Starting Your Business: Bookkeeping for Small Businesses
January 2015, the perfect time to start pursuing your new business. Whether you want to pick up more freelancing work this year or are going to launch a full business, there is one area that you cannot afford to mess up: finances.
This time last year I filed for my Shrein Media, LLC and began setting up the foundation of my business. I tried to do everything “the right way” and listened to podcasts and read many articles to do my best. There was one decision I made which I probably should have done differently and it has everything to do with the one thing I couldn’t afford to mess up: finances.
In the fall I began working with an accountant. I can manage simple budget lines but when it comes to write-offs and organizing receipts and taxes, etc., I really need help. Within a matter of weeks my accountant had me on the straight and narrow.
I know I’m not the only one with questions about bookkeeping for small businesses so I asked Patty if she would be willing to answer a few questions to help other creatives and entrepreneurs setup their finances for success… she agreed.
The following represents a casual question and answer session between myself and Patty Gray of Techeon Business Solutions. While the content here is intended to be helpful and informative it represents general practices and is in no way personlized advice. If you have specific questions about your situation you should consult your accountant. If you do not yet have an accountant, you should connect with Patty directly – she is fantastic! Visit her website here.
13 Questions You’ll Probably Have About Your Business Finances
The questions I asked Patty are marked in bold and her responses are just beneath in italics.
If someone is thinking about starting their own business, what are the top three things they need to know about managing their money?
1. Don’t co-mingle your personal funds and your business funds. Legally set up a company and keep your money clearly separated so that your personal assets are protected from any lawsuits against your business and also so that you can have a clear picture of the health of your business.
2. Don’t spend money on growth before you experience growth. Many small businesses fail because they rent a large space and hire too many people before their business needs it. Remember that companies like Apple started in a garage.
3. Find or build start up funding before diving into your new business. There are several ways to do this including: working your new business part-time if you have a full-time job until you have enough revenue to leave your full-time job, starting a crowd-funding campaign to raise the necessary funds, pursuing investment capital, and starting your business after you have landed a few steady sources of income. The best path for you depends on the type of business you are starting and your current financial condition.
What are common mistakes you see from new business owners when it comes to managing their books?
The most common mistakes are:
1. Entering the data into your books too infrequently. Your books provide you with your business’s history, trends, and the data you need in order to make the best business decisions for your future. Entering your data at least monthly is important, but entering it daily will alert you to fraudulent charges and improve your cash flow planning.
2. The level of detail is too high to be useful for analysis. If your business has several products or services to sell to its customers, it can be very useful to separate the income and expenses related to each item so that it is clear which ones are the most profitable, are generating the most revenue, or losing your company money. Regular analysis of this data allows you to decide when to discontinue parts of your business, raise the selling price, run a sale, and other important decisions for your company’s future.
3. Overdue invoices are not getting paid. Most people go into business to make money. Unfortunately, many customers don’t pay on time or need several reminders before payments are made. Invoices should be entered and tracked until payment is received or you decide that payment will most likely never be paid. If customers value your products or services, they will understand that payment is owed.
Does my company need to worry about sales tax?
The sales tax laws vary in each state. In general, the answer is yes although most states do not require you to charge sales tax if you provide a service only. Even if you do only provide a service, it can be useful to you and your customers to pursue getting a wholesale or transaction privilege license. Sales tax calculations can be quite complex with different rates applied for state, county, and even city sales taxes.
For products sold on the internet, sales tax must be charged to customers whose shipping address is in the same state, county, or city as you or your store. Be sure to find someone in your location to help you with this or contact your local Department of Revenue.
Do I have to pay myself, as the sole employee of my business, an official salary or can I just withdraw money from my account?
If your business is structured as a corporation, you are expected to pay yourself through payroll and the business must pay the matching payroll taxes on your pay. If your business is an S-Corporation, you may also take a draw or distribution in addition to your payroll. If your business is structured as a sole proprietorship or you are in a partnership, then you can pay yourself however and whenever you want. But you shouldn’t feel like you got away with not paying payroll taxes. You will pay essentially the same amount through your personal taxes.
It is usually a good practice to make regular payments to yourself to make sure that your business is not relying on your working for free in order to survive.
How can I make sure I am most prepared for end of year taxes?
If you or your bookkeeper has been keeping your books up to date throughout the year, preparing for end of year taxes will not cause too much extra work. If you have employees, they should all be contacted to confirm that their name and address on their pay stub is correct and will match the information that the social security office has. A mismatch can delay their W2 form or cause the payroll information to not be properly recorded.
All sole proprietorships or individuals as well as all legal firms that you have paid more than $600 to for services must provide you with a W9 form so that you can issue them a form 1099 which is used to report those payments to the IRS.
