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How to Untangle Your Business Finances

Chapters

1. Bookkeeping

A bookkeeper plays a pivotal role within a small business. They’re responsible for a variety of tasks, but their main focus is on the organization, recording, and reporting of the many financial transactions that make up the operational life of a small business. Nowadays, modern bookkeepers have extended their range of duties to include:

• Training clients to use accounting software.
• Implementing document management and inventory control processes to create and improve efficiencies within the business.
• Implementing POS (Point of Sale) systems that will capture the daily transactions in a retail environment.
• Developing, implementing, maintaining, and reviewing internal business processes
• Any other area of specialty that your bookkeeper might possess. (In fact, it’s smart to inquire about your bookkeepers special skills when you’re hiring for the position.)

WHAT DO BOOKKEEPERS DO?

There are many tasks a bookkeeper must undertake to keep your business running smoothly. Here are just a few of them:

Track daily transactions: Bookkeepers handle the recording of day-to-day bank transactions. If your accounting software has daily automatic bank feeds, this is an ideal tool for your bookkeeper. When your bank statement lines are fed into your accounting software, it’s significantly easier to keep an eye on the business’s cash flow—it will also save time spent on data entry.
Send invoices and manage accounts receivable ledger: Typically, preparing and sending invoices to clients falls under the bookkeeper’s responsibility. Managing the accounts receivable ledger, as well as chasing late payments, is also part of their job.
Handling the accounts payable ledger: While there’s typically a cap on the dollar amount, many bookkeepers make payments on behalf of the business. These payments include expenses, supplier invoices, and petty cash.
Keeping an eye on cashflow: This is one of the bookkeeper’s most important tasks. Ensuring that the company’s day-to-day money doesn’t run out is accomplished by watching the balance of revenues to expenses. If they notice a problematic pattern, they take action or offer advice if it appears that the company requires more ready cash.

The bookkeeper’s role in the organization is to undertake the day-to-day work so the accountant can concentrate on strategic financial operations. Bookkeepers are an integral part of any business—without them, accountants can’t do their jobs.

HOW WILL YOU VIEW YOUR BOOKS?

CASH VS. ACCRUAL

Business owners need to determine whether they’ll use the cash or accrual method of accounting. Let’s take a look at the difference between the two methods here:

Cash Method: Expenses and revenues are both recognized during the month they are actually paid or received.
When your business works with the cash basis of accounting, you simply record your income as it’s received, just as you record your business’s expenses as they’re paid. Keep in mind, this isn’t pertinent to accounts payable or receivable; rather, it’s only applicable to payments from clients when you get cash in hand and expenses as soon as the transaction clears your business’s bank account.

Say, for example, you invoice a client for $5,000 on February 1, and receive payment on March 15. You would record the income you received in March’s bookkeeping—not February, when you invoiced the client. March was when the money was received.

For many small business owners, the cash method of accounting is the easier of the two bookkeeping options available to them. Why? Well, for small businesses, it’s simpler to track money as it moves in and out of their bank account. For one thing, they don’t have to record receivables or payables; additionally, the business doesn’t have to pay income tax on any revenue until it’s actually deposited into their bank account. For all its good points, there is a downside to using the cash basis of accounting. It can produce a false overall picture of your financial picture. This method doesn’t account for all of your business’s incoming revenue or outgoing expenses, which means that it can lead you to believe you’re having a very high cash-flow month. In truth, your cash-flow is a result of the previous month’s work.
Accrual Method: When you utilize the accrual method, your business’s revenues and expenses are recognized as soon as the transaction occurs, whether the cash has been deposited in the bank or not. It’s more complicated than the cash method, as it requires tracking payables and receivables.

Let’s continue with the example we used above, but apply the accrual basis of accounting. You would record the $5,000 as income in February’s bookkeeping versus March, when the funds actually land in your bank account.

The advantage to the accrual method is that it provides a more realistic picture of the small business’s income and expenses during a designated time period. You and your accountant will better understand exactly how successful your business is as well as where it’s heading in the future.
The downside to the accrual method is that the funds that are available in your bank account aren’t included in your accounting. If your bookkeeping practices aren’t spot-on, the practicing accrual-based accounting might be financially catastrophic for your small business. Your books could show that you’ve got a hefty stream of revenue, but your bank account would tell a very different story.

WHAT’S BEST FOR YOUR SMALL BUSINESS?

The cash method of accounting is decidedly the more straightforward of the two methods, which makes it appealing to small business owners who value simplicity. The accrual method requires more bookkeeping simply because you’re forced to do a lot more tracking and recording.

So long as your sales don’t total more than $5 million per year, small business owners may use the cash method or the accrual method—it’s your choice. But, if you have merchandise in inventory that you sell to your consumers, you’re required by the IRS to use the accrual method.

There are pros and cons to both methods. While the accrual method accounts for money that’s yet to come in, you’ll get a better picture of the funds in your bank account if you use the cash method. The accrual basis offers your small business a long-term view of your finances, but the cash basis provides an upto-the-minute look at your financial picture.

Some small businesses decide to use a hybrid method of accounting, allowing them to take advantage of the benefits of both the methods, using accrual accounting for inventory and the cash method for expenses and income. If you’re wondering which accounting method would be best for your small business, speak with your CPA or tax professional.

