According to the Bureau of Labor Statistics, about half of all businesses will close in their first five years of operations, and one of the most common reasons for closure is mishandling funds and running out of money.
Rather than malicious fraud or disastrously low sales, what usually leads to financial crisis comes down to small errors in bookkeeping that add up over time.
Most entrepreneurs aren’t experts in accounting, and most new businesses don’t have the funds to have a dedicated accounting team, so mistakes are bound to happen, but keeping these five accounting tips in mind will help you keep them to a minimum, and keep your business thriving for years to come.
Here are 5 accounting tips for entrepreneurs that can help them in the initial stage of their business.
1) Open a Business Account
One of the first things you need to do when starting a new business venture is to open a separate business bank account.
While it might seem more convenient to transact business through a personal bank account when you’re first growing your business, this can lead to major complications when it comes to tax reporting and could leave your personal assets vulnerable if your business runs into financial or legal trouble.
It’s also important to make sure your business and personal finances are completely separate.
It might seem like no big deal to use the business credit card on personal purchases every now and then, this can be considered embezzlement by the Department of Justice, and can lead to massive fines and legal troubles.
You’ll want to make sure you’re opening a business bank account, and not just another personal bank account for your business, as business bank accounts have extra protections and perks, like purchase protection for your clients, and give you an air of professionalism that will make your business more trustworthy.
While opening a business account requires a bit more documentation, like a business license and articles of incorporation, it’s a vital first step to keeping your business finances healthy and secure.
2) Prepare for Taxes Early
If you’re used to having taxes automatically withheld from your paycheck and filing at tax time, the world of business and self-employment taxes can feel massively overwhelming.
One of the biggest differences between W2 (employee) and self-employment taxes is that, instead of being filed at the end of the year, self-employed workers are subject to estimated quarterly taxes, based on their estimated net income for that year.
To avoid being surprised with a huge bill every 3 months, you’ll want to set aside 30%-35% of your income to prepare for your upcoming payment. However, every state has different tax laws and guidelines, so make sure to look up your state’s requirements and possibly consult with a CPA.
Accounting software like ProfitBooks can automatically calculate your taxes for you, saving you time that might have been taking up crunching numbers, and helping you avoid some potentially costly errors at tax time.
3) Save for Big Expenses and Emergencies
As your business expands, it stands to reason that your business expenses will rise too. You’ll most likely need to update software to handle more users, upgrade aging hardware, or expand your inventory.
You might have a handle on your day-to-day expenses, but not planning ahead for these major expenses can land your company in hot water.
You should also plan ahead for worst-case scenarios, like natural disasters, global pandemics or even personal family crises that could keep your business closed for weeks or even months.
Many financial advisors suggest saving at least three to six months worth of business expenses in reserve. This should be liquid cash that is easily accessible in a business savings account, so you can tap into it with little worry if disaster hits your business.
It’s also recommended to have a target savings date in mind when it comes to upgrading technology, both to make saving easier, and to make sure your tech doesn’t grow too old and cause problems for your business.
Say you want to upgrade your business’s phone systems in the next two years, and you estimate it will cost $2400, you can set aside $100 every month towards the new system, so that when the time comes to upgrade, you have the cash ready to go, and won’t find yourself in debt or financial straits.
Of course, the exact amount of savings that is best is completely unique to your business, and having a solid picture of what your business looks like in its highest months and lowest months is necessary to calculate just how much your business needs to stay secure no matter what is thrown your way.
4) Keep Every Receipt
Keeping a detailed record of every transaction you make or receive is one of the most important things you can do to protect your business finances.
Having all of your receipts handy can help you make more accurate tax deductions and save more money when tax time rolls around.
They are also important to have if your business gets audited, to prove that any deductions are legitimate.
No receipt is too small. Even keeping a receipt from the gas station during a business trip can help you out while you’re filing your taxes.
If you’re groaning at the thought of binders full of crumpled receipts, never fear. As more and more transactions are digitized, saving receipts is as easy as downloading a file to your computer, and many accounting software, like ProfitBooks, offer secure places to store receipts and sort them by criteria like date or merchant.
5) Find the Right Software
If you’re still using a spreadsheet for accounting, you’re missing out on some major tools that can streamline your bookkeeping and save your business time and money.
Accounting software is designed to streamline your business’s finances and help even novices to the world of business and bookkeeping keep their business profitable and out of financial or legal trouble.
You don’t have to pay premium prices for premium services, however. There is a wealth of powerful software for every type of business and at every price point.
If you’re a freelancer, for instance, there are many great free bookkeeping apps equipped with powerful features to keep your finances in order. They can also help pay your invoices paid and they only do without the more complex paid features that you’ll probably never end up using.
However, if you have employees on the payroll, you’ll want to budget for accounting software that can reliably keep your team members paid on time.
Having the right accounting software is the most powerful tool your business can have to stay thriving, making it easy to have a complete picture of your company’s financial health, while saving you massive amounts of time for a fraction of the cost of an accounting team.
Conclusion
Starting a new business venture is an exciting and potentially nerve-wracking time for any entrepreneur, and having to learn accounting on the fly can increase anxiety.
However, even if you’re a complete novice at bookkeeping, organization and attention to detail can go a long way in keeping your business profitable.
Keeping these five accounting tips in mind as you expand your business will help you organize your finances with ease, and let you get back to the parts of being an entrepreneur that you love.
Please feel free to share your thoughts in the comments below.
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