So Timmy has decided that it's time to start the business of his dreams. Naturally, he uses his personal savings to fund early brainstorm sessions, computer equipment, and whatever necessary to fuel the budding flame of his entrepreneurial vision. When he finds time, he stuffs all of this personal and business receipts into several shoeboxes.
Months later, Timmy decides it's now time to open a business bank account. He scrambles to write checks to his vendors and employees based on what checkbook he has with him, often paying late fees after forgetting when his bills are due. As tax time rolls around, he calls a friend who majored in accounting in college to help him sort through his endless piles of receipts and the mess that he's created in just a few months. Timmy has long forgotten which receipts are personal or business-related, so his financial history and P&L reports are unreliable and inaccurate. He prays he won't get audited.
Too many entrepreneurs fall into bad habits the second they embark on a new business venture, leaving behind a wake of muddled and commingled finances. The result is often a huge waste of time, resources, and high accounting cost, not to mention vulnerability during an audit. Here are some tips to avoid sharing the fate of poor Timmy:
1. Know the costs. Once you conceive of your business idea, spend some time brainstorming all of your business costs. Don't forget the costs that are related to preparing a business plan or establishing an office space - even if your business isn't officially established. (Before this step, you should consult with a professional about how to establish your business (S Corp, LLC, etc.) This will help you identify your business expenses and prevent you from mistaking personal expenses for business expenses in the future.
2. Open Business Accounts ASAP. We advise all entrepreneurs to open a separate business checking and savings account immediately after opening a new business or startup company. This crucial step enables you to keep your business finances simple, separate, and straightforward. It is not illegal to conduct business from your personal accounts. However, if you choose to conduct all business with your personal account, the IRS may feel inclined to view your business as a "hobby" instead of an actual business.
3. Use the right card. No excuses. Accidental usage of your business credit or debit card for personal expenses creates more work for you and your accountant, so just discipline yourself to use the correct card every time. If you have trouble remembering which card to use, mark the correct card or even open a card at a different bank to ensure you won't have to untangle the mess later. Err on the side of caution if you are unsure, or consult with a professional (see below).
4. The business card is not your income. As a business owner who may or may not be taking regular withdrawals to earn a monthly income, it's easy to think of personal purchases on the business card as your income. This is bad. Do not make this a habit, and do not cut corners. When you need to take an "owner's draw," as it's often called, always make the transfer for the amount you need from your business account to your personal account. Here's an example of an iffy situation: you have some checks payable to your business, but you are planning on making an owner's draw transfer shortly. So, you deposit the business checks directly to your personal account. This may save a few minutes now, but later will require extra documentation and cause confusion during tax time.
5. Go paperless. The age of receipt hoarding in shoeboxes is coming to an end, and new entrepreneurs should consider the benefits of running a paperless office. More paper means file management and organization, and who has time for that? To track your receipts, try mobile applications (inDinero will be releasing our iPhone application next year!) or even just snapping receipts with your mobile phone after a business lunch, etc. For legal documents and receipt management, consider using programs like Dropbox, Shoeboxed, and Echosign.
6. Embrace electronic payments and online invoicing. Bill payment nowadays is made easy with automatic debit, and it saves business owners time and relieves them of having to remember to pay bills. However, more business owners are still sending their clients paper invoices and waiting months to get paid, which is why new entrepreneurs should seriously consider online invoicing and offering electronic payment. At inDinero, we've met business owners who have even managed to completely eradicate paper check writing, and it's made their books that much simpler. Goodbye scavenging through check register! To find out more about going paperless and online invoicing/bill payment services, check out my previous post about new small business cloud applications.
7. Recruit great advisors. New entrepreneurs, naturally, have questions about their business finances, but due to fear of cost or lack of foresight, many only seek help once it's too late. Quick access to a legal advisor or a trusted CPA can make all the difference when you're starting a business. Don't wait until tax time or a legal debaucle to start making connections with legal and finance professionals; build relationships early, and you'll benefit not only with their advice but also their networks in the long run.
Andrea B
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