10 Steps to Set Up (or Review) Your Accounting

If you’ve just launched a new business, or if you have an established business, congratulations! It took passion and perseverance to get where you are today. As you know, however, small business owners often have a number of milestones to achieve. If you haven’t done so already, one such milestone you may want to tackle is getting on top of the accounting tasks that come with owning and operating a small business. Here are 10.

Get the necessary bank accounts.  Having separate bank accounts keeps business and personal records separate and will make your life easier when it’s tax time.

Track expenses.  A key tenet of solid business bookkeeping is accurate expense tracking. From the start, establish an accounting system for organizing receipts. This process can be old-school (bring on the paper), or you can use an app.

Use a bookkeeping system.  As a business owner, you’ll need to manage your books. You can choose an Excel spreadsheet, use software like QuickBooks or outsource to a part-time bookkeeper. When your business is big enough, you can hire an in-house bookkeeper.

Set up payroll.  When you need outside help, you can hire an employee or an independent contractor. Either way, understand how each is treated from a payroll perspective. For employees, you’ll have to set up a payroll schedule and ensure you’re withholding the correct taxes. For independent contractors, you may be required to file 1099s at year-end.

Figure out how you’ll get paid. If you sell products online, you may want a way to accept credit card payments. Shopify Payments accepts debit and credit card orders. Alternately, you can get a merchant account or use a third-party payment processor like PayPal, Stripe or Square. Fees vary.

Understand sales taxes.  If you sell online, customers may be located in different cities, states and countries. Determine if you operate your business in an origin-based state (meaning you charge sales tax based on the state where you run your business) or a destination-based state (meaning you charge sales tax based on the purchaser’s location). International purchases are tax-exempt for U.S.-based businesses.

Decide how you’ll pay taxes.  If you’re a sole proprietorship, LLC or partnership, you’ll claim business income on your personal tax return. If you’re a corporation, your income from the corporation is taxed as an employee.

Get accounting help.  If you need some extra accounting guidance, consider enlisting a certified public accountant (CPA), bookkeeper, tax preparer and/or tax attorney.

Apply for a loan.  Sometimes a growing business needs to secure external financing. You can obtain that through a line of credit, investors or a small business loan.

Keep reviewing your methods.  When you first start out, you may keep things simple, perhaps tracking expenses with a spreadsheet. But as you grow, you’ll want to consider more advanced methods like QuickBooks.

Completing these accounting steps will give you the confidence to know you’ve covered your bases and are ready to move on to the next item on your small business finance to-do list.

Tracking Your Expenses When operating a Business

Accurate expense tracking is the foundation of solid business because it lets you keep track of deductions, prepare tax returns and make your filings legitimate. But expense tracking is often overlooked. You should pay particular attention to the following categories of expenses.

Meals and entertainment.  Business meetings are often held in restaurants. Be sure to document these meetings well by noting who attended and the purpose of the meetings.

Travel. The IRS doesn’t like people who claim personal activities as business expenses, so be sure to use your travel receipts to provide documentation of your business activities.

Vehicle expenses.  If you use a personal vehicle for business, be sure to record where, when and why you used the vehicle for business. Then calculate the percentage of your vehicle used for business and apply that to all expenses (such as insurance and gas).

Gifts.  When giving a gift (such as tickets to a sporting event), it’s only considered a gift if you don’t attend the event; otherwise, it’s considered entertainment.

Home office.   Running a business from your home offers some unique tax breaks. You can deduct the portion of your home that’s used for business as well as things like the internet and phone. But as with vehicle expenses, you must calculate the percentage of your home used for business, then apply that percentage to the expenses.

It’s a good idea to establish a solid system to organize your receipts. This system can be simple (Excel) or you can use a service like Shoeboxed.

5 Things Small Businesses Need to Know about Accounting

Most small business owners are not accountants, but they must learn the nuts and bolts of accounting. Fortunately, the basics of small business accounting is fairly simple for a company that operates in a single state. You need to ensure your revenues exceed your expenses, keep your books clean and pay your taxes. Here are five tips that will help you do that.

1. Keep business and personal accounts separate.

One of the biggest accounting blunders is mixing business and personal finances. Sure, as an entrepreneur, you may have chipped in to get your business going; that’s not unusual. But you must keep business revenues and expenses separate from personal funds (money coming in and going out).

