Take Time in the Beginning to Do It Right
You are getting ready to start your new business. It may feel rewarding while feeling quite difficult at the same time. It takes a lot of focus and passion in order to get to the point where you currently are. However, as you are already aware, owning a business means never-ending tasks to complete and a constant achievement of both large and small goals. With your startup, you need to make sure that you take care of the accounting work that goes along with owning your business. This list of 11 small business accounting tips will help you to feel more confident about your business, knowing that you have everything covered.
1. Select a business entity - When you start a business, you must make a decision regarding the type of business entity that you wish to establish. Your type of business will determine which income tax return form needs to be filed. The most common types of business entities are sole proprietorship, corporation, S corporation and partnership. A Limited Liability Company (LLC) is a newer type of business structure that is allowed according to state statute. There are some legal and tax considerations for you to look into before you select a business structure.
- Sole Proprietorship;
- S Corporations;
- Limited Liability Company (LLC).
2. Set up a bank account - After you have submitted a legal registration for your business, you will need somewhere to keep the income from your business. Maintaining a separate bank account for your business can help to make your life easier once tax time arrives. You should be aware of the fact that LLCs, corporations and partnerships must have separate business bank accounts. Sole proprietors aren't required to have a separate bank account. However, it is highly recommended.
You should begin by requesting a business checking account, followed by any savings accounts that will allow you to organize your business funds and make arrangements for the taxes that need to be paid. For example, if you set up a savings account, you can take away a percentage of each payment so that it can be used to cover your self-employed tax withholding.
The next step is to consider applying for a business credit card so that you can begin to build credit for your business. Corporations and LLCs are legally required to maintain a separate credit card so that business and personal assets are not commingled.
Before you get in touch with a bank to host your account, you should make sure that you do your homework. Start by shopping for business accounts and look at the varying structures for fees and business incentives.
Some business checking accounts have fees that are higher than the fees charged for personal banking at the same bank. So you should make sure that you pay careful attention to these potential costs.
Opening a business bank account requires that you have a business name. This business name must be registered with your state . You should contact the bank directly to find out which documents are required for your appointment.
3. Set up your bookkeeping system - Before we begin with bookkeeping systems, it is a good idea to have a basic understanding of what bookkeeping involves and how it is distinctive from accounting. Bookkeeping involves the daily maintenance of the accounting system including recording individual transactions, placing them into categories and reconciling this information with the bank statements.
Accounting is a top level process that involves looking at the progress of a business and is designed to make sense of the data that has been put together by the bookkeeper through the process of building financial statements.
As you get started with your new business, you need to decide what bookkeeping methods you prefer:
You have the option to use a professional bookkeeper, as a part-time employee or via an outsourced service that is either maintained in the cloud or is local.
Since there are many options available, you should be able to find a bookkeeping service or option that can allow you to maintain control over the accounting for your business.
Small businesses need to select an accounting method , cash or accrual. There are two significant differences between the cash and accrual methods of accounting:
Cash Method: In the cash method, revenues and expenses paid are recognized in the accounting system at the time that they are actually paid or received.
Accrual: In the accrual method, revenues and expenses are recognized at the moment when the transaction occurs. This happens even if the cash is not in or out of the bank yet) and the tracking of payables and receivables is required.
4. Keep track of expenses - The key to building up a sound accounting system for your business is to start by keeping up with your expenses. This step allows you to pay attention to the growth of your business, build up a record of the financial statements and deductible expenses, prepare your tax forms and support the information that you reported on every tax return.
Starting from the beginning you should make sure that you have set up a system to maintain the receipts for your business and other important information. The IRS does not ask you to keep receipts for expenses that are less than $75 . However, it is a good habit to have just in case.
These are five receipts types that you should pay close attention to:
Non-Local Business Travel: The IRS pays careful attention to people that try to claim personal activities as business expenses. Fortunately, your receipts can provide a paper trail of your business activities when you travel to non-local destinations.
Vehicle Related Expenses: Make sure that you keep a careful record of every place where you used your vehicle for business purposes, and then apply the appropriate percentage of use to vehicle related expenses.
Meals and Entertainment: Hosting a business meeting in a restaurant or cafe is a good option. However, you must make sure that you retain all of the documentation associated with the expenses. On the receipt itself, you should make a note of the attendees and the purpose of the particular meal or outing.
Gift Receipts: For gifts, such as tickets to a sporting event, it is important whether the gift giver attends the event with the recipient. If the gift giver attends the event, then this expense should be placed in the category of entertainment, rather than as a gift expense. You should make sure that you indicate the details on the gift receipt.
