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The firm uses the FIFO cost layering system, and the oldest cost layer for the green widget states that the widget costs $10. However, the replacement cost of the widget is $13, so if the widget had been sold at replacement cost, the profit would instead have been $1. Thus, the $4 profit using FIFO is comprised of a $3 phantom profit and a $1 actual profit. The phantom profits issue most commonly arises when the phantom profit formula first in, first out (FIFO) cost layering system is used, so that the cost of the oldest inventory is charged to expense when a product is sold.

• Best Widgets Co. uses the Last In, First Out (LIFO) method for inventory accounting.
• Phantom stock plans are deferred compensation plans and, as such, must be designed and documented to conform to the requirements of section 409A.
• I then ask why performing arts nonprofits exist, taking into account the objectives of both consumers and suppliers of performing arts services.
• Once the old cost layers have been eliminated, managers may find that their reported profit levels suddenly decline.
• Just as with an ESOP, employees who receive phantom equity develop a stake, sometimes a sizable one, in the growth and profitability of the company.
• Departing employees will need to be paid cash compensation for the value of their equity.
• The national measures differ from the domestic measures by the net inflow — that is, inflow less outflow — of labor and property incomes from abroad.

Phantom Profit: FIFO and LIFO

Together, these mechanisms generated what we term “synthetic inertia”, which made prices on the NYSE relatively well-behaved. We hypothesize that NYSE demutualization — converting from nonprofit to for-profit — altered the incentives of the NYSE and undermined this synthetic inertia and thus informational efficiency. We believe that our approach helps resolve an apparent tension between competing theories of market behavior and contributes an analytical framework from which to consider regulatory changes.

• Phantom phantom profit formula income occurs when an individual is taxed on the value of their stake in a partnership (or another equivalent agreement), even if they do not receive any cash benefits or compensation.
• Phantom income is typically an investment gain that has not yet been realized through a cash sale or a distribution.
• These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.
• For example, companies must strictly adhere to the Internal Revenue Service’s (IRS) Tax rule 409A statute.
• Such income poses a lot of problems for the taxpayers because they have to scramble to pay tax on an income they did not receive.

What are phantom profits?

Phantom equity is essentially a deferred compensation agreement between the company and the employee. This chapter surveys the relevant theory and the most prominent empirical studies on performing arts nonprofits. The chapter begins with a description of the nonprofit sector – and the role of the performing arts in this sector – around the world. Domestic measures relate to the physical location of the factors of production; they refer to production attributable to all labor and property located in a country.

I then ask why performing arts nonprofits exist, taking into account the objectives of both consumers and suppliers of performing arts services. Next, I study the production and cost conditions that these firms face, paying particular attention to issues such as product quality, product cross-subsidization, and the so-called “cost disease”. The issue of revenue sources and their generation follows, with a special emphasis on earned revenues, donations, and government subsidies. This discussion includes topics such as ticket pricing strategies, fundraising innovations, and the relationship between private giving and public funding. This paper takes stock of what we know about the role of nonprofit enterprise in the production and distribution of the arts (broadly defined), primarily in the United States. After briefly discussing measurement, I present data on the extent of nonprofit activity in a range of cultural subfields.

AUD CPA Practice Questions: Preconditions for Accepting an Engagement

Phantom equity plans have proven very advantageous to businesses that wish to incentivize employees to stay with the company without transferring any more ownership away from founders. Equity is now a commonplace form of compensation, and it is vital in ensuring employee retention. However, the particulars of equity distribution plans can vary in how and when shares are allocated.

LIFO Phantom Profits

Economists prefer that the replacement cost of the inventory be matched with sales. The terms phantom profits or illusory profits are often used in the context of inventory (but can also pertain to depreciation) during periods of rising costs. Illusory profit, also called phantom profit, is the difference between 1) the profit reported using historical costs required by US GAAP, and 2) the profit computed using replacement costs. Illusory profit is greatest during periods of rising costs at companies with significant amounts of inventory and plant assets. The difference in profits from using FIFO instead of the replacement cost is referred to as phantom or illusory profits.

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These are usually the result of accounting practices or changes in market conditions rather than real economic gains. Phantom profits may look good on a company’s financial statements, but they don’t represent actual cash that the company has earned. This means that no stock is distributed in phantom equity distribution plans.

