Starting a business comes with all sorts of challenges. It takes passion and perseverance to succeed. But somehow, every bit of struggle is worth every milestone you reach.
One of the first challenges of starting a business is getting on top of the accounting tasks that come with owning a business. You want to start right to avoid major accounting issues down the line.
Here are the accounting steps to covering all your bases in managing your finances:
Regardless if you have registered your business as a partnership, corporation, LLC, or sole proprietor— having a separate bank account for your business is highly recommended.
Do note that LLCs, partnerships, and corporations are legally required to have a separate bank account for business. Although sole proprietors are not required to do this, it is still advisable since having a separate bank account keeps your records distinct.
It will help your business create a strong financial profile for creditors and investors. On top of that, dealing with taxes will be so much easier.
Bookkeeping is the process of recording financial transactions for a business. To ensure the reliability of your records, you need to ensure that your bookkeeping process implements effective and accurate expense tracking.
Keeping close track of your expenses helps you monitor the growth of your business, prepare financial statements, track deductible expenses, and prepare tax returns.
Keeping and organizing your receipts and other records is a great way to track your expenses.
Some of the most common expenses that you should pay attention to includes:
Note that if you use any of these items for personal reasons, you need to calculate what percentage is used for business– this may apply to cell phone and vehicle expenses.
Bookkeeping involves recording daily transactions, categorizing them, and reconciling bank statements. On the other hand, accounting is the process of analyzing business growth by studying the data compiled by the bookkeeper through producing financial statements.
There are three ways you can manage your records.
Startup businesses usually start with just a couple of employees which makes managing their payroll relatively easy. However, as your business grows, you will eventually need to expand and hire new members of the staff.
Time will come when you can no longer manage payroll on your own. You can hire a professional or try several payroll software to make the job more manageable.
You need to set up a payroll schedule and make sure that the business is withholding the correct taxes from the employees.
Regardless if you are selling a product or offering a service, your business needs to get paid. You need to determine how you want your clients to send their payments.
For brick-and-mortar businesses, cash and credit cards are the usual options. Checks are also an option for bigger transactions. However, if you are running an online business or an e-commerce business there third-party payment processors like Paypal, Payoneer, Stripe, or Square. Keep in mind that third-party payment processors charge fees per transaction.
Sales tax for brick-and-mortar stores is straightforward. Customers for physical stores pay sales tax of whatever state or province they purchase regardless of where they live. Meanwhile, online sales can be a little more complicated than that.
If you offer your product online, then you need to determine if your business operates in an origin-based state or destination-based state.
If your business operates in an origin-based state then you must charge sales tax based on the state where you run your business, while destination-based means that it will be applied based on the purchaser’s location. However, take note that international purchases are tax-exempt.
You can determine your tax obligations based on the legal structure of your business. For instance, sole proprietorship, LLC, and partnership mean that you are self-employed, therefore– you need to claim business income on your personal tax return.
If your business is a corporation, then your company is a separate tax entity which means it will be taxed independently from owners.
Gross margin represents the total sales revenue the business keeps after it incurs all direct costs to produce the product or service.
Calculating your gross margin helps you understand where your business is in terms of progress. Improving the gross margin of your company will result in more income.
You can calculate your gross margin by using this formula:
Gross margin (%) = (revenue – COGS) / revenue
Note: COGS or cost of goods sold is the cost incurred in producing your products which normally includes materials and direct labor costs.
You may want to do a lot of things yourself when you are starting. However, things have to change as your business grows since it tends to get more complicated down the line.
You will eventually need to hire accounting and financial professionals to help you gain more control over your money.
Your methods should grow with your business. You may start with simple tools and processes, but you need to upgrade your methods as your business expands.
Getting on top of your accounting tasks should be one of your priorities when starting a business. Effectively keeping track of your transactions and analyzing your data can help you understand your company’s progress and foresee where it is going.
Organizing your finances will contribute to your success as your business grows. Running a business can be overwhelming, but with the right mindset and a plan in hand– you will be able to manage.