The most important thing for your business, however, is that your tax accountant should spend some time with you before the end of your fiscal year to strategize and advise you on ways to reduce your tax liability. You should also review the available tax credits and deductions on the IRS website to be sure your tax accountant is covering everything with you.
Can I write off my phone or computer?
If you use your phone or computer for business purposes, these can be written off as either a business expense or depreciated over several years. If you use your phone and computer also for personal use, then only a portion of these expenses can be deducted.
If you work from a home office, your local phone service is usually not deductible. Your long distance service can be deducted for those calls made for business purposes. Because cell phones are frequently used for both business and personal reasons, the IRS does scrutinize these expenses more closely.
You should occasionally examine your detailed cell phone bill to see how many minutes of the total minutes used are for business purposes and use that percentage for your deduction amount, adjusting that percentage as needed.
Where is the line between personal and business expenses?
The line is drawn where the business owner chooses to draw it. OK, that statement could get me in trouble with the IRS, but it really does come down to you.
For each expense, ask yourself how your investors (current or future), the IRS, your business partners, or even your employees would feel about you calling that expense a business expense. A potential investor may choose to not invest because he feels that you are spending frivolously or are dishonest. Your employees may feel free to spend your money more freely because of the example you’ve set.
The IRS, if they disagree with your expenses, may fine you for back taxes which include interest and penalties. Another interesting thing to consider is if you make your business look like it is not making money, it can make getting a loan for the company, or for you personally, more difficult.
Do scanned receipts work just as well as physical receipts for keeping documentation?
The IRS has determined that a readable scan of a receipt is acceptable. They also do not require any receipt to be stored for expenses under $75.00 except for lodging.
What if I lost a receipt for a purchase? Can I still write it off?
You can still write off an expense even if you have lost the receipt. You will need to provide an alternative documentary evidence such as your own written statement of the expense including the date, description of the expense, and some evidence of its business purpose or proof that the expense occurred. An estimate of the expense amount is not allowed.
What type of decisions does a business owner need to make up front that will impact his books forever?
The nice thing about bookkeeping software is that nothing is forever as long as the underlying data that is being entered into the books is always available. There have been quite a few times when a client has tried to do their own bookkeeping and then decided to hand it over to me. Many times, I’ve had to start the books over because trying to make corrections was going to take longer.
What if I decide to close my business if it doesn’t work like I want it to? What does that mean for my books?
At the end of the life of a business, all accounts should be “closed” meaning the balances in bank accounts, owner equity accounts, and liabilities are zero. For limited liability companies, a liquidation process must happen for all assets, creditors paid, and, if there is anything left, the remainder disbursed to partners or shareholders. All final payroll to employees, payments to vendors, and any other expenses related to closing the business must be recorded for the final financial reports.
Are there any other things business owners should be aware of or keep on their radar as it relates to their business growing and bookkeeping needs changing?
Congratulations! Your business is growing and you are hiring employees, renting or buying larger buildings, and revenue is growing. As you start to grow to a larger, more complex business, expect more from your bookkeeper and tax accountant. There is a point where you will want to have an in-house team of financial people to do your books and to stay on top of tax strategies and implementation.
Have we missed any other important topics?
Probably the one last point is that many cash businesses misuse cash because it is so easy to grab a $20 out of the till as you run out for lunch. Any missing cash will be counted as income to the owner in the absence of a receipt.
Do You Have An Accountant?
I have found that much like finding a good dentist or a good doctor, it’s hard to know where to start. You could search Google for recommendations but for something that isn’t fun it feels like it still takes too much work. However, when someone recommends their doctor or dentist it makes scheduling that first appointment all the easier.
If you do not have anyone looking over your books I would love to encourage you to contact Patty and learn more about how Techeon Business Solutions can get you setup for 2015. I am not an affiliate and I don’t get any kickback from business that makes it’s way to Patty – just a guy who has been pleased with every experience I’ve had so far working with her.
Hope this helps and here’s to a more successful year than we could dream or imagine!
Great post! What if you’re not an official business but you have purchased items to use for work purposes, can these items be written off on your personal taxes?
If you’ve personally purchased items that are being used for your business, it would be cleaner for you to personally submit something like an expense report to the business for reimbursement. Then, the purchased items can be written off as business expenses or, for larger capital items, depreciated. This keeps the firewall between personal and business assets in place.
Ok. What if that isn’t an option? I purchased items to benefit my workflow since my setup at the time wasn’t working for me.
You should discuss your specific situation with your tax accountant. Without understanding what your purchase was for and if you are running a business, even if under your personal social security number, it would be hard to give you an answer. You tax accountant will give you the best advice since he/she would have to defend the guidance that your given.