The amount of phantom or illusory profit was $45 ($65 reported minus $20 measured using replacement cost). An economist would argue that you must first replace the item before you can measure the profit. GAAP doesn’t allow the use of replacement cost since that violates the (historical) cost principle. Phantom stock plans can be a valuable method for companies that seek to tie incentive compensation to increases or decreases in company value without awarding actual shares of company stock. Here are answers to nine frequently asked questions about phantom stock plans and what they could mean for your company. For example, in computing the cost of goods sold accountants often use the FIFO cost flow assumption.

The values of Treasury notes are published in the financial press every business day. What is Legal E-Billing At the end of each fiscal year, a company must report how much each asset is worth in its financial statements. It’s easy for accountants to estimate the market value if traders buy and sell that type of asset often. Navigating the MTM ocean requires a steady hand, whether you’re steering personal investments or a business’s financial ship. Peering through the lens of MTM, one can trace its significant impact on many financial events, like the notorious 2008 financial crisis.

Cons of Mark to Market Accounting

You’d have to pay attention to maintenance margin requirements in Certified Bookkeeper order to avoid a margin call. Futures markets follow an official daily settlement price that’s established by the exchange. In a futures contract transaction you have a long trader and a short trader. The amount of value gained or lost in the futures contract at the end of the day is reflected in the values of the accounts belonging to the short and long trader. If a company were in a cash crunch, for example, and wanted to sell off some of its assets, mark to market accounting could give an idea of how much capital it might be able to raise.

What is the significant advantage of mark to market accounting?

Mark to market accounting, also known as fair value accounting, has become a pivotal concept in the financial world. This method involves valuing assets and liabilities at their current market price rather than historical cost. Its importance lies in providing a more accurate reflection of an entity’s financial health, especially in volatile markets. Mark to Market (MTM) is an accounting method used to measure the current value of assets or liabilities. As the historical cost principle of accounting values assets based on the original price it was purchased, using mark to market provides a more accurate picture of what a company’s assets are worth today. During their early development, OTC derivatives such as interest rate swaps were not marked to market frequently.

• Investors often respond to this fresh info, which can lead to increases or declines in stock price, reflecting the company’s updated value in real-time.
• Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer.
• MTM can be sensitive to these fluctuations, leading to unrealized gains or losses on the balance sheet.
• Realized gains or losses occur when an asset is actually sold, whereas unrealized gains or losses represent the potential profit or loss, even if the asset is not actually sold.
• It can create a feedback loop, where falling asset values lead to more selling and further drops in value—a dynamic that every investor should be aware of.

#1 – Available for Sale Securities

The mark-to-market process is important in financial instruments as it helps investors value assets accurately and manage risk. Financial markets are inherently volatile, meaning prices can fluctuate significantly in the short term. MTM can be sensitive to these fluctuations, leading to unrealized gains or losses on the balance sheet.

MTM accounting can impact the income statement by changing the value of a company’s assets or liabilities. In simple words, you will have to provide the additional funds required if the price of the futures contract drops before the daily settlement. Once the balance margin is submitted to the stockbroker, you can proceed with your positions and close them as per your discretion. Mark to margin is calculated based on the current market price of the financial instrument. Mark to market accounting forced banks to write down the values of their subprime securities. Now banks needed to lend less to make sure their liabilities weren’t greater than their assets.

For example, Ford Motor Company (F) manufactures automobiles and trucks. The steel and bolts needed for the production of a car or truck would be classified as direct costs. However, an indirect cost would be the electricity for the manufacturing plant. Although the electricity expense can be tied to the facility, it can’t be directly tied to a specific unit and is, therefore, classified as indirect.

Fixed direct costs remain constant regardless of production output and include expenses such as overhead costs, administrative expenses, and salaries of permanent staff. This is  an example of how direct and indirect costs appear on a company’s income statement. Indirect costs would be the utilities, administrative and marketing expenses and salaries involved in running of the overall business that cannot be easily assigned to a specific car production unit. Activity-based costing provides a more precise method for allocating overhead costs by linking expenses to specific activities.