First, you may want to create a separate business structure with a distinct legal entity, such as an S corporation or LLC. Next, open a business checking account and get a business credit card in the name of that entity. Then pay all of your business expenses from those accounts (including your salary). Be sure to track any business usage of your personal items.

2. Always get a receipt.

You can claim a good portion of your company’s expenses as tax deductions: meals with clients, marketing campaigns, office rent, office supplies, accounting, freelancers, etc. In order to claim these deductions, though, you need receipts. Software is available to help you track receipts. A simple program called Shoeboxed, for example, allows you to photograph, upload and categorize receipts on a desktop computer or smartphone app. A simple Google search will help you find many other options.

3. Watch accounts receivable.

It’s important to keep an eye on accounts payable, but outgoing money doesn’t dictate your survival like accounts receivable does. If there isn’t money coming in the door, you can’t continue to operate. Each month, then, you should review outstanding revenue. Generally speaking, no more than 10% to 15% of your accounts receivable should be past due, so reach out weekly to those clients. Also consider instituting penalties for late payment (such as a monthly finance charge of 1% or 2% of the principal). But if you do this, be sure to tell clients in advance. It’s legally important, and the threat of penalties may be enough to dissuade those clients who tend to be late.

4. Invoice correctly (and regularly).

Invoicing is a critical part of owning a business because any mistake or delay can hurt your ability to get paid. But it can be time-consuming. That’s why it’s important to ensure you send out accurate invoices. The invoices should be detailed, providing specific information about all line items. Send invoices in a timely manner and regularly, and follow up with an email reminder to increase your likelihood of getting paid.

5. Stay on top of tax deadlines.

Most small businesses file estimated quarterly tax payments. These payments are made on two types of taxes: self-employment tax (which includes Social Security and Medicare taxes) and income tax (on the profits your company makes). If you do need to make estimated tax payments, they are generally due on April 15, June 15, September 15 and January 15.

3 Things for You to Consider When Hiring Workers

Accounting can be challenging for small business owners without financial backgrounds, especially as it pertains to labor. But these three tips can help.

1. Calculate labor costs before you hire.

If you decide to hire employees, you’ll be on the hook for more than just their wages. You also must come up with money to pay benefits and payroll taxes. Those expenses can accumulate faster than you realize. Some small business owners even end up cutting compensation post-hire. That’s a terrible position for you and your employees (who feel cheated), so avoid it at all costs.

2. Classify workers properly.

When building a team, you have two choices: employees and contractors. And the penalties for misclassifying workers can be hefty. First, there’s a $50 fee for the W-2 form for each misclassified contractor. Add to that 1.5% of wages and 40% of FICA taxes (in addition to 100% of the FICA taxes that you should have paid per employee). The IRS can also fine you up to $1,000 per worker or imprison you for a year if it believes the misclassification was intentional.

3. Don’t try to do it yourself.

Many small business owners are used to controlling all aspects of their businesses. Eventually, however, you have to delegate to experts, especially when it comes to accounting and bookkeeping. By hiring a professional, you can reduce accounting mistakes and ensure that your accounting records are accurate and up to date. It will also save you a lot of time.

Components of a Profit and Loss Statement

When you need to report on your business finances, such as when you seek a loan, you might be asked for a profit and loss (P&L) statement. Do you know what that is? Could you create one? While it may sound complicated, every business owner should be comfortable creating a P&L statement, so let’s see if you’re ready.

First, let’s recap. A P&L statement is a document that provides an overview of the income and expenses incurred during a specified period in which your business is operating, often a fiscal quarter or a fiscal year. It generally provides basic information about your company’s ability (or inability, but we hope not) to generate a profit. It may be called a number of other things: an income statement, a statement of operations or an expense statement, for example.

While the easiest way to create a P&L statement (other than paying an accountant to do it) is to use accounting software, you can do it manually in a few steps. Here they are.

Step 1: First, calculate your revenue, which is all the money your business has received during the covered period, whether it’s from selling your products and services or from selling your old office equipment at a garage sale. Sometimes you include revenue that is due but has not been collected; other times you include only revenue that has been collected. But that’s another topic altogether.

Step 2: Calculate your cost of goods sold (or cost of services sold, if you don’t manufacture goods). If you produce goods, this is the money you spend on materials and supplies necessary to produce your goods. If you sell juice, for example, you will want to include the cost of buying lemons, limes and protein powder. If you produce services, however, this number would include the cost of your time and your employees’ time.

