In 2017, over 400,000 startups across the US created 2.2 million jobs.
The number of new entrepreneurs starting their own businesses is growing. When starting a new business, there’s a lot of items to consider to ensure success. One of the most important of those items is how to manage your finances.
Startup accounting is a key component in managing finances, forecasting and staying compliant. It’s also important when you’re trying to find ways to scale your business.
If you’re an entrepreneur, this guide will tell you everything you need to know about managing your finances. Keep reading to get yourself started on the right foot.
Before you think about your accounting, there are a few things you need to do and think about.
Open a Bank Account
Once you’ve registered your new business, you need to open a bank account that keeps personal finances separate from those of the business.
If you’re a sole proprietor, you’re not legally required to have a separate bank account. But this will save you headaches when it comes to filing your taxes.
As for LLC’s, partnerships and corporations, you need a separate bank account by law.
Business accounts are different from personal accounts. They usually have higher fees, so look at your options. You’ll need to provide the bank you choose with your business name and your business registration.
All you really need is a checking account. A savings account will come in handy when you’re organizing funds and preparing for tax time.
Get a Business Credit Card
Although not necessary for sole proprietors, having a separate credit card for your business can help track your expenditures. It will also help with building credit for your business.
Again, LLC’s and corporation are required by law to have a business credit card.
Tracking your expenses involves recording what you’re spending your money on as well as keeping and organizing receipts. But what receipts do you need to keep?
- Meals and entertainment (i.e. for business meetings)
- Business travel (i.e. out-of-town meetings or conferences)
- Receipts for client-related gifts (i.e. tickets to a sports game or concert)
- Home office expenses
- Expenses related to your vehicle
For the last two expenses, you have to figure out what percentage of your home/vehicle is used for business. Then you can apply that percentage to the claim on those expenses.
You should also keep in mind that expenses that are a mix of personal and business life should be reflected in your tax claims.
Special Notes for At-Home Businesses
If your home is your office, there are tax breaks you can look for. Often you can claim a portion of your internet, cell phone and transportation for business errands.
Below we explain the two key components of business accounting.
Bookkeeping is more of a transactional function than that of accounting. It includes recording transactions, categorizing transactions (i.e. sales and expenditures) and organizing bank statements. It may involve both an accounts payable and an accounts receivable role.
A bookkeeper can also be responsible for the following:
- Managing supply costs
- Managing office expenses
- Managing rent and utilities
- Paying the bills
- Managing payroll (including ensuring the correct taxes are withheld, taking care of wage garnishments and applying insurance deductions)
- Filling out forms and paperwork related to finances
- Storing and protecting important financial information
- Preparing records for tax time
- Ensuring that you’re compliant
As a startup, you can find use DIY bookkeeping software as well as online automated bookkeeping services.
When to Hire A Bookkeeper
When you’re first starting out, you may be able to handle everything that’s involved with keeping clean and organized books. It keeps your costs low and gives you control over the security of your financial information. But as your business grows, it will be difficult to balance bookkeeping with you other functional tasks
When record keeping begins to get in the way of performing essential tasks, it’s time to think about hiring a bookkeeper. You can hire an in-house bookkeeper, or you can consider outsourcing your bookkeeping to keep your overhead low.
Although a bookkeeper doesn’t usually help the business strategize, they will be able to explain your financial management options. They’ll have systems for managing and updating your records. They can also identify problems with your current books.
Accounting is far more involved than simply keeping your books compliant and in order. Accounting is the process of looking at all your finances and compiling and translating the data. With proper accounting, you can identify opportunities for progress and growth, mitigate risk and find areas for cost-saving.
While larger businesses may be able to hire a full-time accountant, this cost is often not affordable for startups. As an entrepreneur, you have two options for your startup accounting.
To keep overhead costs low, you can consider an automated accounting system. This includes both accounting software as well as online automated accounting. Although unable to provide solutions to non-routine situations, they can record all revenues, purchases and identify potential liabilities.
These services aren’t free, but they’re also not expensive. Software and online programs come with different kinds of if subscription plans. Do your research and know what you need from your accounting program before making the investment.
It might be a good idea to consult with an accountant before making your decisions. After explaining a bit about your business and what goals you want to reach, the accountant can tell you the benefits and disadvantages of the programs you’re considering. Most accountants are well-versed on the different technologies available – and their shortcomings.
You should also consider the accessibility of the program. Depending on how many people need to access the program, you may need to think about how many users you can have (and for what cost).
If you’re going to need to access the program via mobile, you should look for a program that offers this ability. Lastly, think about cloud-based technology gives you the security that you need.
Your second option as a startup is to outsource your accounting to a service provider. Although computer technology can help you get down the basics, it’s not capable of making projections and identifying future risks according to market movements.
Accounting services are a great alternative to an in-house accountant. The benefits of hiring an accounting service include:
- No need to hire a new employee
- No need to increase overhead
- An entire office of experts to work with
- Identification of cost saving across vendors, manufacturing, operations and employee management
- Identification of potential tax savings
- Knowledge about tax breaks and potential refunds
- Industry best-practices for paperwork work and reports
- Ability to make projections
- Ability to mitigate risk
- Representation for audits and appeals
- You don’t have to worry about payroll
- Helps plan for growth
- Stays up to date on tax law
- Keeps your finances and financial liabilities up to date
- Avoid fines, penalties and interest charges
Outsourcing your accounting is the middle-way between accounting software and a full-time accountant. You get all the benefits of an in-house accountant without any of the overhead or responsibility for a new employee.
Other Things to Consider
In terms of business finances, there are few other items to keep in mind as you get started.
When you hire someone to do a job for you, you have to identify whether that person is an employee or an independent contractor. This will impact your payroll.
Employees will need to be put on a payroll and you’re responsible for withholding the correct taxes. When working with independent contractors, you should be tracking how much you’ve paid them for their services.
How to Invoice
Do you accept credit card payments? Or are you a cash-only business?
As you begin to grow, you’ll need to have a way to accept more than cash. You can accept credit cards through third-party processors (i.e. Paypal). But these usually charge a fee for their services.
You can also set up a merchant bank account. This will put credit card payment directly into an account, making them easy to track and manage.
How to Charge Tax
If your business is a brick and mortar shop, taxes are easy to navigate. The taxes are charged according to state and federal laws.
If you’re an online business, taxes can be a bit more difficult. You’ll have to do some research to ensure you’re charging the right taxes to the right people.
How to Pay Tax
If you’re considered self-employed you’ll have to claim business income on your personal tax return. You’re responsible for withholding your own taxes from your salary. Self-employed people include sole proprietors, LLC’s and partnerships.
If your startup is incorporated, your taxes work differently. The income you make from the corporation is taxed as an employee.
Is it Time to Look for Accounting Help?
When you first start out, it may be possible to handle all the aspects of your business on your own, or with minimal outside help. But if you want to scale your business, you’ll have to delegate responsibility so you can focus on more important things.
Startup accounting doesn’t have to involve in-house personnel. It can be as simple as using software. For more information on financial solutions for your startup, check out our blog.
Sean Haughey, CPA