Product or service pricing: indirect vs. direct costs

Direct costs can include materials, labor, and other expenses incurred directly in producing a product or service. Direct costs are expenses that can be directly attributed to the production of a specific product or service. These costs are directly tied to a cost object, which can be a product, service, project, or department. In simpler terms, if the cost wouldn’t exist without the product or service, it’s likely a direct cost. Cost is an important component of price, especially when using the cost-plus pricing strategy.

Take Actions to Minimize Costs and Maximize Profits

For example, the price of a vacuum cleaner for a manufacturing plant may vary depending on the market cost of that product. A direct cost like labour charge for an hourly employee may also vary as their timetable might alter. The electric city could be consumed for another purpose which is not directly contributed to producing plastic. While the cost of electricity for the period will partially be considered an indirect cost because the electricity is not solely used for plastic tubs. Direct costs are also termed variable costs as they vary with the change in production volume while remaining fixed for each production unit. By identifying these costs, organizations can attain a clearer view of their financial landscape, which facilitates more knowledge-based decision making.

Direct costs are expenses that can be directly attributed to a specific cost object, such as a product, project, or service. These costs are critical components in financial reporting and analysis for organizations like Ford Motor Company and academic institutions like the University of Michigan. Using direct costs requires strict management of inventory valuation when inventory is purchased at different dollar amounts.

This is the case only if these positions were to be eliminated as a result of a customer being eliminated. This approach not only assists in setting competitive prices but also provides valuable insights into overall profitability. For example, a manufacturer that accurately calculates their per-unit costs can identify which products yield higher margins and which may require re-evaluation.

• Direct costs are expenses that can be directly attributed to the production of a specific product or service.
• Financial decisions by any business are always one of the most tricky ones to deal with.
• Combined, direct and indirect costs represent all of the expenses incurred to run a company’s day-to-day business operations.
• The beginning inventory is the total value of goods available at the start of the accounting period.
• Indirect costs are expenses that apply to multiple activities as part of daily operations.

Determining all direct and indirect costs helps you set a desired markup on goods and services. If you have a consistent ratio of indirect to direct costs, you can set a purchase price based on a percentage of direct costs that will both cover your indirect costs and provide needed profit. In cost accounting and managerial accounting, costs play a significant role in analyzing business profitability and resource usage. There are two major reasons why distinguishing between direct and indirect costs is important.

By prioritizing the analysis of direct costs, organizations can enhance their budgeting processes, ultimately fostering financial stability and growth. Direct costs play a crucial role in financial analysis, as they provide essential insights into profitability and compliance with accounting standards, thereby guiding strategic decisions for businesses. To enhance their financial strategies, companies should consider implementing regular cost analysis reviews, which aid in recognizing trends and highlight areas for improved efficiency. Additionally, utilizing advanced budgeting software can streamline this process, allowing teams to adjust budgets swiftly based on real-time financial data and forecasts. To manage these costs effectively, businesses often implement strategies like lean manufacturing and just-in-time inventory. Such approaches allow for increased flexibility, reduced waste, and improved alignment with market demand, ultimately contributing to enhanced profitability.

Differences Between Accounting Software and ERP

This guide provides definitions and examples of direct and indirect expenses while explaining what distinguishes them and why they matter. Understanding these costs is crucial for businesses, as they constitute the foundation of financial planning. For example, in the manufacturing sector, a factory incurs rent for its facility, irrespective of whether it produces one item or a thousand. Similarly, in the service sector, a consultancy firm pays its employees a consistent salary, even during months with fewer client projects.

In contrast, activity-based costing takes a more detailed and accurate approach by assigning costs based on specific activities that consume direct costs examples resources. Instead of relying on a single cost driver, the ABC method identifies multiple cost drivers, such as machine setups, inspections or order processing, to allocate expenses more precisely. This method is simpler and easier to implement, making it suitable for businesses with uniform production processes and minimal variability in overhead costs. However, because it applies a broad allocation method, traditional costing can sometimes lead to inaccurate cost distribution, potentially distorting product pricing and profitability.

Indirect Costs = Allocation

This weekly summary of start time, lunch, quitting time as well as overtime can be used for time management, but also track labor costs. There are multiple free templates available to help with activity-based costing. Our site has over 100 free project management templates for Excel and Word that cover all aspects of managing a project across multiple industries.

