10 Steps to Getting Your Business Ready

So you read our other business articles and ready to open your business or you have just recently opened. A big congratulations! It takes perseverance  and passion to get to the point you’re at. However, as you know, business ownership is a constant journey of milestones with a forever expanding list of to-do items. So how do you get on top of the accounting tasks that come along with owning a business? This list  of ten steps for a small business will give you some guidance and confidence to know you’ve covered your bases, and that you're ready to move on to the next task on your business to-do list.

1. OPEN A BANK ACCOUNT

After you’ve legally registered your business, you’ll need bank to deposit your cash and pay your bills. Having a separate bank account and not using your personal bank account keeps  the business records distinct and will make life easier come tax time. If your business was formed as an  LLC, partnership or corporation, you are legally required to have a separate bank account for business. Sole proprietors don’t legally need a  separate account, but it’s definitely recommended.

Start by opening up a business checking account, and then any savings accounts that will help you organize funds and plan for taxes. For  instance, you may want to set up a savings account and allocate a percentage of your monthly net income as your self-employment tax. You will want to consider a business credit card to start building business credit.  Corporations and LLCs are required to use a separate credit card to avoid commingling personal and business assets.

Before you talk to a bank about opening an account, do your homework, or better yet, give us a call and find out how we can help. Make sure to shop around for business accounts and compare fee structures. Most business checking accounts have fees that are higher than personal  banking, so pay close attention to those pesky bank fees.

In order to open a business bank account, you’re required to have a  business name, and usually be registered with your state or city. Check with your bank for what documents to bring to the  appointment.

2. TRACK YOUR EXPENSES

The foundation of solid business record keeping is learning to track  your expenses effectively. It’s a crucial step that allows you to monitor the growth of your business, build financial statements, keep track of deductible expenses, prepare tax returns, and support what you report on your tax return.

Right from the beginning, you should establish a system for organizing receipts and other important records. This process can be simple at first, but you can use our cloud-based accounting service using QuickBooks Online Accountant. 

There are five types of receipts that you should pay extra attention to:

• Meals and Entertainment:  Conducting a business meeting in a coffee cafe or restaurant is a great  option, just be sure to document it well. On the back of the receipt,  record who attended and the purpose of the meal or outing.
• Out of Town Business Travel:  The IRS and state taxing authorities are wary of people claiming personal activities as business expenses. Thankfully, your receipts also provide a paper trail  of your business activities while away.
• Vehicle Related Expenses:  Record where, when, and why you used the vehicle for business, and then apply the percentage of use to vehicle related expenses.
• Receipts for Gifts:  For gifts like tickets to a concert, it matters whether you as the gift giver goes to the event with the recipient. If you do, then the expense would be categorized as entertainment, rather than a gift. Note these details  on the receipt.
• Home Office Receipts:  Similar to the vehicle expenses, you need to calculate what percentage of your home is used for business and then apply that percentage to home  related expenses. NOTE: RECENT CHANGES IN FEDERAL TAX LAW HAS MADE DEDUCTING A HOME OFFICE DIFFICULT. PLEASE CONSULT WITH YOUR TAX ADVISOR ON YOUR PARTICULAR SITUATION.

Starting your business at home is a great way to keep your overhead low.  You may be able to deduct the portion of your home that’s used for business, as well as your internet connection, cell phone, and transportation to and from work sites and for business errands. Any expense that’s used partly for personal life and partly for business must reflect the mixed use. For instance, if you have one cell phone, you can deduct the percentage you use the device for business. Gas mileage costs are 100% deductible, just be sure to  hold on to all records and keep a log of your business miles (where you’re going and the purpose of the trip). 

3. DEVELOP A BOOKKEEPING SYSTEM

You will notice that we mention bookkeeping system and not accounting system. Before we jump into establishing a bookkeeping system, it’s helpful to understand exactly what bookkeeping is, and how it differs from accounting. Bookkeeping is the day-to-day process of recording  transactions, categorizing them, and reconciling bank statements.

Accounting is a high level process that looks at business progress and makes sense of the data compiled by the bookkeeping system by building  financial statements.

As a new business owner, you will need to determine which bookkeeping method to use:

• You can choose to go the very simple route and use Excel spreadsheets to track your income and expenses.
• You can use our bookkeeping services which frees up your valuable time to run your business.
• You can have us implement a cloud-based accounting system.
• When your business is big enough you can opt to hire an in-house bookkeeper and/or accountant.

With so many options available, give us a call and let us find a bookkeeping solution that will suit your business needs. 

