Being the creative head honcho of a small business, you must make sure that your financial ducks are in a row. For some entrepreneurs, this task can create a host of unpleasant physiological responses. However, if you don’t tackle it now, you are doomed to face failure later on.
Do you need an accountant?
Being the do-it-yourself, take charge leader that you are, you may not jump to hire outside help to do your accounting. Perhaps it’s time to rethink that philosophy. Not only can a good accountant give you guidance with tax reporting and compliance, but they can help you plan for the future, possibly reducing your payout each period. And they can keep you from costly mistakes.
If you are just starting out and are pondering your options for structuring your business, run it by an accountant. They canhelp you decide if you should apply for an LLC, a corporation, or a partnership. A good accountant can also advise you on bookkeeping software, and processes for helping you track your daily business activities.
In addition, accountants are trained to advise you in your business and financial plans. They can perform a solid business review and forecast the viability of various projects you have in the works. Whether you are expanding or just looking to reorganize your existing business, an accountant can give you a hand with the analysis.
Although you can rummage through your hall closet and open an antiquated, dusty phone book to look for an accountant, I would recommend you consider asking a fellow business owner for a referral. As with any professional, accountants range broadly in skill, expertise, and cost. Expect to spend $100 - $300 per hour.
Being your own bookkeeper
A bookkeeper is not the same as an accountant. You would expect to consult your accountant infrequently after starting up and usually only when contemplating a change in your business practice and at tax time. Whether you choose to do your own bookkeeping or outsource it, you will be dealing with bookkeeping every week if not every day. That said, if you own a small business, you can probably handle your own bookkeeping. There are plenty of software programs out there which can be of assistance. Some people prefer the traditional and simple method of doing it by hand. There are various systems, but an easy one involves just labeling a page with the given month then dividing the page into columns, and recording the income and expenses within those columns.
Even if your business is tiny and you work out of your house, it is smart to set up a separate bank account for your company. Edward Wacks, a financial planner at Ameriprise, with over four decades of experience in the industry, commented that people tend to move money back and forth, making it hard to keep the records straight. He observed that when people commingle funds, it can create a lot of confusion and hurt your business down the line.
Think of it this way, if you had investors or business partners, you would need to account for all your business expenses. You would have your own credit card for business purchases and would need to be meticulous when it came to cataloging receipts, explaining why the trip to the grocery store was considered a business expense.
Okay, so wealthy men and women in Prada aren’t knocking on your door to buy you out at the moment, but it would be wise to treat your business as if they might be interested. With a distinct division of your finances, you’ll be better protected against law suits and audits.
Some loathe bookkeeping so much that they hire someone to help them. However, if you keep your own books, here are some common errors small business owners make:
Throwing away receipts: Most people forget to keep all their appropriate receipts. Come tax time, you’ll need to be able to prove how much you spent on what sort of expenses. Most receipts should be kept for three years.
Misclassifying employees: It’s important to determine whether someone is an employee or an independent contractor, so you can report their fees properly. Also, if you hire an employee you’ll need to handle payroll and withhold taxes, social security, and Medicare.
Improper petty cash policies: There really should never be a petty cash box, because it can be hard to trace those expenses. However, if you do have one, you must keep track of those bills as you would others, so that you can have an accurate record.
Not hiring a bookkeeper to help you when you need it: Entrepreneurs are very self-sufficient by nature. I know that I grimace at the thought of hiring someone to come in and tidy up my financial messes. Still, having an expert put his or her eyes on my accounting is always worth the money. Independent bookkeepers charge as little as $20 per hour (some are much more) and are often worth their weight in gold.
Opening a business bank account
As discussed above, it is important to keep your business bank account separate from your personal one. In order to accept checks made out to your business name, you’ll need to bring your company documentation, proving that your business is legitimate and was properly formed. You’ll also need all the normal personal documentation you usually need to open an account.
Although the hoop-jumping may seem unnecessary if you’re a small business owner, you’ll find that there are a number of benefits to having a business bank account:
- Instant organization: When you open a business bank account, it becomes easy to separate the income and outgo for that business from your personal funds.
- Spot trends and overall performance: It’s much easier to determine your company’s cash flow, to see if you are truly a profitable enterprise, when you have all the data in one place.
- Credibility: Without a bank account your customers will wonder if you’re a fly-by-night business that will not be around for long. When a client must write a check to your name, they will often question your legitimacy.
- You can apply for a merchant account and accept credit cards: Depending on your business, you may or may not need to accept credit cards. Banks will require a business account before they will approve your application.
- Legal coverage: If you’ve taken the steps to form a corporation to protect your personal assets, but didn’t bother to get a business bank account, you might end up being liable anyway if your finances are co-mingled.
Once you look over your finances and get a grasp of what is needed, the road becomes less bumpy and the trip can even be enjoyable. It’s important to tackle all these aspects early on and set up good habits which will carry you onto a long and fruitful future.