Own A Small Business? Here’s What You Need to Know
Running your own business can be time-consuming and stressful — don’t let bookkeeping and accounting tasks make it more so!
Know What You’re Talking About
Here are some common, but important terms that you may not be familiar with:
Sale Money In – This is a transaction you receive payment for.
Expense Money Out – This is something you pay for like rent or business supplies.
Liability This is something you owe money on that your company owns (computer, printer, etc.)
Revenue Revenue is income from sales. Deducting expenses from revenue tells you the profit.
Account Receivable Money that your customers owe based on invoices you send out.
Prepare to Create Your Business Plan and Allocate Funds with These Documents:
Balance Sheet
This shows your assets, liabilities, and owner’s equity. Equity is the value of business assets less the liabilities. In short, it tells you how much your company is worth.
Profit and Loss Statement
A profit and loss statement is usually completed quarterly. It gives you a quick summary of your profits (or losses) for a particular time period. This tells you if your business is profitable and by how much.
Cash Flow Statement
Your cash flow is divided into categories based on operating expenses, investments into business assets, and personal investments/borrowed money to fund your business.
Don’t Mix Business and Pleasure
It’s cliché, but extremely important in owning your own business. Start by setting up a bank account specifically for your company. Keep it (and any business related transactions) 100% separate from your personal accounts.
Every Penny Counts
Track every single expense! This is very important to monitor profit and loss, as well as keeping things simple for tax purposes. This means keeping receipts from all purchases and goes hand in hand with having a separate bank account for your company.
Two Copies are Better Than None
If you’ve ever found yourself searching desperately for a misplaced document, you’ll understand the importance of this tip. Scanning and saving to a digital record is the easiest way to ensure you always have a copy that is accessible when you need it.
Be sure to include Bank and Credit Card Statements, Cancelled Checks, Receipts (for sales and expenses), Bills, Customer Invoices and Payments, Deposit Slips, Tax Returns, Payroll Documentation (including 1099 and W2 forms).
You can choose to hand file these documents, but keep in mind that receipts and other documents may fade over time, making them impossible to read!
Stay Up To Date on All Cash Flow
Just because you sent an invoice doesn’t mean you were paid. By keeping accurate records, you can quickly catch any unpaid invoices to make sure your expenses are covered – and your services weren’t just given away!
Be Prepared
While you can’t predict the future, you can prepare for unexpected expenses or periods of lesser profit. Just as you should have a separate bank account for your business, you should also have a separate emergency fund. It should contain enough cash to cover your expenses for a minimum of three months, although six is preferable.
As much as possible, pay your expenses with cash (or debit). You may have less to take home in the beginning, but operating debt free will ultimately leave you with less risk and more profit. Avoid using credit cards or business loans when not absolutely necessary.
Plan Ahead for Tax Time
All of the previous tips help you achieve this goal – don’t be caught by surprise when you file your small business taxes.
Income Tax: These returns are based on your business structure, whether a sole proprietorship, an LLC, or a C/S Corporation. Check with a tax professional to see how your business structure will affect how you file.
Payroll Tax: You must also file payroll tax returns if you have employees. You must deposit these funds monthly and report quarterly. You’ll need a Federal Employer Identification Number, as well as a State Identification Number for each state where your business operates.
Sales Tax: This is another area where it can get tricky. You need to collect sales tax from each customer if you sell products. However, this varies by state, county, and city – even more so if you operate more than one location or sell items online.
A Professional Can Be a Valuable Resource
Small errors can be easily overlooked by an inexperienced person – and those errors can be costly. Even if only on a temporary or periodic basis, it is very helpful to have an experienced professional on your side, particularly someone who keeps up to date on the ever-changing tax laws.
Heather Worrell, of A Tax Haven, has decades of experience in business tax preparation and planning, as well as bookkeeping. She is an Enrolled Agent, which requires a comprehensive exam covering individual and business tax laws, as well as continuing education requirements. This also allows her to represent a client before the IRS in audits.
Call for an appointment today at 501-262-1040.