SPREADSHEETS VS. A SYSTEM

Google Sheets, Excel vs. Quickbooks, Xero If you only take one piece of advice from this guide, let it be this: if you don’t have a clear picture of your business’s financial health, you’re not making as much money as you possibly can—money is being left behind. Period. For the health of your business, it’s time for you to begin using some form of accounting software, such as QuickBooks. When you avoid the time-consuming and cumbersome Excel spreadsheets, you’ll save time, money, and your sanity.

Accountants are, at heart, financial doctors. We spend our days monitoring the pulses of small businesses everywhere, and we want to share some of the most common accounting habits (good or bad) we encounter regularly in small businesses—the habits that sometimes hold small business entrepreneurs back from achieving their full potential.

Accounting with Excel is the wrong move. A prominent accounting issue: using Excel to track expenses instead of an option like QuickBooks, Xero, Wave, or Kashoo.

As you might imagine, we encourage you to use accounting software because we know it will make your business game stronger. However, before we start to compare and contrast Excel to QuickBooks or any other accounting software, we have a question for you:

If your car broke down tomorrow, would you call up your cousin and ask him to watch dozens of hours of YouTube videos, and then try to revive the car together? Or would you consult a mechanic—an expert—so you don’t have to reinvent the wheel (pun intended) yourself? You need a mechanic to fix your car right the first time, just as you need accounting software to improve your small business’s accounting practices.

Accounting Software Beats Excel Every Time

Still not sure? Here’s a rundown of some of the pros of working with accounting software versus old-fashioned Excel spreadsheet tracking.

1. Accounting software is created by accounting professionals. With Excel, you’re on your own when it comes to process design. If you’re not an Excel expert, this could be rocky at best.
2. Accounting software enables users to create reports that will aid you in your high-level business planning—reports such as a profit and loss sheet. Excel users are forced to create these reports manually, which is time-consuming.
3. Excel users make formula errors, which can put a definite wrench in your accounting. Alternately, accounting software will take care of the math automatically, so you’ll have accurate reports every time.
4. Accounting software will create an audit trail for your business. There’s a record of every activity, regardless of who does it or when they do it, unlike Excel, which doesn’t have the capability of creating an electronic record of activity.
5. You can send invoices electronically if you adopt accounting software. Conversely, if you want to send, receive, and resolve payments through Excel, you’ll need to create an entirely separate system.
6. When you trust your important accounting systems to Excel, you’re faced with one big question: Who is in charge of your business’s Master Spreadsheet? How can you be sure that the version you’re looking at is the most current version? If multiple people need access to the spreadsheet at once, what will you do? With Excel, you’ve got to waste time sending the current spreadsheet back and forth via email. Accounting software, on the other hand, allows users to sign in to the program online, regardless of which device you’re using. You can be confident that you’re looking at the most current numbers.
7. An accounting system enables users to work on the go. You can use your smartphone or tablet to work anywhere, anytime. However, Excel doesn’t cooperate with mobile devices. You’re stuck at your desktop or laptop.
8. Should you decide to bring in an outside professional accountant, they’ll be able to instantly jump in with your accounting software—there will be no need to spend a lot of time bringing them up to speed. However, if you’ve created an Excel spreadsheet from scratch, it will take more time for them to figure out your processes.

Benefits of the Cloud

For new businesses, starting fresh with a cloud solution is as easy as signing up. Established businesses, however, will need to plan their migration carefully to ensure that critical data is kept intact and everything continues to run smoothly. Major cloud accounting providers will allow seamless transition from their older, more traditional desktop-based solutions. Many business owners who migrated to cloud accounting technology have reported cost savings and greater efficiencies in day-to-day operations.

Here are the top benefits to consider when researching cloud accounting solutions:

>1. Safe storage of financial data

Cloud accounting technology can provide a more secure method of storing financial information than desktop-based software. Data is routinely backed up to servers in multiple locations by the SaaS provider, and there are no physical hard drives or computers containing sensitive data that could be stolen. Financial information isn’t kept on the premises, so the risk of fire or natural disaster is mitigated.

>2. Sync data automatically

Cloud accounting software does the heavy lifting so you can spend your time on other important business tasks. Automatically sync your bank accounts, so you won’t have to go through the trouble and inconvenience of manually importing transactions or verifying expenses. If 84% of businesses using cloud software are cutting their application costs, it’s an excellent indicator that, with the adoption of online accounting, you can, too.

>3. Pay as you grow

Growing pains are a common malady among small businesses, forcing them to choose software based on the potential for future growth. Cloud accounting software enables these forward-thinking businesses to purchase the software they need for the moment, but offering them the opportunity scale up their spending as they grow. This includes adding more storage space, users, and additional advanced features. Many business owners who migrated to cloud accounting technology have reported cost savings and greater efficiencies in day-today operations.

4. Multi-user access

In your business, it might eventually become necessary to outsource certain tasks. Implementing cloud-based accounting software will allow your business to scale as needed, but in a more cost-effective and controllable way.

Cloud accounting’s convenient multi-user feature allows businesses to offer access to financial records and bookkeeping processes to different employees. Bonus? They can work remotely, which is an increasingly necessary feature in today’s work from-home culture. This will not only streamline your business’s workflow, but it will also give you the opportunity to ask accountant any question you might have directly. You’ll have the most current information right in front of you.