Receipts for Home Office Expenses: In the same way as vehicle expense records are kept, you need to record the exact percentage of your home that is to be used for business and then categorize the appropriate percentage of the expense as a home related expense.
Starting a business from your home is a good way to make sure that your costs are kept to a minimum. In addition, you can qualify for certain home office tax deductions. You can deduct the part of your home that you use for business purposes, your internet connection, phone bill, and any transportation that you use to take you to and from work sites and other business-related travels.
An expense that is used in part to maintain your personal life and a part that is used for business should be reflected as mixed use. For example, if you only have one cell phone, you can take a deduction for the percentage use for business purposes of the device. You must just make sure that you keep track of the receipts and maintain a log of the miles that you traveled for business (where you traveled to and your purpose for traveling).
5. Put a payroll system in place - As a business owner that is just starting out, you are more likely to be a single-person business or only have a small staff. However, you may plan to hire an employee on a part-time basis, or a freelancer that will work on a single project for you. Immediately, you must decide if this person will be considered as an employee or an independent contractor.
For employees, you will need to figure out a payroll schedule and make sure that you are withholding the right amount of taxes; there are many services that can assist you with payroll. For independent contractors, you must keep track of the amount that you have paid to each contractor. For small businesses, the filing of 1099 forms is required for each contractor that you paid $600 or more throughout the calendar year. You will need to make sure that you maintain their name and address for this purpose each year.
6. Figure out how your business can take payments - When the sales start to come in, you will need a way to take care of the payments. Accepting credit cards, checks, cash, ACH, PayPal or some other method of payment makes paying your business convenient for your customers.
However, there are some steps in getting the process set up. You will need to work with a company that provides merchant accounts before you will be able to take credit cards for invoices. There are several online merchants that can help you to get your payment methods set up with an easy and painless process of approval. If you will set up an online store, the service may come with a payment processing option for you already.
7. Set up sales tax and compliance system - For businesses focusing on online sales, there has been continuous change and much confusion regarding sales tax regulations. When a customer decides to make a purchase from a brick and mortar retail shop, sales tax that is paid is determined by the state or province that the customer makes the purchase in, regardless of whether the person actually resides in that city, or if the person is visiting from abroad. However, if you sell something online, you may be selling to customers that live in other states or even countries.
8. File your taxes - Tax obligations for your business will be different depending on your business legal structure. If you are a self-employed individual (sole proprietorship, partnership or LLC), you'll be able to claim business income with your personal tax return.
Corporations, in contrast, are separately taxed and these funds are taxed independently from their owners. Your income that comes from the corporation is taxed as an employee of the corporation.
Self-employed people must withhold taxes from their income and send these funds to the government, in contrast with the withholding that an employer would do under normal circumstances.
9. Figure out the gross margin of your business - Improving the gross margin of your business is the first way that you can potentially make more income overall. In order to calculate the gross margin, you need to figure out the costs that are involved in order to make your product. To get a better idea of how this works, you need to first look at the Cost of Goods Sold (COGS) and gross margin.
Cost of Goods Sold (COGS): These are the direct costs that are associated with producing the products that are to be sold by your business. This cost incorporates both the direct labor expenses and the costs of materials.
Gross Margin: The gross margin is the total sales revenue that is remaining after the business has paid off any costs that are directly related to producing the product or service.
Here's how you can calculate the gross margin;
Gross Margin (%) = (Revenue - COGS) / Revenue
The difference between the amount that you sell a product for, and the amount that the business can actually retain after the accounts are paid is what actually makes it possible for you to keep your business open.
10. Build a strong team – Some of the most successful entrepreneurs swear by building your team first. No business launch is without failures that must be learned from. Having the right team on board at the start will help you make the right decisions and build the best processes. Your business is built from the people up.
11. Plan for growth – The only way to get big is to think BIG! As you grow the need for outside capital and accountability increases exponentially. Making sure your accounting systems and metrics are solid can be the key to successfully navigating through a capital raise. Working with professionals at this stage of growth is vital. From connections to the quality of the presentation, playing in the big leagues requires unique expertise and guidance.
Starting up a business can be a process that seems daunting. However, if you follow these recommendations, you will have your new business finances in order from the start.
From creating a new bank account to figuring out how much your business will earn per product or service delivered, these tasks will contribute to how successful your business becomes.
If you need small business start up help, call 407-578-8300 today for a free consultation.