• When building financial models or understanding managerial accounting, direct costs are a component that helps managers and entrepreneurs alike make sound business decisions.
• These costs are incurred regardless of whether the business produces any products or services.
• This is because direct costs are those that are incurred to create a product or provide a service and therefore play an important role in estimating the production costs accurately.
• It includes the price of shipping materials from the production facility and transportation between production and sales sites.

Discover what a production management system is, its importance, functions,… For example, if a toy takes 3 hours to make and each labourer gets paid 10 rs for an hour, the labour charge for each toy is 30 rs. With LIFO, the newest inventory (last purchased) is sold first, while older inventory remains in stock. This results in higher COGS and lower profits when prices are rising, which can provide tax benefits by reducing taxable income. The company’s COGS for the month is $60,000, representing the cost of materials used to manufacture and sell the furniture. A furniture manufacturer starts the month with $50,000 worth of raw materials.

Direct cost techniques can define the price of goods or services a company suggests, and reviewing them can help you account for changes in production costs when choosing prices. The WAC method calculates an average cost per unit by dividing the total cost of inventory by the total units available. This method smooths out price fluctuations and prevents extreme variations in COGS, making it useful for businesses with large volumes of similar items. It simplifies inventory accounting and provides a balanced valuation approach, though it may not be as accurate as FIFO or LIFO when prices fluctuate significantly. Direct and indirect costs are considered expense elements in the financial statements, which are recognized and recorded in the financial statements when they are incurred. For example, if a manager is directly attributed to a project or production process, his salary may also be considered a direct cost for the specific project or department.

Additionally, it may help you reduce production costs to increase profits. But some direct costs are stable, called fixed costs, and others change depending on the variety of product and market factors. The benefits of using the direct costing method are that it provides reasonable information to the management for decision-making about the product and the pricing of the product. With $35 as the goal, you can do a deep dive in product development and understand how the business can achieve this target cost. This strategy is not only about minimizing or reducing costs but also enhancing product quality and adding more value for customers. By focusing on the direct costs, you can concentrate on controlling the costs that will have the greatest impact on both total cost and quality.

Indirect costs are sometimes referred to as overhead costs because they are incurred by the business as a whole rather than a specific product or service. These costs are essential for running the business and supporting the production process. Indirect costs are usually allocated to the products or services the business produces based on a predetermined cost allocation method. This is done to ensure that the cost of producing each product or service includes all the necessary expenses incurred by the business.

Whether it’s cleaning up years of financial mismanagement or setting up systems for smooth cash flow, we create solutions that fit your business. We update and reconcile your accounts weekly, ensuring your financial data is always up to date and ready for tax time. BDO Seattle is committed to supporting local community initiatives, including The Food Lifeline, whose goal is to feed people who are experiencing hunger today and, at the same time, solve the issue of hunger for tomorrow. We practice proven strategies to minimize costs and compliance risks and maximize your profits. We nurture your financial health with bookkeeping cleanup, support and guidance. Sound Payroll, our partner company, offers a convenient cloud-based portal.

Compare our Top Accountants

The Hagen Firm was established by a father and son team nearly two decades ago. Today, the firm provides certified public accountant services from its Edmonds, WA office. The firm provides its expert services to both businesses and individuals, offering QuickBooks help, BOSS, accounting, financial statements, bookkeeping for cleaning business tax planning and preparation, business consulting, and payroll help. The Hagen Firm promises professional service, and an approachable, friendly staff. Eastham Foster is the certified public accountant firm of Scott Eastham and Rick Foster and has been operating for over two decades. Although the company is based in Washington, the two accountants serve clients throughout the nation, handling the financial questions of individuals, businesses, non-profit organizations, and estates.

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Jacobson Jarvis has built a reputation as an authority on issues affecting not-for-profit organizations and has been a key resource in conferences and state or national committees. Our valuation experts accurately assess asset values, optimize investment decisions, gift taxes and financial strategy through professional valuation services. Get your taxes done right, maintain your bookkeeping and ensure you never overpay in taxes with managed accounting services from SmartCloud Tax & Accounting. We are focused on finding the right fit to help you thrive in today’s 24/7 global economy.

