Small Business 101: Accounting for the Non-Accountant
Know Which Category You Fall Into
Before you can nail down a proper way to track any income or expenses, you really must have a clear understanding of which type of company you are running. Each type has clear implications on taxes, pay structure, acceptable ways to reimburse yourself, etc. We strongly suggest that you do some homework on your options before picking the direction that is best for you and your business.
Separate Bank Account
Regardless of the type of small business you are running, you NEED a separate bank account. Even though Sole Proprietors can just operate out of their own checking accounts, it can be a hairy mess if you lose track of time and aren’t recording things properly. Check in with your local credit union or bank for options. Do not settle for paid checking, if you think this is your only option, you are throwing away money.
Process for Tracking and Collecting Payment
I can’t reiterate enough how important it is to have not only a sales process, but a collection process too. It doesn’t need to be elaborate, but putting things like contracts, invoicing, late fees, etc. in place can make such a major difference. In the beginning, I trusted too many people. Not that people don’t have the best intentions in the beginning, but you just never know what life will throw at you.
Have written and signed agreements. Have due dates for payment. Have penalties for not following your guidelines. Please keep in mind these are somewhat structured by state, so don’t forget to check out local laws. Things like sales tax, quarterly filings and late fee percentages are often highly regulated.
Managing Your Cash
If you have ever worked in corporate America, you are used the standard paycheck. The pay slip that already has all your taxes, social security and often even fees for health insurance and retirement deducted. When setting prices and managing cash, it is easy to forget about all this extra overhead.
A good rule of thumb to keep in mind if running strictly on your own is 50% of every dollar owned you can keep, 30% must be saved for taxes, and 20% is essential for padding in your account to pay for things such as marketing, office supplies, meetings, entertainment, education, etc. I often see people charging what they were used to taking home. To actually continue making the same paycheck, you often need to double or even triple your old hourly rate to come out in the same place.
Developing a Rhythm
Over time you will begin to see where things are falling short. Perhaps you are spending twice as much time on one project as you anticipated. Sure you may not be “losing” money, but if you are working 80 hours a week, you’re not profitable.
Take a step back and start streamlining systems, perhaps charging more or setting more realistic expectations with your clients/customers. You may eventually start to see a pattern and be able to predict your paycheck. Keep in mind that many industries have slow and busy seasons, so you must be prepared to earn varying amounts, depending on the season. This fluctuation doesn’t mean you’re failing, it just means you need to plan for it.