5. Data accuracy

Cloud accounting programs are more accurate. Why? It’s simple. They streamline vital data-importing processes, thus removing the possibility of any double-entry mistakes as well as any other basic human errors that all-too-frequently occur.

6. Prevent unauthorized access

You protect your personal photos and Google documents from strangers; why would your accounting documents be any different? It’s downright dangerous to find unauthorized users have access to your accounting software. Simply require users to have login credentials for your cloud accounting software. This will keep any forbidden users from viewing or, worse, accessing your business’s sensitive financial information.

Periodic security upgrades and software updates are vital to ensuring that your software accounting programs are running at their best. Of course, cloud accounting software requires regular updates, too. While you’ll experience (only minimal) downtime for these updates, your cloud software will give you plenty of advance notice.

HOW WILL YOU GET PAID? WILL YOU ACCEPT ONLINE PAYMENTS?

One of the most efficient ways that small businesses maximize their sales (not to mention their success) is to offer customers a variety of payment options. When you do this, you’re not only giving customers the choices they desire, but you’re making sure that you’re actually capturing every sale possible. Though the options available for payment seem to increase every day, it’s important to develop a better understanding of many of the different ways customers might pay and determine which payment solutions might best fit your business needs.

One of the most efficient ways that small businesses maximize their sales is to offer customers a variety of payment options.

CASH

As the old adage says, “Cash is king.” That may be the case for many businesses, but is it truly applicable to your business’s customer base? Many businesses opt to rely on cash only for many different reasons—not all of them are exactly ethical. Some businesses opt for cash only to enable them to report less on their tax documents— needless to say, this is illegal and we discourage it. Not only will this put a target on your back when it’s time for tax audits, it can result in fines or even jail time. However, reputable businesses rely on cash only transactions, too. This is primarily because the merchant fees associated with processing credit and debit card payments are out of their price range. While you should definitely accept cash at your small business, it’s important that you give your customers more options.

CHECKS

While checks might feel like they’re going the way of the horse and buggy, but as long as there are customers who prefer to use them, businesses will continue to accept them. The challenge lies in determining whether the checks will have sufficient funds for the purchase, especially for small businesses. When a check bounces, it’s not just a drain on your bottom line, it can also lead to additional fees. If you decide to allow customers to pay by check, be cautious.

CREDIT CARDS

Credit card payments are second only to cash all around the world. Credit cards are convenient and simple, but this payment method does come at a cost for businesses. Most credit card companies charge an array of fees each time the card is swiped, including:

•Transactional fees—fees that are assessed with each transaction
•Flat fees—monthly fees
•Incidental fees—fees that are incurred under certain circumstances, including chargebacks

The market is overshadowed by superpowers Visa and MasterCard; they’re accepted all over the world. The runners up are American Express and Discover, but their high fees knock them out of contention for many small businesses. Regardless of which cards your small business accepts, most customers have come to expect that credit cards will be a valid form of payment for every business—failure to take credit cards can have a big impact on your business. Additionally, the latest updates to credit cards in the battle against fraud now put the onus on businesses to have the latest equipment—equipment that is compatible with smart cards or cards with the newest EMV chip technology. If your business can’t accept these fraud-reduction measures, the liability for fraudulent activity might land in your lap. NFC, or near field communication, technology is also becoming increasingly popular—this includes payment methods such as Apple Pay.

ONLINE PAYMENT

As online payments become the more secure and more convenient option for many customers, it’s smart for small businesses to hop on board. Not only is online payment beneficial for the customer, it’s also a less expensive, more reliable, and generally faster method of doing business. PayPal’s Venmo is one common method used by small businesses, as is Square Cash. Another method that’s been slowly gaining traction is Bitcoin, a secure payment solution that’s based on blockchain tech.

As online payments become the more secure and more convenient option for many customers, it’s smart for small businesses to hop on board.

Print Invoicing

Traditionally, businesses create invoices at the end of their billing periods. They’re printed, popped in an envelope, stamped, and finally mailed to the customer. While this is the way businesses have billed for decades, it’s not necessarily the most efficient way to do business. Creating the invoice is time-consuming, and relying on the postal service to deliver the invoice to the customer isn’t exactly a timesaver— and that’s if the invoice actually reaches the customer. Then, you have to wait for the customer to process the invoice, and eventually the invoice is paid. Beyond the issues with sending the invoice, there are inefficiencies related to redundancies in the process. For instance, most businesses are forced to enter customer billing information at least twice—once per account, and once per invoice. Additionally, you have to create templates for each client to be sure that you’re meeting their individual billing needs. You’ve also got to keep track of the invoices you’ve sent and whether they’ve been paid or not. This is especially challenging if you’re doing it manually, keeping them in a folder or on your computer’s desktop. Even if you decide to cut out the post office middleman and send your invoices via email, you won’t be reducing your workload by much.