Also as a new business owner, you will need to determine whether you will use the cash or accrual method of accounting. Let’s take a look at the difference between the two methods here:

• Cash Method: Revenues and expenses are recognized at the time they are actually received or paid.
• Accrual Method:  Revenues and expenses are recognized when the transaction occurs (even if the cash has not been received or paid out  yet) and requires tracking  receivables and payables.

Not sure which method to use? You may to keep things simple and use the cash method throughout the year. Then we can adjust your accounting records at the end of the year to report  on the accrual basis of accounting and for tax reporting purposes.

4. SETUP A PAYROLL SYSTEM

As a new business owner, you will likely be a one-person business. However, maybe you’ll hire a part-time employee to help you out, or a freelancer to design your logo. Right away, you need to establish whether that individual is an employee or an independent contractor.  For employees, you’ll need to decide on a payroll schedule and ensure  that you’re withholding the correct taxes; there are a lot of payroll service providers that can help with this. For independent contractors, be sure to track how much you’re paying each person. You may be required to file1099s for each contractor at year end (you’ll also need to keep their name, address, and taxpayer identification number on file for this).

5. WILL YOUR BUSINESS BE SUBJECT TO IMPORT TAXES?

Depending on your business model, you may be planning to purchase and  import goods from other countries to sell in your store. When importing  products, you may be be subject to import taxes and duties. These are fees that the U.S. imposes on incoming goods. Take the time to learn about importing goods into the U.S. and the associated taxes, so that you know the rules from the start. 

6. DETERMINE HOW YOU WILL GET PAID

When sales start rolling in, you will need a way to accept the payments. There are many service providers available so you can accept credit card payments (Visa, American Express, and Mastercard). But using a provider such as Square can save you the hassle of setting up a merchant account or third party payment gateway with each credit card company

If you want to accept credit card payments without using Square, you will either need a merchant account or you can use a third party payment processor like PayPal. A merchant  account is a type of bank account that allows your business to accept credit card payments from customers. If you use a third party payment processor, the fees are generally around 2.9% plus a per transaction fee. You can consult with us to help you find a payment system that will work for your business.

7. ESTABLISH A SALES TAX REPORTING SYSTEM

The world of e-commerce has shaken up sales tax regulations and they are admittedly a bit confusing due to location issues. When a customer  walks into a brick and mortar retail shop, they pay the sales tax of  whatever state or city they make the purchase in, no matter if they live in that city, or they are visiting from across the world. However,  when you sell online, you’re often selling to customers who live in different states and even countries.

Selling to customers in other states can sometimes be easier than in-state sales because you often don’t need to charge sales tax when selling to out-of-state and out-of-country customers. For U.S. based businesses, international purchases maybe tax exempt as well. However, this can get a bit complicated depending on the state you are located in. So make sure to consult with us for detailed information about your specific state’s regulations regarding sales tax. 

8. DETERMINE YOUR POTENTIAL TAX LIABILITY

Tax obligations vary depending on the legal structure of your business. If you are self-employed (sole proprietorship, LLC, partnership), you can claim business income on your personal tax return. Corporations, on the other hand, are separate taxable entities and are taxed independently from its owners. Your income from the corporation is taxed as an employee.

Self-employed individuals need to withhold taxes from their income, and  remit these to state and federal tax agencies in lieu of the withholding that an employer would normally conduct. As a business owner, you may need to pay estimated quarterly taxes if you owe more than $1,000 in taxes in the tax year.

9. KNOW YOUR GROSS MARGIN

Improving your business gross margin is the first step towards earning more income overall. In order to calculate gross margin, you need to know the costs incurred to produce your product. To understand this  better, let’s quickly define both Cost of Goods Sold (COGS) and gross margin.

• Cost of Goods Sold (COGS): These are the direct costs incurred in producing products sold by a company. This includes both materials and direct labor costs.
• Gross Margin: This number represents the net sales revenue after the business incurs all direct costs to produce the product or service.

Here’s how you can go about calculating gross margin:

•  Gross Margin (%) = (Revenue - COGS) / Revenue  

The difference between how much you sell a product for, and how much the  business actually keeps at the end of the day is what truly determines your ability to keep the doors open. 

10. CONSTANTLY RE-EVALUATE METHODS

When you first start out you may decide to use a simple spreadsheet to  manage your books but as you grow you will want to consider more advanced  methods of tracking your business income and expenses.  As you keep growing, it’s good to continually reassess the amount of  time you’re spending on your books, and how much that time is costing your business. The right bookkeeping solution means you can invest more  time in the business with bookkeeping no longer on your plate, and  potentially save the business money.

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Starting a business can be an overwhelming process, but if you follow  this list or hire us to help you get your new business started, you can have your finances in order from the  beginning. From opening the right type of bank account to determining  how much you’ll bring in per product, we can handle these tasks for you and contribute to your business’s success, now and as it grows.