Unless you happen to be an accountant, just the word ‘accounting’ may make you fearful – or at the very least, a bit nervous. Accounting is one of those things most startup founders know they have to address right out of the gate, yet they tend to push the task aside as they busy themselves with the plethora of other things that must be done.
Because money is the lifeblood of any business, it’s imperative that it is managed well since if it’s not, the business is doomed to fail. While the obvious solution would be to hire an accountant, most startups simply don’t have money to do so, at least not in the early stages. Even if you could afford to pay an accountant and push the financial duties off on this person, it’s still important that you understand the basics of accounting because it’s an important part of running a business.
Here are some basic accounting tips any new startup can use to get off to a good start concerning business finances.
Keep Your Business and Personal Accounts Separate
It’s common for business owners to intertwine their business and personal finances because it’s an easy thing to do. But this is a big mistake as mixing up the two can lead to nothing but problems when the taxman comes calling. This is why you should keep your business and personal accounts separate, even if you initially think that they’re one and the same because after all, you are your business.
You can start this process with your bank by opening a business checking account. If the IRS has a question as to whether an expense was personal or business, the first thing it will do is check to see if you have a separate business checking account. If you’re using an accounting software program, set up two separate systems there – one for personal and one for business. This is a smart thing to do for both tax reasons and for keeping you well organized. When you keep good records all year long, you will have proof of your business expenses if you do get audited plus you’ll be able to sleep better at night.
Get a Business Credit Card
Even though lending requirements for businesses are stringent, try to get a business credit card. Just like the separate checking account, a credit card will help you keep good track of your expenses while providing you with something to show the IRS in case of an audit. Just don’t make the mistake of using your business credit card for personal reasons. Also, don’t allow yourself to make impulse purchases with your card just because you have it.
Stay on Top of Your Receivables
Getting paid is one of the most gratifying aspects of running a business but what’s not so gratifying is keeping track of incoming payments. However, it’s imperative that you stay on top of your receivables. As soon as you receive a payment from a customer, it should be applied against the invoice you sent to mark it as paid. If you fail to do this regularly, when tax season comes you’ll inevitably be spending lots of time trying to figure out a receivables report that makes zero sense. To get around having to manually update invoices that are paid, think about using a combination of cloud accounting software and accepting online payments as this will automate the receivables process and help you get paid faster.
Save Expense Receipts
Failing to save expense receipts will lead to all types of problems including tax issues, accounting nightmares and cash flow problems. While it may seem like a big hassle to have to save every business expense receipt, it’s really not difficult to do if you organize yourself. A good way to keep your business receipts separate from your personal receipts is to do something as simple as keeping an envelope handy that you can put your expense receipts into instead of stuffing them in your wallet or bag. Then go through these receipts weekly or monthly and either file them away to your tax folder or save digital copies of them.
Choose the Right Accounting Software and Use It
As a business owner and not an accountant, you’d much prefer spending your time running your business rather than getting stressed out over having to manually update ledgers, track expenses and create reports. This is why you should make use of accounting software that makes these tasks much easier to carry out. If you choose the right software and use it correctly, your life will become much easier. There are two basic types of accounting software: industry-specific and generic. While the first option offers more customizable features, it’s usually more expense both in terms of buying it and when requesting on-going support. Therefore, most startups go with generic software as it’s easy to use and affordable. Once you’ve chosen your software package, remember that there’s a learning curve associated with using it so be patient, stick with it and know that it will get easier with time.