Online Invoicing

Fortunately, there is a solution to the ongoing problem of invoicing. Online invoicing makes it easier than ever to send and track invoices as well as receive payment in a timely manner. You’ll not only save time, but you’ll also save money. Online invoicing will benefit your business in the following ways:

1. Invoice Immediately

If you’re accustomed to sending your invoices at the end of the month, consider speeding up the process. After all, the sooner your customers get the invoice, the sooner you’ll get paid. Invoicing software will aid in this by offering:

•Direct invoicing—If your software automatically sends an online invoice, you won’t have to pay an employee to do it for you.
•Scheduled invoicing—You can easily set up your software to automatically send invoices on specific dates without any additional effort on your part. Your software will generate and send the invoice to the email address you’ve added to your customer profile.
•Invoicing anywhere, anytime—On the road? Invoicing software will allow you to send your invoice when you’re away from the office. You won’t have to wait until you’re back at your desk to finish your billing.

2. Improve Invoice Tracking

Ok, you’ve sent your invoices to your clients… now what? Most businesses simply check their bank accounts on the due date to see if the invoiced clients have paid their bill. Then, they start the arduous process of dunning the tardy clients. Invoice tracking is absolutely key for a small business; failure to track invoices can lead to neglected bills that might go unpaid forever. Online invoicing ensures that these payments don’t fall through the cracks. Your business will be paid what it’s owed, regardless of the size of the payment due.

Online invoicing makes it easier than ever to send and track invoices as well as receive payment in a timely manner.

3. Expedite Payment

Your small business depends on the rapid payment of your customers’ bills. Invoicing online will significantly decrease the time between sending the client an invoice and seeing the payment land in your bank account. You’ll find software can offer:

•Same-day delivery of invoices—You won’t have to wonder whether the invoice got to the client or not. In fact, there are also softwares available that can provide you with a read receipt when the client opens the invoice.
•Utilization of payment services—When your software offers the option for online payment, you won’t have to wait for the client to drop a check in the mail. In fact, many softwares offer clients the ability to “Pay Now” as soon as they open the invoice. It’s convenient for the client, and ensures fast payment for your business.
•Improved security—In this age of increased cyberfraud, it’s important that your clients feel safe making their payment. Online invoicing offers special encryption that offers an extra level of security for wary customers. When clients trust that their confidential data is safe, they’re more likely to pay in a timely fashion.

4. Save Time and Money

Regardless of who is responsible in your organization for sending invoices, that person is being paid to do the work. When you have software that can send the invoice automatically, that will free up the time (and the money) to be spent on other tasks.

You won’t have to worry about the complicated management of cashflow or accounts reconciliation, and you can easily track cashflow by sending clients their invoices on a routine schedule.

You’ll be free of the shackles of paperwork, and your software can generate invoices without you needing to dig out old invoices to model this month’s invoice on, not to mention the pain of numbering the invoices—your software will always remember where you are in the sequence.

REDUCE YOUR PAPERWORK

While the arrival of the paperless office has been forecast for years, but most small businesses haven’t gotten there yet. They produce reams of paper that must be handled every day—it’s got to be carefully stored, indexed, and archived, and it’s going to take up a lot of valuable real estate.

Some offices are combating the onslaught of paper by scanning and converting their documents to PDF and then shredding the original papers. But while this makes it more convenient for the future, it’s very time-consuming for the present.

If you use online invoices from the beginning, there will be no paper to store; instead, all your invoices will be neatly archived and stored electronically. While your office probably won’t be able to boast that it’s paperless, online invoices are certainly a step in the right direction toward becoming a more environmentally-friendly operation.

EASIER PAYMENT

When you go about it properly, sending online invoices promptly will incentivize your customers to pay their bill faster. Here are additional tips to help facilitate payment in a timely manner.

•Provide reminders—Everyone’s busy, and nobody’s busier than a small business. A reminder wouldn’t go amiss, and could lead to quicker payment.
•Give a variety of payment options—You want to make payment simple; offering different ways to pay online invoices will make customers more likely to pay upon receipt.
•Go to the cloud—A cloud-based payment service will further improve the speed with which you’re paid— with the click of a mouse, the invoice will be resolved and the client can move on to other matters.
BEST PRACTICES FOR ONLINE INVOICING

We’ve gathered a few of the best practices that will help you make the most of your invoicing software.

•Take the time to set up your system—If you don’t ensure that every customer has a unique code attributed to them, and that their invoices aren’t assigned a set of sequential numbers, you’ll be behind before you even get started.
•Pick a day to send invoices and stick to it—Sending invoices whenever it crosses your mind is a recipe for disaster. Your clients will find it difficult to budget for it, and you’ll never know if you’ve actually sent them or not, wasting your time and losing out on getting paid in a timely manner.
•Charge a fee for late payment—It’s important that your clients understand that failure to pay on time isn’t acceptable. Be sure to note on your invoice that a penalty will be added to the charges if the payment is late. (That said, if a longtime client with an otherwise impeccable record slips up, offering a grace period would be the friendly thing to do.)
•Set up reporting perimeters—Today’s accounting software is equipped with many reporting options, so take the time to review them in advance. Then, you can choose the ones that are applicable to your business and create custom reports as needed. Run them monthly, and you’ll stay on track.

ONLINE INVOICING IS BETTER FOR BUSINESS

If your business is like most, your clients demand that you provide your services or products in a fast and efficient manner, and all too often with very little notice. It’s only fair that you expect the same when it comes time for payment. When you’re not wasting time chasing down late payments, your business has improved cashflow and you have the luxury of time to grow your business.

