If you’ve just launched or are about to start your small business, congratulations! It takes uncommon passion and perseverance to get to where you are today. However, business ownership is a constant flood of satisfying milestones coupled with expanding to-do lists. With your launch, you’ll need to get on top of the accounting tasks that come along with owning a side hustle. For many, this necessary evil is foreign territory, so here is our simple summary checklist for novices navigating the waters.
If you’ve just launched or are about to start your small business, congratulations! It takes uncommon passion and perseverance to get to where you are today. However, business ownership is a constant flood of satisfying milestones coupled with expanding to-do lists. With your launch, you’ll need to get on top of the accounting tasks that come along with owning a side hustle. For many, this necessary evil is foreign territory, so here is our simple summary checklist for novices navigating the waters.
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1. Business Bank Accounts
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After you’ve legally registered your business, you’ll need somewhere to stash your business income. Having a separate bank account keeps records distinct and will make life easier come tax time. It also protects your personal assets in the unfortunate case of bankruptcy, lawsuits, or audits. And if you want funding down the line, from creditors and investors alike, strong business financial records can increase the likelihood of approvals.
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Note that limited companies, partnerships, and corporations 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, followed by any savings accounts that will help you organise funds and plan for taxes. For instance, set up a savings account and squirrel away a percentage of each payment as your self-employed tax withholding. A good rule of thumb is to put 25% of your income aside, though more conservative estimates for high earners might be closer to one third.
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Before you talk to a bank about opening an account, do your homework. Shop around for business accounts and compare fee structures. Most business checking accounts have higher fees than personal banking, so pay close attention to what you’ll owe. Check with the individual bank for which documents to bring to the appointment, but at the very least you’ll need a registered business name.
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2. Track Your Expenses
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The foundation of solid business bookkeeping is effective and accurate expense tracking. 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 legitimise your filings. From the start, establish a system for organising receipts and other important records. This process can be simple and old school (bring on the Filofax), or you can use a service like QuickBooks.
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There are a couple of receipts to pay particular attention to: conducting a business meeting in a café 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. If you’re going out of town for business travel, beware that the 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.
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Record where, when, and why you use your personal or company vehicle for business, and then apply the percentage of use to vehicle-related expenses, to cover costs such as petrol. For gifts like tickets to a concert, it matters whether the gift giver goes to the event with the recipient. If they do, then the expense would be categorised as entertainment rather than a gift. Note these details on the receipt. And finally, similar to vehicle expenses, you need to calculate what percentage of your home is used for business and then apply that percentage to home-related expenses.
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Starting your business at home is a great way to keep overhead low, plus you’ll qualify for some unique tax breaks. You can deduct the portion of your home that’s used for business, as well as your home internet, mobile phone, and transportation to and from work sites and for business errands. Any expense that’s used partly for personal use and partly for business must reflect that 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).
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3. Book-Keeping
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Bookkeeping is the day-to-day process of recording transactions, categorising them, and reconciling bank statements. Whereas accounting is a high-level process that looks at business progress and makes sense of the data compiled by the bookkeeper by building financial statements. While you may do your own bookkeeping as a freelancer or small business, it can be helpful to outsource the accounting submissions to a professional, to reduce errors and be able to receive advice.
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There are many online-only accountants available, which have much lower fees than the traditional bricks and mortar services, without compromising on results. There are many bookkeeping options available: from doing it yourself using excel, to out-sourcing to a part-time bookkeeper that’s local or cloud based, or if you’re big enough then hiring an in-house bookkeeper and / or accountant.
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4. Payroll
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Many online stores start out as a one-person show. When you’ve reached the point where it makes sense to hire outside help, you need to establish whether that individual is an employee or an independent contractor. For employees, you’ll have to set up a payroll schedule and ensure you’re withholding the correct taxes. There are lots of services that can help with this, and many accounting software options offer payroll as a feature. For independent contractors, be sure to track how much you’re paying each person. You may also want to consider paying yourself a salary from your payroll process, in order to claim the tax benefits.
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5. Sales Taxes
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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’ll likely be subject to taxes and duties, which is worth noting if you run a drop-shipping business. Also, if you’re importing goods, a duty calculator can help you estimate the fees in your own business and plan for costs. The world of e-commerce has made it easier than ever to sell to customers outside of your country. While this is a great opportunity for brands with growth goals, it introduces confusing sales tax regulations, so you’ll need to get specific about the regulations in your area before you start.
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6. Applying For Funding
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There are many scenarios where a growing e-commerce business might need to secure external business financing, be it through a line of credit, investors, a small business loan, or even a business partner. For instance, you might have an unexpected downturn in sales due to uncontrollable external circumstances, or maybe you need a financial boost during slow periods in a seasonal business. Brands with big growth goals often need to secure funding to make investments in new product developments, inventory, retail stores, hiring, and more.
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Remember, to get a small business loan, you’ll likely have to provide financial statements - a balance sheet and income statement at the very least, possibly a cash flow statement as well. If you haven’t done these, hiring an accountant could help. But before you sign off on the debt, it’s important to make sure the numbers make sense. In other words, it’s a good idea to calculate the ROI of the loan. Add up all the expenses you need the loan to cover, the expected new revenue you'll get from the loan, and the total cost of interest.
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When you first start out you may opt to use a simple spreadsheet to manage your books, but as you grow you’ll want to consider more advanced methods like Quickbooks or Bench. As you keep growing, 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 - which is a win-win.
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Starting a business can be an overwhelming process, but if you follow this list, you’ll have your new store’s finances in order from the beginning. From opening the right type of bank account to determining how much you’ll bring in per product, knowing your numbers is the key to effectively and efficiently growing your business of any size.
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