So you’ve always had the idea and dream of starting your own business and you are financially/professionally ready to put it into action. It has taken a lot of hard work and determination to get to this point and your next steps are crucial to the longevity of your new entity. Whether you took accounting in college or used it throughout your professional career, there are a several items to highlight in order to start your new business on the right foot.  To make sure your accounting for a new business efforts are a success, follow these five tips.

Open a business bank account / Establish a line of credit

The first step in accounting for a new business is opening a business bank account.  Having a separate bank account from your personal finances will make it much easier to track expenses and will certainly come in handy come tax season. As a matter of best practice, you should do this for all entity types, with some exceptions for certain low-risk sole proprietorships. Next, you will want to start establishing business credit, which, like a personal line of credit, takes history to increase. It is wise to shop around different banks / credit card companies to see where you can get the lowest interest rate possible. This will also help you build liquidity (cash and unused line of credit) for purposes of growing your business.  Even if you don’t need the capital today, it’s always good to have it available in case you are presented with a unique opportunity for business growth that may require excess capital.

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Keep accurate and reliable records from the start

The second step with accounting for a new business is tracking your income and expenses.  Now that you have set up a bank account, it is important to track every business related transaction you make. Bank statements simply aren’t enough as you cant view all of your expenses / earnings from a glance and able to cut or allocate funds accordingly. There are plenty of software programs that will aid and assist you in doing so such as Quickbooks Online, Xero, Freshbooks, Zoho Books, etc. These will allow you to group financials in certain categories and can create balance sheet / income statements for you on demand. Having this established from the start will save you a lot of time in the future, especially during tax season or during an audit.

Keep cash on the balance sheet

A common mistake startups make when accounting for a new business is aggressive spending without monitoring the cash on hand. A standard accounting practice is to have at least 3 times 1 months operating expenses on hand at all times. Figure out what that amount is and begin to create a goal to have that cash balance in your account at all times. This helps ensures liquidity and allows for stability during economic downturns or periods of seasonality.  Further, it can help avoid uncomfortable conversations if you suddenly discover your poor cash management will cause you to miss payroll for your employees.

Create a budget, forecast forward and compare year end results

A good way to measure and achieve success is by planning yearly goals and projecting income statements from the beginning. Just setting a sales goal is not enough. Try to create a full income statement projection for a certain period and try to budget each expense group. This will drive you to regularly evaluate business performance and see where mistakes are being made. It’s important to reflect after periods to see different trends in your business and to fix problems before they can grow any larger.

Understand your tax structure / obligations

The structure of your new business and how you pay employees, or general contractors, will greatly impact you tax obligations. Setting up the correct type of entity from the start is important in order to pay the lowest amount possible for your specific company. There are many different types of websites that can handle this for you, however, it is greatly encouraged to seek out a tax specialist to make sure it is filed correctly as errors can lead to overpayment and potential legal issues. The three main different types are listed below:

  1. Corporations are taxed on income and gains but also allow for a net operating loss carry over which can be used to reduce taxes the next 20 years following a year in which a company loses money.
  2. LLC’s use a flow through method where members are subject to tax implications at the individual level instead of the entity itself.
  3. S-Corporations also use a pass-through method where income is divided amongst the shareholders (100 maximum) who pay federal taxes individually. A separate election to be taxed as an S-Corp needs to be made, and there is a deadline for doing so!

In conclusion, establishing good accounting practices when accounting for a new business is essential for any new venture. Launching your company correctly and creating good habits from the start are keys towards your overall success.

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