you're selling, like why, why would you be doing this?

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And you're able to move forward with a clear direction in your life,

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in your business and make changes.

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We do that every single quarter in our business, we sit down,

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but where are we putting effort?

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Well, where is that effort going further?

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Where is that effort falling short?

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Is that something we actually give a shit about?

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You know, as a taxes, taxes are one of our least profitable things, right.

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But for a lot of our clients, we include taxes because that makes

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the client experience much easier and it keeps our clients happy.

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Right.

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We like where our big value is, is in a lot of our other

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programs, packages and services.

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But we keep taxes knowing that it's not a big money maker because

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it's a client retention tool.

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However, we assess, like I said, every quarter, are we going to keep doing XYZ?

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Is this making the money for the amount of effort that we're putting in?

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Are we excited about this offering?

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If we're not excited about it and it's not a moneymaker, it gets dropped.

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If we're excited about it, and it's not a money maker, we assess if it's worth

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giving it a try for another quarter, how can we be doing this differently?

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How could it be taking less time?

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And if we're excited about it, and it's a moneymaker, how can we be

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focusing more of our efforts on this?

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Where can we be doubling down to make this 20% go further?

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And where does this need to be changed?

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Tweaked manipulated so that it's a better service offering.

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Is it as lean and tight of a package as we want it to be?

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And as our clients are looking for, we solicit client feedback,

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we solicit team feedback.

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Well, where is this working?

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Where is this not, where are there breakdowns and where

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can our systems be better?

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None of that would be possible if we didn't have all of the

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financial records that we keep.

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Separately from all of this.

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So where can you be doing more without taking more time?

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Where can you be registering your business?

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Whether it's a single member, LLC, whether it's a sole proprietor,

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whether it's an S-corp setting up that dedicated business bank account, like

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I said, at a bare minimum, you should have a checking account that is for

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all of your business transactions, no matter what type of business you are.

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Everything goes through there.

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Income expenses.

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And that is so that you don't miss out on tax deductions.

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You don't have to spend freaking hours during tax season going through and trying

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to find them so that if you are an LLC, it is keeping that corporate veil intact.

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And it is protecting your personal assets from legal issues in

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the business side of things.

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And so that you understand your profits, your numbers, and you are able to make

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clear, confident, concise decisions for what direction to move your business in

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how to make changes, how to implement changes and how to change your service

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About the Podcast

Wealth Witches
Where financial empowerment meets magic!
Welcome to the Wealth Witches™ podcast, where financial empowerment meets magic! I'm Katelyn Magnuson, your guide on this enchanted journey to holistic wealth and prosperity. Here, we honor all identities and invoke our inner witches to create a community where everyone feels welcome and inspired.

Formerly known as the Confident Money podcast, we've transformed into Wealth Witches™ with Katelyn Magnuson. This change is about embracing the once-taboo topics of money and magic, blending them into a powerful mix of practical advice and mystical insights. Whether you're here for financial tips or to explore the magical side of life, this podcast is your new home.

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About your host

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Katelyn Magnuson

Katelyn, the driving force behind The Freelance CFO and creator of Wealth Witches, is revolutionizing accounting with a sprinkle of magic. With a decade of experience, she’s not your typical number cruncher. Her unique blend of expertise and approachability, infused with a touch of spiritual insight, has made her a go-to authority. Katelyn believes finance should be a stepping stone to success, not a barrier. With a judgment-free ethos, she simplifies complex financial topics, making them actionable for entrepreneurs and small businesses. Her ultimate goal? To empower you to manifest your authentic life—not a cookie-cutter one!