When starting a new business one of the most daunting tasks the entrepreneur will face is that of accounting. Many small business owners neglect this important area of business, particularly during start up. Making this mistake can be fatal and many companies fail because of a lack of knowledge of the business’ finances. Keeping good records and having good accounting practices from day one is paramount. There are many simple, yet effective techniques that can help the small business owner get their finances on track.
The first, and most important thing, you can do is to set your business up as a legal entity separate from yourself. This means setting up some type of corporation, or LLC. This simple step is overlooked by too many entrepreneurs. Keeping your personal and business finances and taxes separate is the main reason for this, but there are other benefits as well. Which of the different entities is right for you will depend on many factors of your business, and you should consult a CPA and an attorney to help you with the process.
Once you have decided on which entity you will use and have followed your state’s guidelines to set it up you will need to file form SS-4 with the IRS to obtain your EIN, which will be your business’ federal tax ID number. As soon as you have set up your business entity your next step will be to visit your bank (be sure to check out the competition’s offers as well) to open your business checking account. Most banks offer free small business checking accounts with no minimum balances. If the bank is going to charge you for small business checking, or a debit card, find another bank.
When choosing a bank be sure to ask the sales representative if the statements are cut on the last business day of the month, so that each statement represents an individual month. If the statement is cut on a floating 30 cycle, or if the cycle begins on the day of the month on which you opened the account find another bank. This simple thing can save hours when settling your account each month.
It is also a smart idea to have multiple accounts dedicated to different portions of your business as well. This may include a payroll account, an account that receives payment deposits and an operating account to name a few. If the bank only allows one free account per business find another bank. You may find that you need multiple accounts and keeping up with them all is starting to get confusing. If this happens ask your banker about the Cash Management services they offer. These services will normally include fees, but can help save you time, energy and headaches.
Once you have your new business set up and you are starting to see some cash flow you must make sure to keep your business and personal finances completely separated. This means that only revenue from the business should be going through the business checking accounts, and more importantly that no personal purchases be made through the business.
It is crucial that you take a salary from your business, rather than spending the business’ money on yourself. There are several different ways to take a salary including taking a fixed amount and/or a percentage amount based on the business’ performance.
My last point is also on the list of things often overlooked by the small business owner. Make sure you hire a bookkeeper. This point bears repeating – Make sure that you hire a bookkeeper. Even if your business is small it will be a tremendous benefit to hire someone to keep the books. Most new businesses fail to do this because they are trying to save money, but the fact of the matter is that you can get a bookkeeper for around $25 per hour depending on where you do business. Your time can be better spent on other aspects of the business that are your specialty and others can’t do. Make sure you are leveraging your time properly. There are thousands of bookkeepers out there but only one you! These types of services will usually save you a lot of money in the long run.
These are just a few points that all new business owners should make sure to focus on during start up. This was by no means an exhaustive list of accounting procedures, but only a few of the most important first steps. Finance and accounting are some of the most important aspects of business, but are so often overlooked by the new business owner.
By: Danielle Niesz