HOW WILL YOU KEEP TRACK OF YOUR EXPENSES?

MAIN RULE: CATEGORIZE EVERYTHING.

Organization is important, and nowhere is it more important than with your finances. Here are the five types of receipts that you must be sure to keep careful track of:

Meals and entertainment: Business isn’t always conducted in the office. Whether you’re meeting a client at a restaurant or cafe be sure that you save your receipt. Note who attended the meeting and the meeting’s purpose on the back of the receipt, and the receipt will serve as appropriate documentation.
Business travel: Unfortunately, the IRS has been burned too many times by people attempting to write off personal travel as a business expense. Keep your receipts and you’ll have a helpful paper trail to prove your activities were on the up and up.
Expenses related to your vehicle: Keep a scrupulous record of where, when, and why your vehicle was used for business purposes. You can apply the percentage of use to your vehicle’s expenses.
Gift receipts: Gifts can be tricky. For example, if you buy sporting event tickets for a client, but you attend the event with the client, it would be classified as entertainment, not as a gift. Be sure that you note the details on the receipt, so you classify the expense properly.
Home office: If you routinely use part of your home to conduct business, you can calculate the percentage of the house that you use for business. Then, you can apply the percentage to your home-related expenses.

HOW WILL YOU KEEP YOUR BUSINESS IN THE BLACK?

First, let’s define what “black” means in the business world. Basically, black describes the positive balance on a business’s financial statement. If a company is profitable, it’s said to be “in the black.” This means that the company has produced positive earnings after they’ve accounted for all of their expenses. If your company doesn’t achieve this profitability, it’s described as “in the red.”

BUDGETING

You recognize that a budget will help your business get—and stay—in the black. However, creating a budget that will line up with your business strategic plans is time consuming. All too often, businesses end up with haphazardly created budgets that inevitably leave out vital components of your spending or overestimate your growth, or worse—skip budgeting altogether.

Engaging an accounting professional to help you create a comprehensive budget is just good sense. They’ll have the experience and know-how to craft a budget that will take into consideration your plans for the year to come, as well as the current trends.

It’s also helpful to have the perspective of an outsider, particularly an outsider with accounting expertise. An accounting professional will bring up the questions that you might not even know ask. For example, have you budgeted for the increasing costs related to health insurance? What about the expenses related to new hires? An outside perspective will bring into focus details that have become so familiar to you that you might overlook them.

Whether your budget process takes a couple of days or a couple of weeks, you should bring an accounting professional into the mix as early as possible. They’ll have a better handle on what you’re trying to accomplish, and they’ll be able to offer some accountability so you’re done with your budget in a timely manner.

Nobody wants to create a budget, but putting it off can be detrimental to your business. It’s best to tackle it with help from a pro.

 

2. Payroll

HOW WILL YOU HANDLE PAYROLL?

Small business owners have a never-ending to-do list, so hiring employees to help carry the load is just good sense. However, when you transition from solopreneur to employer, there’s a new skill-set you’ve got to master quickly—payroll is at the top of the list. Here are the steps to making your payroll management as smooth as possible:

STEP 1: Collect all pertinent payroll information—Of course, you’ve got to get all of the paperwork required by law, such as the Form W-4, Form I-9, ID, and Social Security card. Additionally, you need to determine whether your employee will be hourly or salaried.

STEP 2: Find your payroll system—There are a variety of ways to process your business’s payroll. These include:

Manual payroll—While this might be the most cost-effective on paper, when you consider how much time it will take you to learn how to do it properly, you might realize that it’s better to opt for one of the other choices. While it won’t cost much up front—after all, all you’ll need is a calculator, a pencil, and the willingness to learn—if you make an error, particularly as you figure the employee taxes, it could cost you big time.
Specialized payroll software—This option gives you full control over your employee payroll without the steep learning curve of manual payroll. While it’s not as lowcost as the previous option, it’s definitely more cost-effective than hiring an expert, and it’s built for accuracy and speed, freeing up your time to do more to grow your business. We recommend the following options:
Intuit Payroll—This payroll service offers three tiers, ranging from basic (generating paychecks, tax calculations, direct deposit, reports for tax purposes) to full service (enter the hours, they do the rest), with a price point for every business. The cost is between $20/month +$2/employee/month to $79.20/month + $2/employee/month.
Gusto Payroll—Gusto offers three tiers as well, but their tiers are more comprehensive than Intuit’s. Even the most basic option offers Employee selfservice and health benefit administration. However, the price tag reflects that— the first-level Core service is $39/month + $6/person/month, while the top level Concierge service is $149/month +$12/person/month.
Outsourced payroll—Hiring a payroll accountant or payroll service is a definite timesaver. But can your budget take it? Outsourcing payroll is a big expense, even though you’ll know everything is done the right way by experts. You won’t have control over the intricacies of your employees’ payroll, either—if an employee has an issue with their pay, or needs to make an adjustment to their tax status, you’ll have to depend on someone else to handle it.

