If you’ve been following along with our Business Basics plan, by now you should be open for business (with an idea, a name and your legal bases covered), and so it’s time to start handling all the cash money you’re planning to make (and… eeek… spend). Today, we’re taking you through our best—and simplest—practices for managing your new business’s finances.
First things first, it is crucially important to completely segregate your business’s cash flow from your own personal. While your significant other may be the only one who cares if you get sloppy with your personal accounts and bookkeeping, the IRS will definitely care if you are sloppy with your business bookkeeping. Lack of proper accounting and trouble with the IRS are two of the top reasons new businesses fail.
Start by setting up two basic accounts with the bank: simple business savings and checking accounts. I recommend using a bank you already do business with for this – if you have an existing relationship, you can usually get them to waive any fees that may be associated with the account. Get a debit card with the checking account, and if desired, a basic checkbook. (Expensive business checks are totally unnecessary at this point.) To set this up, your bank may require you to obtain an EIN from the IRS, which can be done in about 30 seconds by clicking the link at the bottom of this page.
Now, here are the rules. All money that comes into your business goes immediately in through the checking account. All money that goes out of your business (to pay expenses like overhead and materials) goes out of the checking account, via your debit card and/or checkbook. Anything that’s left in the account is your profit. Profit is what the government will tax. When you’re ready to pay yourself, determine the total amount you will be withdrawing (gross pay). Transfer 75% of that to your personal checking account and 25% to your business savings account to cover your payroll, self-employment and income taxes.
Note: you may be required to file and pay quarterly estimated income taxes, depending on the size of your business. Consult a CPA regarding your specific situation.
You’ll also need to properly track your business finances for both the IRS and your own data. Unless you’d like to create the Excel spreadsheet from Hell, I strongly encourage you to purchase an accounting software that syncs with your bank accounts. While I recommend use Quickbooks Online Simple Start, there are many other quality options available.
If you need a quick refresher (or a beginner’s guide) to business accounting, or help setting up your Quickbooks account, I recommend Lynda.com’s courses in accounting.
The Point of Sale
Finally, you’ll need to consider how you’re going to be accepting money from your customers. While cash and checks are easy to accept in person, you will need to make sure you’re keeping excellent records of payments owed and received. Your accounting software can help with that. Additionally, you may wish to accept credit cards for in person, over the phone or online. For in person credit card sales, most small businesses will be happy with a mobile card reader that plugs into a tablet or phone. Quickbooks Merchant Services, your bank and companies like Square are all good places to find these. Most online accounting software will have an optional payment processor and/or integrate with PayPal, so you can easily accept online payments. To sell products via an online (ecommerce) store consult a web designer or developer for help getting started. (We’d be happy to help!)
A word of advice: don’t spend too much time obsessing over payment processing rates. While rates can vary as much as 2-5%, this will not make nearly as big an impact on your bottom line as delaying your start while you research and negotiate. Find a payment processor you can live with, get moving and revisit the issue when your sales start booming.
Get your two business accounts set up and a decent accounting program in place before you start accepting payments from your customers. I know. So unsexy. But so, so, so worth it.