Five Steps to Get Your Business Finances in Order
You have a great business idea, and you're lining up the resources to make it a reality. But if you don't establish solid corporate and accounting strategies from the start, you could be putting your business in peril before you ever get off the ground, says Gail Rosen, a CPA in Martinsville, N.J.
"If you aren't capturing your deductions or you make a mistake because you didn't know you needed to pay a certain kind of tax or workers' compensation insurance, it can really get expensive," she says.
Rosen recommends startups follow these five steps to get off on the proper financial foot.
1. Be thoughtful before organizing.
"So many businesses just start up as a limited liability company (LLC), but that might not be the right form of organization," Rosen says. Understanding whether to operate as a sole proprietor, partnership, S Corporation, C Corporation or LLC has tax implications, and each offers different levels of liability protection. And if you incorporate, you can't change back to an LLC later, so it's important to know the best structure for your business.
2. Know your tax responsibilities.
Depending on the state you plan to do business in and the type of business you're launching, your tax responsibilities will vary and may include federal, state and local payroll taxes; corporate taxes; sales or use tax; or others. If you have employees, you may also have workers' compensation or other insurance requirements. Being unaware of these responsibilities can be costly, especially if you're subjected to penalties, interest and fees, Rosen warns. While you can consult with the IRS, your state's revenue agency and local tax-collection authorities, it's also a good idea to consult with an accountant.
3. Budget and track expenses.
Playing fast and loose with the checkbook can get you in trouble in a few ways. First, it can mess with your cash flow, which is the reason many businesses fail. Also, when you lose track of what you're spending, you could be missing out on valuable deductions for your business. "Every time you're deducting $1,000, you're saving a significant amount of money on your tax bill," Rosen says.
4. Use technology to your advantage.
Tame the paper tiger and keep your finances more organized by using a good accounting program like QuickBooks or FreshBooks, Rosen says. You'll have less financial organizing to do at tax time, and you'll likely reduce accounting fees if you're able to hand over a digital file to your tax preparer. Also, consider using apps like XpenseTracker and ProOnGo, which can help you organize receipts, log mileage and track spending whether you're in the office or on the road.
5. Establish good bookkeeping practices.
One of the biggest mistakes entrepreneurs make, according to Rosen, is ignoring their financial management at the start, either because they are overwhelmed or they think their business is too small to warrant formal bookkeeping practices. However, the sooner you're able to establish good practices, the less likely you'll be to rack up penalties, interest, late fees and other unnecessary expenses.