Personalized Tax Help

• The firm provides its expert services to both businesses and individuals, offering QuickBooks help, BOSS, accounting, financial statements, tax planning and preparation, business consulting, and payroll help.
• Sprute & Davis provides professional accounting and consulting services to Seattle and the surrounding area.
• Every client can expect a reply within one business day, ensuring your questions and concerns are addressed promptly.
• Eastham Foster is a member of the American Institute of Certified Public Accountants and the Washington State Society of Certified Public Accountants.
• We are dedicated to providing our clients with professional, personalized services and guidance in a wide range of financial and business providing local solutions to our clients needs.
• BDO’s is proud to volunteer at organizations like the Seattle Children’s Hospital whose mission is to provide hope, care and cures to help every child live the healthiest and most fulfilling life possible.

Streamline reporting processes, and maintain operational consistency through compilation services and strategic oversight. Optimize financial projections, enhance budgeting accuracy, and improve operational efficiency through targeted business consulting and comprehensive analysis. Collaborate with our specialists to  ensure accurate compliance with all regulations, maximizing deductions and credits from your tax plan.

• Need a trusted advisor to prepare your business and personal tax returns?
• We practice proven strategies to minimize costs and compliance risks and maximize your profits.
• We nurture your financial health with bookkeeping cleanup, support and guidance.
• Optimize financial projections, enhance budgeting accuracy, and improve operational efficiency through targeted business consulting and comprehensive analysis.
• Collaborate with our specialists to  ensure accurate compliance with all regulations, maximizing deductions and credits from your tax plan.

That means we work hard to understand your priorities throughout all stages of your life and career. We help you align your personal values and goals with opportunities to move and advance throughout the firm. We know that everyone has different needs, responsibilities and interests, so flexibility at BDO is not a one-size-fits-all approach. We encourage our people to collaborate with their teams to achieve work+life fit.

Individual Tax Planning and Preparation

All you need to do is enter your employees’ hours—we’ll take it from there, and take away your worries. We handle all the numbers and then go deeper—it’s like having a part-time chief financial officer dedicated to helping your business grow. BDO is bookkeeping seattle the brand name for the BDO network and for each of the BDO Member Firms. BDO USA, P.C., a Virginia professional corporation, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

The company offers its expertise to business owners, executives, and individuals, providing a variety of services. Greenwood Ohlund & CO. promises affordable rates and a friendly staff. Sprute & Davis provides professional accounting and consulting services to Seattle and the surrounding area. The company boasts over three decades of experience, and this qualified firm provides a variety of services to businesses, non-profits, estates, trusts, and individuals. These services include tax planning and prep, businesses consulting, financial reporting, software support, bookkeeping, and payroll help. Sprute & Davis strives to build relationships with clients and become a trusted partner.

Career Opportunities in Seattle

For more information and to see opportunities available in Seattle and across the country, visit our career page today. The Akopyan Group provides accounting expertise and proactive guidance to help Seattle-area businesses of all sizes maximize their potential.We’re more than a service provider—we’re your partner, invested in your success. Navigate compliance challenges, mitigate risks, and maintain operational integrity through strategic risk management and comprehensive compliance oversight. We combine innovative technology and knowledge to ensure efficiency.

• Our downtown Seattle office provides the local presence, experience, accessibility and insight businesses expect from BDO.
• BDO’s Life Sciences Practice provides guidance to pharmaceutical, biotech, and medical device manufacturers at every stage of a company’s lifecycle.
• Partner with our team to manage and analyze your financial statements, ensuring accurate tracking of your business performance and adherence to accounting standards.
• It also offers corporate new business setup and consultation, accounting and bookkeeping, financial statement preparation, payroll, tax planning, and tax filing services to business clients.
• Our goal is to connect people with the best local professionals.
• The Akopyan Group provides accounting expertise and proactive guidance to help Seattle-area businesses of all sizes maximize their potential.We’re more than a service provider—we’re your partner, invested in your success.