STEP 3: Process the payroll—The payroll system that you choose will have a big impact on how you’ll process your payroll. Regardless of the system, you’ll need to enter the hours worked for every employee and withhold the necessary taxes. When you’ve confirmed that the payroll is accurate, you send payment to your employees by the payment method of their preference.

When you transition from solopreneur to employer, there’s a new skill-set you’ve got to master quickly—payroll is at the top of the list.

3. Taxes

Small business owners are rarely tax experts—they save their expertise for their own industry! Unfortunately, taxes are a reality, and if you’ve got employees, you’ve got to manage payroll and income tax. Here are the taxes that every small business owner is required to withhold, deposit, and report from their employees’ gross pay:

Federal income tax—It’s your responsibility as a small business owner to withhold federal income tax based on the employee’s W-4 form. This is where they record their personal allowances. If you opt for payroll software or a payroll professional/ service, the amount withheld will automatically be calculated for you.

If you’re doing your payroll manually, you can find the wage bracket to determine how much to withhold. It’s important that you deposit your federal payroll tax payments on a semiweekly (for businesses reporting over $50,000 in taxes) or monthly (businesses reporting under $50,000 in taxes). Your schedule is determined by the IRS, and it’s dependent on your reporting of your tax liability on your Form 941.

Taxes are a reality, and if you’ve got employees, you’ve got to manage payroll and income tax.

State and local taxes—The location of your small business will determine how much you’ll need to withhold for state and local income taxes—or if you need to withhold them at all. Research your state’s requirements to learn what your responsibilities are in addition to the deposit and report schedule.

FICA (Federal Insurance Contributions Act) tax—FICA tax consists of two separate components—Social Security and Medicare taxes. Both the employer and the employee contribute to FICA, so it’s your responsibility as the employer to match the amount withheld for your employee.

Social Security tax is currently at a rate of 6.2% up to $127,200; this means that 6.2% of your employee’s wages are withheld for Social Security. Then, you pay 6.2% of the employee’s gross wages, for a total of 12.4% contributed toward Social Security. This is only applicable for employees who make $127,200 or less—that’s the cap for withholdings.

Medicare tax is currently at a rate of 1.45%. You withhold 1.45% of your employees’ gross wages, and then pay 1.45% of the wages, for a total 2.9% contributed to Medicare. Unlike Social Security, Medicare tax has no cap. In fact, employees making more than $200,000 (single), $125,000 (married filed separately), or $250,000 (married filed jointly) are required to pay an additional 0.9%. The employer is not required to match this additional contribution.

Like federal income taxes, you deposit and report your FICA tax on a semi-weekly or monthly schedule, depending on the amount of taxes you pay.

Employer-specific taxes—As an employer, you’re required to pay taxes on your employees’ wages. You’re responsible for paying FUTA (federal unemployment) tax as well as SUTA (state unemployment) tax. FUTA’s rate is simply a percentage of the first $7000 you pay to every employee who works for you. Your SUTA is dependent on the location of your business. FUTA must be deposited four times per year: January 31, April 30, July 31, and October 31.

4. Banking

As you start your small business, you might not consider the implications of separating your personal and business accounts. After all, when you’re the only employee, all the money’s going into the same place, right? Well, what happens when you start to grow, and you need to hire an employee or two? And what happens when the IRS comes knocking, with their hands outstretched for their share of your profits? Things could get tangled quickly, which is why we recommend that you follow one very important rule:

KEEP YOUR BUSINESS AND PERSONAL ACCOUNTS 100% SEPARATED.

Skeptical? Here are a few reasons why it’s important.

• Audit—Maintaining a separate account for your business will ultimately protect you. Say, for instance, that the IRS decides to audit your business. The burden of proof falls on you to fully disclose any of your business income and related expenses. If your profit and expenditures are enmeshed with your personal account, it’s going to take longer to determine—and be more difficult to prove—what’s business and what’s personal.
• Record keeping—Again, if you’re using the same account to pay your household expenses and your business expenses, it becomes challenging to sort what’s used for what. The IRS offers advice on what you should keep and how long you should keep it, and it’s going to be much easier to find what you need when you need it if it’s associated with a business-specific account.
• Protection—If your business isn’t successful, you don’t want it to impact your personal credit. Creating a separate account as well as a creating a separate legal entity for your business will protect you if your business doesn’t grow as planned.

5. Reporting

If you’re not keeping an eye on your business’s reporting, you probably don’t have a very good understanding of your business’s actual financial situation. While reports might seem like a meaningless string of numbers, when you take the time to learn what they mean, they’ll offer insight into your business that can help you set goals for the future. Here are four of the most important reports you should generate, whether you’re doing it by hand, through accounting software, or with an accounting professional.

MARGINS

For your small business, keeping an eye on your margin reporting is vital. Why? Well, it determines how much profit you’re taking home. There are four levels of profit that your margin analysis can report on. These include:

• Gross profit margin—If you begin with sales, and then remove any cost that’s related to creating or offering the service or product that you’re selling, you’re left with your gross margin.
• Operating profit margin—When you take the operating expenses out of your business’s gross profit, you’re left with your operating income. This is important to know, as it’s the profit related to your ongoing operations. It’s not subject to any oddball accounting-specific fluctuations, so it might feel like a more stable and accurate number. It’s most often utilized to offer potential investors or lenders a clear picture of your business’s value!
• Pretax profit margin—You arrive at the pretax profit margin when you subtract interest expense from your operating income, and then add interest income to that total. Adjust for non-recurring items, such as any gain or loss from operations that you’ve discontinued, and you’ll have a number that is your pretax profit, also known as your EBT—earnings before taxes.
• Net profit margin—This is the amount that’s left after every possible expense has been subtracted from your revenue. This includes operating expenses, taxes, and anything in between. If you’re the sole owner of the business, this is your takehome profit once all your expenses have been covered.

