When starting a business, it’s important that you understand how to set up your business’s finances. In this article, we’ll cover the basics to set your business up for financial success.
Set Up Your Bank Account
You will want to open checking and savings accounts. It’s best to use the checking account for regular expenses and receiving payments, but you will want to use the savings account to organize funds and plan for taxes. A good rule of thumb is to save 25%-33% of your income for business taxes. We recommend transferring that amount every time you process payroll. You may be able to automate this process, too, so ask your bank.
Remember: You don’t want to mix business and personal expenses in any form. Having a business account is not only beneficial for tax purposes, but it also helps you proactively monitor profits.
How will you pay for supplies, outsourced services, payroll, and more? From the beginning, it’s best to budget, which means tracking your income and expenses. Obviously, you want to make more than you spend, so budgeting from day one helps you stay on track and adjust expenses according to your needs and income.
Budgeting is the foundation of accounting as it will later allow you to pay your bills, create financial statements, and grow your business.
As you begin budgeting, it’s also important to create a process for organizing your important documents, such as W-9s and receipts. Then, make a habit to budget and organize important documents to ensure that your business is financially healthy.
Part of budgeting is calculating gross margin, which will enable your business to thrive and grow.
According to Shopify, gross margin “represents the total sales revenue that’s kept after the business incurs all direct costs to produce the product or service.”
To calculate gross margin, you need to know your revenue and the cost of goods sold, which includes the material and labor costs it takes you to produce the products or services you provide.
Shopify offers this formula:
Gross margin (%) = (revenue – cost of goods sold) / revenue
Armed with a plan, it’s time to develop the infrastructure that will enable your business to pay bills and accept payments.
Business-wise, you will need a physical and/or digital storefront as well as hardware, such as computers, software, and an internet connection at the very least.
To set up the infrastructure for your accounting processes, you will need payment processing and payroll processing software. If you have a physical storefront or a local services business, you will also need payment processing hardware (e.g. card reader).
Collaborate with Your Team and Clients
If your small business is a one-man or one-woman show, then we recommend having an accountability partner to help you stick to your budget and work through your business goals on a regular basis. This may be an accountant, friend, spouse, coach, or someone else you trust to provide excellent financial and business guidance.
Regardless of how large your team is, you need to collaborate with clients. This means being transparent about pricing, firmly requesting on-time payments, and enforcing company policies.
If you have a team, large or small, then it’s important to collaborate with everyone on your team. Create procedures for your team to clock hours, submit vacation requests, submit receipts, request pay raises, and more – and follow-through with those policies. Remember to get feedback from your team members about these procedures; over time, they may need to be updated. The larger your team, the more guidance you will want from an accountant on what policies to establish in regards to payroll and other accounting matters.
Did you know that small business owners typically spend 21-120 hours per year on bookkeeping and tax preparation?
That’s why many business owners outsource these tasks. Business owners who outsource understand how valuable their time is. By outsourcing tasks like accounting, business owners can focus on what they do best and run their business.
However, it’s important to note that even if you do outsource accounting matters, you still need to keep an eye on the books. This best practice applies to nearly every area of your business. Even if you don’t do the day-to-day accounting, marketing, information technology, and human resources tasks, it’s best to have your finger on the pulse of what is happening in each area.
To help you determine whether you need an accountant, a Certified Public Accountant (CPA), or a bookkeeper, read this article.
Prepare for Tax Season
We already covered some of these tips, but they bear repeating:
- Save at least 25% of your income for taxes
- Get a W-9 for each payee
- Keep your receipts
Whether you are preparing for the next tax season or filing late, we can help you file your 1099s, 1098s, ACAs, and W-2s. Sign up for a free eFile360 account here. Your information will be securely saved year after year for easy reference.
Re-evaluate and Refine
As your business changes and grows, it’s important to re-evaluate and refine your processes often. You may find that different software or partners who worked well for you before no longer serve your business’s needs. With that in mind, remember that your budget and accounting processes can, and will, change.