The largest city of the Pacific Northwest region, Seattle is a major gateway for trade with Asia and headquarters for Fortune 500 companies across a diverse mix of industries. Our downtown Seattle office provides the local presence, experience, accessibility and insight businesses expect from BDO. And cross-functional teams offer a comprehensive array of assurance, tax and business advisory services, utilizing the depth and breadth of resources offered by a leading global accounting and advisory firm. At BDO, we believe that being a online bookkeeping true business advisor means delivering the knowledge needed to assist in achieving your goals — and more. Our national and global resources are here to help you chart additional strategies for success. Dimov Tax Specialists aids in the personal or business financial concerns of clients in Seattle.

Typically, bookkeepers cannot file tax returns on behalf of other companies on their own. Bookkeepers will usually prepare relevant records and tax documents, and then forward this information to an accountant, who will then prepare the actual tax return. While there are certain scenarios where it makes sense to have a dedicated bookkeeper (or several) on your staff, this is typically reserved for very large companies. For the vast majority of businesses, the job of bookkeeping is too small for a department but too much for the owner. InDinero offers monthly, quarterly, and annual pricing but differs from the rest on our list because you have to talk to a salesperson to get an actual price. Sign up today and we’ll do one prior month of your bookkeeping and prepare a set of financial statements for free.

Small Business Bookkeeping (Guide)

In today’s fast-paced business landscape, outsourcing bookkeeping offers access to specialized talent, modern tools, and cost efficiency—without the overhead. Communication with an outsourced bookkeeping service provider like Fourlane will include scheduling a call and discussing your needs. Our experts will put together a plan for you and provide you with an account manager.

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Leveraging bookkeeping services allows you to look at your income and expenses in real-time frequently. Having access to robust reports and financial bookkeeping services statements allows you to make better decisions for your business leading to an increased ROI from investing in online bookkeeping services. Bookkeeping services can also help small business owners save more through tax preparation and tax filing. Some business owners, for example, might want their bookkeeper to handle payroll, HR or other back-office jobs like invoicing, bill pay and inventory management on top of fielding basic bookkeeping tasks. Or, if it isn’t already included, you may be looking for tax support to take some of the pressure off when it’s time to file returns. These services can help you claim the correct small-business tax credits and deductions, prepare your returns and file them.

Get The Expert Small Business Bookkeeping Services You Need

Our team comprises qualified professionals with a minimum four-year accounting degree, ensuring accuracy and expertise in every transaction. Our automated web service securely downloads monthly statements, enabling seamless integration with QuickBooks Online or QuickBooks desktop. With prompt responses to your queries, distance is no barrier to exceptional service. Our bookkeeping services are more cost-effective and secure than hiring a traditional, in-house bookkeeper. Whether you’re a small start-up Interior Design Bookkeeping or an established national business, we offer customized pricing specifically for you with no commitments or long-term contracts. Plenty of people believe bookkeepers’ work is primarily centered on data entry and some even mistakenly believe bookkeeping is tied to tax roles.

Accounting software

Though bookkeepers do not typically analyze financials or offer financial advice, they make it possible for accounting professionals to access key financial records easily. Much of the financial data a bookkeeper manages is used for setting budgets and planning for financial decisions such as investments. Software systems can now do a lot of organizing for bookkeepers, but it is still a key task for bookkeepers.

• The dashboard is simple, easy to use, and provides basic bookkeeping services, including invoicing, project tracking, and receipt capture.
• Bookkeeping is the process of tracking income and expenses in your business.
• In other words, debit is all incoming money, while credit is all outgoing money.
• One should not rush to sign any agreement without reading it through.
• Jason Ding is a seasoned accountant with over 15 years of progressive experience in senior finance and accounting across multiple industries.
• QuickBooks Live’s most attractive feature is its price and simplicity.

For instance, hiring in the Philippines via Penbrothers can provide full-time bookkeeping support starting at significantly lower monthly costs than hiring locally in the West. But every business reaches a point where accurate financial management is non-negotiable. Bookkeeping is essential—but not every business has the time or expertise to manage it in-house.

Bookkeeper360 is a well-reviewed fintech bookkeeping assets = liabilities + equity software and management company with numerous awards. For Pilot’s CFO services, you can choose a set amount of monthly engagement, with increasing tiers of services based on hours of engagement purchased. Our reviewers evaluate products and services based on unbiased research. The most common mistakes are mixing personal and business finances, leaving taxes to the last minute, missing out on deductions, and not retaining records for long enough.