CASH FLOW

When you generate your cash flow statement, you’re able to view all of your company’s transactions, both incoming and outgoing, over a designated period of time. It draws from your net income as well as your non-cash transactions to create a picture of what’s been going on with your cash during the predetermined period.

Your cash flow statement takes offers more information about the day-to-day operations of your business, such as where the money’s made and how it’s spent. It focuses primarily on three types of activity:

• Investing: Any long-term change to big equipment, acquisition or selling of assets, etc.
• Operations: These are the functions required for your business to operate every day. This includes inventory, accounts payable and receivable.
• Financing: Debts, loans, or anything else that impacts the amount of cash you’ve got in your bank account without impacting your bottom line.

PROFIT LOSS

Your Profit Loss (or PL) statement is also known as an income statement. It tells you your expenses, revenue, and costs over the course of a set period of time. It’s a window into your business’s bottom line, so it’s of interest to investors or business lenders to show the viability of your business.

The accuracy of your PL is pivotal; any inaccuracies could lead to diminished profitability ratios, which could sink your chances of securing an important loan or frighten away a potential investor, both of which could take your business’s growth to the next level.

This statement consists of two primary components: operating and non-operating. These components both encompass expenses (including rent, salaries, utilities, or bank fees as well as the cost related to goods and services that your business sells) and revenues (aka your total sales).

BALANCE SHEET

The balance sheet offers an up-to-the-minute view of your business’s financial health. It consists of three components: assets, liabilities, and equity.

On the left side of the sheet, your business’s assets, current and fixed, are listed. On the right, liabilities and owner equity are detailed. Ideally, the total of each side of the balance sheet will total to the same amount—if your balance sheet is actually balanced.

Any accountant will tell you that there’s one simple equation to explain the relationship between these three factors: Assets = Liabilities + Owner’s (or Shareholder’s) Equity

6. Your Accounting System

While you might not approach handling your business’s finances with excitement, it doesn’t have to be painful. If you create a well-organized, thoughtful plan in tandem with a carefully-crafted budget, maintain excellent (and accurate) records, and routinely review your results, it can be a beneficial—perhaps even pleasant— experience. Here’s a rundown of the tasks you should undertake to keep your financial house in order, and how often you should perform them.

DAILY ACCOUNTING TASKS

Keep an eye on your cash—the last thing you want is to cut your cashflow too close. Every day, be sure that the first thing you do is check to see where your cash balance sits. While it’s smart to set your expectations for what you’ll take in throughout the week as well as what you plan to spend, your cash acts as the metaphorical gas in your business’s tank. You should always know how much you’ve got.

WEEKLY ACCOUNTING TASKS

Take time to record transactions—If you’re tempted to put recording your business’s transactions off for a week, resist the urge. You should be sure to record transactions including invoicing clients, taking payments, and paying vendors at least once a week—every day if the volume merits it. You can do this manually or using an Excel spreadsheet as well as in your accounting software, if you’re already set up for that.

Keep and categorize receipts—Whether it’s digital or analog, keep a copy of every cash receipt, payment, or invoice sent. Create a vendor file for your business, sorted from A-Z for convenience, make a payroll file that’s sorted by the date the pay is issued, and, finally, start a bank statement file with the statements sorted on a monthly basis. You can scan the paper and organize everything electronically, or keep old-fashioned file cabinets, so long as you’ve got a record.

Assess unpaid vendor invoices—Keep an unpaid vendor folder, where you can store bills as they arrive. Every week, review the invoices within, and note the due dates as well as the payment due. Looking at this folder regularly will help you avoid potential late charges.

Make payments and sign checks—We assume that you’re eager to maintain positive relationships with your vendors; the best way to do this is to pay their invoices on time. Earmark the funds to make these payments in advance, and keep a copy of any invoice you send or receive.

Prep and send invoices to clients—Set a regular day to send invoices to your clients, and before you pass them along, examine them to be sure that they contain the following:

• Due date
• Penalty for late payment
• Payment terms
• Itemized charges
• Payment address

Check your forecasted cash flow—You don’t want to bounce checks to vendors or employees, so it’s vital that you keep tabs on your cash flow. Having a healthy understanding of how much money you’ll need to operate your business in the weeks and months to come will ensure that you’re not caught short. A quick and simple statement that reflects your up-to-the-moment cash status as well as the anticipated income and payments over the coming week or month will ensure that you’re in good financial shape.

 

MONTHLY ACCOUNTING TASKS

Balance your company checkbook—Remember how we recommended that your personal and business accounts be separated? Just as you’re supposed to balance your checkbook at home on a monthly basis, you need to ensure that your business accounts match the bank statement, too. You’ll catch any potential errors, whether they’re yours or the bank’s, before it spirals out of control.