Step 3: Next, determine gross profit. Now it’s time for some math, but easy math. This is simply your revenue (step 1) minus your cost of goods sold (step 2). Simple, right?

Step 4: Now calculate your operating expenses, which include the costs of running your business, such as rent, payroll, equipment, utilities and postage. These costs are distinct from costs of goods sold, so be sure you understand the difference.

Step 5: More math! Determine operating profit (or loss), which is simply your gross profit (step 3) minus your operating expenses (step 4).

Step 6: Now determine earnings before interest, taxes, depreciation and amortization (EBITDA). That word may sound scary, but it simply involves adding any additional income (i.e., income not included in your revenue totals) to your operating profit. This may include interest income or dividends from investments.

Step 7: Calculate any interest payments due, taxes due and depreciation and amortization expenses. You may need help from your accountant with the latter.

Step 8: Arrive at net profit, which is your EBITDA (step 6) minus your interest, taxes, depreciation and amortization expenses (step 7).

That’s it!

Basic Business Accounting Terms You Should Know

How often have you ended a meeting with your accountant feeling even more confused than before it started? If that occurs often, don’t worry. We’ve compiled a list of basic accounting terms to help beef up your knowledge

Accounts payable: This refers to the expenses you have incurred but have not yet paid, such as anything owed to a creditor, employee, freelancer or vendor.

Accounts receivable: This refers to money your business is owed for goods or services you have sold but not yet collected on.

Assets: These are items (liquid or non-liquid) owned by your business. Assets might include land, equipment, and event patents.

Balance sheet: This is a financial statement that reports all your assets, liabilities and equity.

Expenditures:  Also called expenses, these are costs you incur to run your business. They might include rent, employee or freelancer salaries and office supplies.

General ledger:   This is the complete record of all your business transactions, and it is used to generate financial statements.

Inventory:  This refers to assets that you have purchased to sell to customers that remain unsold.

Liabilities: These are debts owed by your business, such as business loans, accounts payable, taxes and mortgage payments.

Revenue: This is the money your business earns from the sale of goods or services before you deduct any expenses from it.

Understanding Fixed versus Variable Costs

Budgeting may be your least favorite part of running a business. You probably don’t even enjoy it in your personal life.

But successful small business owners know that creating and maintaining a business budget is critical to success. And one step in creating a budget is understanding your fixed versus variable costs.

Fixed costs are any costs that are necessary for the operation of your business. They tend to recur, be it daily, weekly, monthly or even yearly.

Examples of fixed costs include rent, equipment, supplies, debt repayment, payroll, depreciation of assets, taxes and insurance. But all small businesses are unique, and yours will likely have different fixed costs than these.

So take some time to review your operations and take stock of all the fixed costs your business incurs.

Variable costs, meanwhile, are those that change depending on how much you use the service. Many of these are necessary for your business to stay in operation, like utilities. Some other examples of variable costs are your own salary, professional development and marketing.

Variable costs also include discretionary expenses that aren’t necessary for the functioning of your business but are nice to have, such as education or a cosmetic office renovation (no one wants to work in a dump, but it may not matter if clients don’t visit your offices, making these renovations discretionary).

Why does taking stock of fixed and variable costs matter? During leaner months, you’ll need to lower your business’s expenses, but fixed costs are, as they are labeled, fixed. So you’ll need to filter them out and focus on cutting variable costs.

During better months when you have a little extra income, you can increase your spending on variable expenses. If you find yourself in need of renovations, as in the example above, you could even afford to make your office less of a dump.

That said, it’s always a good idea to put some of an unexpected windfall into an emergency fund. Why? Beyond fixed and variable costs, you should account for unexpected expenses, which are one-time costs that tend to arise at the most inconvenient of times.

For example, you’re driving to the biggest investor presentation of your career or you’re pitching your product or service to a Fortune 500 prospect, and your car stalls.

You have to take an Uber to the meeting 200 miles away (and we all know how expensive Ubers have become), fly home (at the last minute, no less, boosting the cost) and get your car fixed. It costs thousands of dollars.

These unexpected costs always seem to arise when you are least expecting them and least prepared for them, usually when your budget is extra tight. But you can head off unexpected costs when budgeting for your business by making sure you have some extra cash.

Perhaps you’ve heard the maxim: if you budget for an emergency, the emergency never arises, but if it does, you’ve budgeted for it, so it’s not really an emergency. That’s some circular logic, but it holds true.

