Getting your new business up and running takes a lot of hard work and determination. If you're at the point of launching your start-up, you've likely been through a lot of ups and downs along the way, which help pave the path to a successful venture. Now that you're ready to put your dreams into action and start your business, do you have a plan in place for how you'll track the money flowing in and out?
Setting up an accounting method that fits your needs is critically important not only for understanding your business's financial health at any given moment but also for informing the decisions you'll need to make about how and when to expand. Here are some tips that can help you decide what accounting practices you need to implement.
Organize Your Records
Whether you're operating a sole proprietorship out of your own home or opening a storefront with multiple employees, you need to think through your recordkeeping process. You will accumulate many documents, both digital and paper, that will need to be filed in an organized manner so you can locate them when needed. Whether your filing system is virtual or physical, or a combination of both, be sure you understand what needs to be preserved and why.
You'll definitely need to maintain all records pertaining to your business registration, such as approval letters, insurance, and tax identification. But do you know how long to keep paystubs? What about receipts for utilities, vehicle maintenance, and meals? The answer will depend on your particular situation's specifics, so be sure to thoroughly research the requirements before finalizing your record-keeping system.
Technology has made record-keeping easier than ever, thanks to email inbox filters that can direct receipts and invoices into designated folders automatically. You can also file important documents in folders on Google Drive, one folder per month, so they're available with a few clicks but with no need to print them out.
Select an Accounting Method
Another big decision you'll need to make at the outset is whether you will use the cash method or accrual method of accounting. Basically, cash accounting records income and expenditures at the time money actually enters or leaves your account. In contrast, accrual accounting records financial transactions when they are authorized, creating accounts payable and receivable. There are pros and cons to both methods, so be sure you understand cash versus accrual accounting methods before deciding.
Whichever accounting method you choose, you will also need to adopt a bookkeeping system. Bookkeeping refers to recording transactions into appropriate categories, reconciling bank statements, and other day-to-day activities. There are many options to consider, and the best solution for your business may change over time. You might start by keeping your own books with a simple spreadsheet or basic software. Later, you might need to outsource this function or even hire a full-time bookkeeper or accountant.
Separate Business From Personal
Depending on how your business is registered, you may be required to have a separate business bank account. But even if the law doesn't require it, you should definitely consider keeping your business and personal banking completely separate. Not only does it simplify your bookkeeping, but it also can help protect your personal assets if an unforeseen business liability arises.
Banks often charge higher fees for business accounts than personal ones, so shop around for the best deals. You should also contact your chosen bank to ask which documents they require for opening a business account. Ideally, you will open a business checking account as well as a savings account so you can set aside a percentage of your income for self-employment taxes, a savings cushion, and any large-ticket items you'll need to purchase for the business.
In addition to your business bank accounts, you should consider opening a business credit card as well. Establishing good credit in your business name will help secure further funding in the future should you need it, plus it allows you to avoid mixing business and personal expenses on a single statement.
Review Your Bottom Line Regularly
Set aside time every month to review your income and expenses, look for trends, and evaluate your overall cash flow. Conducting a monthly review allows you to stay on top of your business's financial health throughout the year rather than being surprised with the bottom line at tax time.
You've put a lot of hard work into your start-up. By understanding and implementing basic accounting principles, you will empower yourself to make the best decisions for its future.