Check in with past-due invoices—Each month, be sure that you take time to look over any outstanding receivables. Creating a column to notate aging outstanding invoices (complete with just how long they’ve been outstanding) will enable you to see who’s tardy in sending you payment at a glance. Once a month, send reminders to people who haven’t yet paid their invoices.

Check inventory—If your business is product-based, be sure that you check in monthly to see what’s selling quickly and needs to be re-ordered as well as the items that aren’t so hot and might have to be marked down to move. Routinely reviewing your inventory will help you maintain an even keel, with plenty of the popular items and fewer of those that are less popular.

Approve tax payments and process payroll—You don’t want to fall behind on your payroll taxes. Set aside a time each month to ensure that your payments are going out at the right time and in the right amount. Additionally, check over the payroll summary prior to paying your employees; this will give you the chance to make any necessary corrections.

Review reports—As we mentioned before, there are several reports that should be run monthly to keep your business on track. It’s vital that you review all of these reports, comparing them to the prior period and to your budget, to ensure that you’re on target for success. If you notice a downward trend, it’s a lot easier to correct it if you catch it in its infancy rather than scrambling to fix it at the end of the year.

 

QUARTERLY ACCOUNTING TASKS

Create or Review Annual Profit and Loss Estimate—Once every three months, it’s time to determine exactly how much money your business is making. Are your net profits rising or falling? Is there a drastic difference between your expenses and your revenue—and if so, why? Where are your profits being spent? All of these questions (and more) can be answered by your profit and loss estimate.

Make quarterly payroll payments and review the reports—Most states as well as the IRS demand that businesses generate quarterly payroll reports with the purpose of collecting quarterly payments. If you’re using an accounting pro, they’ll complete and file these reports, but it’s smart for you to review them.

Make quarterly sales tax payments and review reports—This task is dependent on which state your business operates in. If your state does require sales tax, you could incur significant penalties if you don’t make the payments.

Determine estimated income tax and pay the bill—This is where your Profit and Loss report will come in handy. You can review it to determine if you owe estimated taxes for the quarter, and if you’re not sure, consult an accounting professional. 

 

ANNUAL ACCOUNTING TASKS

Examine past-due invoices—While you’ve been reviewing these receivables each month, now’s the time to make some decisions. Which clients do you feel will pay, and which need to be sent to collections? Are there accounts you need to write off? You want to start the new year with as clean a slate as possible.

Check your inventory—Again, you’re reviewing it regularly, but you need to figure out the value of any product that has not been sold; you can deduct any inventory that’s been written down on your end-of-year taxes. Failure to do this will result in you paying more taxes than you technically owe.

Fill out tax forms—Specifically, your W-2 and 1099-MISC forms, which are due by January 31. These forms enable you to report the annual income of your full-time employees and independent contractors, respectively. You must also mail these forms to all employees prior to the January 31 deadline, unless that employee earned less than $600 over the course of the year.

Complete and approve annual financial reports and tax returns—Tax time is an ideal time for you to examine your business’s financial reports prior to handing them over to your accountant, assuming you’ve hired one. These reports will be what you use to check your tax return, so it’s important to review everything for accuracy prior to signing off on anything.

 

HIRING AN ACCOUNTING PROFESSIONAL

If you’re overwhelmed by everything you must do to keep your small business’s finances afloat, it’s important to remember one thing: you don’t have to do it alone. At any point, you can turn things over to an accounting pro, who will assist you with as much or as little of your business’s accounting as you wish. Here are a few questions you should ask before you hire an accountant. 

 

1. May I see your references? Before you entrust your sensitive financial information to an accountant, get a little information about their background. Perhaps you have associates who have worked with the accountant, but if you don’t, a qualified accountant should be able to furnish the contact information of some previous clients so you can ask questions about their experience. Additionally, confirm that their certification is on the up-and-up.

2. Have you worked with small businesses before? A small business’s accounting is very different from that of a large company. It makes sense to work with someone who has experience with small businesses, so they’ll understand your particular needs, especially within the realm of taxes and payroll. You should also ask if they’ve got experience within your particular industry, especially if there are factors that could impact your tax filing or payroll.

3. What services do you provide? If you’re seeking a full-service accounting pro, you don’t want to hire someone who limits themselves to tax prep alone.

4. What do your services cost? This is the biggest question of all. Even if they tick every other box, if they’re out of your price range, it’s not going to be a good fit. The last thing you want to do is explode your budget to get accounting assistance.

In addition to asking these questions, it’s also important to determine ahead of time what you’re looking for in an accountant. There are different ways to interact with your accountant, including:

• Hourly—This method is appropriate for small businesses who have periodic questions, and require an “on-call” accountant to assist as needed.
• By Project—If you hire an account using this method, you’re hiring them to complete one project for you. For instance, if you need an accountant to tackle your quarterly taxes, you’d pay per project. You wouldn’t ask them questions not related to the project, unless you hired them to work on something else.
• Full-service—Do you need an accounting professional to handle all the financial aspects of your business? This is definitely the biggest timesaver, but it’s also the most expensive of the options. However, if you can afford it, you’ll rest easy, knowing that all of your accounting is being handled by a person with the knowledge and experience to take care of anything you can throw at them.