Here Is Why You Need a Business Budget

When launching your business, creating a budget can fall by the wayside. And if your business is operating with a solid profit, it might not seem important to create a budget.

But budgeting, while perhaps your least favorite part of running a business, is a necessity because it helps you prepare for the future.

Think you don’t need to prepare for the future? Think again.

Let’s say you have had a few bad months. Maybe you took some losses on customer returns (they all want Amazon-level service these days, don’t they?). In this case, your budget can help you prepare by minimizing expenses where possible.

On the other hand, let’s say you’ve had a few good months. That video you posted to TikTok of your toddler dabbing in the warehouse went viral and is bringing in droves of customers.

But how much extra can you afford to spend? In this case, your budget can help you determine if you can take a little more risk, perhaps by investing in higher-quality inventory to satisfy those picky customers.

In other words, you don’t need a crystal ball to run a business, but in all seasons, good and bad, you need to be able to make an educated guess about the future of your business’s finances and then use that information to make wise financial decisions for the months and years ahead.

Doing so takes some of the guesswork out of planning and ensures everything runs smoothly over the long term.

5 Steps to Separate Business and Personal Finances

Keeping your personal finances distinct from your business finances is a sometimes involved process with which many business owners are unfamiliar, especially in the earlier stages of their operations. But it is important, even critical. Not separating personal and business finances can create numerous legal implications, including the possibility of personal asset seizure if you are sued and lose. To help you get started, here are five steps.

1. Establish your business entity. You can set up your business as one of several entity types: an LLC, a corporation or a sole proprietorship. Using one of the first two entities establishes your business as a separate legal entity (called incorporation) and is highly recommended. Incorporation also lets you file dedicated business tax returns, and it gives your business a measure of legal protection.

2. Apply for an employer identification number (EIN). An EIN is a nine-digit number assigned to your company by the IRS, much like a Social Security number but for businesses. You use it when establishing your business entity type, filing your business’s taxes, opening a business bank account and more. An EIN also helps create a divide between your personal and business finances.

3. Open a business bank account and get a business credit card. With a business checking account, you can pay bills and deposit cash without having to use your personal bank account. If you’re also making business purchases with a personal credit card, you should also get a business credit card. In addition to separating personal and business spending, it also helps you build a business credit score. This is important if you see your business growing.

4. Pay yourself a salary. Paying yourself a salary creates a boundary between your personal and business finances. And it’s easy: just transfer money from your business bank account to your personal checking account on a regular schedule (weekly or monthly, for example), the same as if you were working for another business and getting paid.

5. Identify when you’re using personal items for business purposes. If you have a home office, use your personal vehicle to attend meetings or speak with clients on your personal phone, track when you use personal items for business purposes. This will allow you to deduct at least part of those expenses come tax season.

Why should you do this? Well, keeping distinct business and personal finances is required for LLCs and corporations. It is not required for sole proprietorships, but that means it is even more important for sole proprietorships to separate personal and business finances. They will have to prove separation if audited.

If all of this sounds overwhelming, take heart. It’s simple once you start doing it, and the benefit is huge. If you’re a serious entrepreneur or established business owner, there is absolutely no reason to put your personal assets and credit score at risk. So, regardless of the kind of business you operate, you should consider taking these five steps to ensure your business and personal finances stay separate.

Why You Should Start Your Budget with Expense Limits

As a small business owner, you have to figure out many things, including how to create a business budget. That can be intimidating, but creating a business budget isn’t difficult if you take the right approach. It can all be broken down into several key steps, one of which is expenses.

First, add up all your fixed costs. These are any expenses that are necessary for the ongoing operation of your business and tend to recur. Fixed costs might occur daily, weekly, monthly or even yearly. Examples include rent, supplies, debt repayment, payroll, depreciation of assets, taxes and insurance.

Next, determine your variable expenses. These are costs that change. Many are necessary for your business to stay in operation. Some examples of variable expenses are your salary, equipment, office supplies, professional development, marketing and utilities.

Next, set aside a contingency fund for unexpected expenses. These are expenses that arise when you’re least expecting them. Ensuring you have some extra cash on hand for contingencies can help you keep a budget.

With that information in hand, you can create your profit and loss statement. Just add up all of your income for the month and subtract the expenses. You want a positive number at the end, which means you’ve made a profit. If not, you’ve had a loss.

A business budget can help you ensure that you’re spending money in the right places and at the right time to stay out of debt. And that can help to ensure the long-term success of your business.