You’ve decided to start your own business, and that’s exciting! Your blood is pumping, and your mind is racing, thinking of everything you need to do.
Near the top of that list needs to be a decision to use good accounting practices. After all, they can keep your business in the black and you out of financial and legal trouble.
Here are a few of the most crucial accounting practices new business owners need to master.
Separate business and personal accounts
It may seem obvious, but separating business and personal expenses is extremely important. Dipping into your savings to prop up a business or buying a personal item with company funds muddies your financial picture.
And that can lead to tax problems and financial headaches later.
Consider establishing your company as a legal entity like an S Corporation or an LLC. Don’t just get separate accounts for your business and personal accounts; get a different bank.
Doing so creates psychological friction that can help you from blurring the lines between business and personal funds.
Watch your hiring practices
When hiring, you may have a choice for labor: contractors or employees.
It’s tempting to label some hires as contractors because it can add up to significant labor savings. But be sure you fully understand all state and federal laws. The financial penalties for mistakes are steep, and business owners can even face prison time in some cases.
Also, be sure to factor labor costs correctly for employees. Budget in the costs of all employee benefits no matter how insignificant they may seem.
For example, if an employee goes on vacation, you may have to hire temporary help. That’s an extra labor cost to factor into your budget.
Of course, don’t forget payroll taxes, either.
Hold clients accountable for invoices
This is a tough one because you want to keep a good relationship with customers.
But you aren’t a bank. Letting clients delay payment for weeks and months is effectively giving them an interest-free loan.
So, be tactful but firm in this area. And don’t be afraid to stop doing business with clients that repeatedly hold your money.
Establish a minimum monthly profit and a budget
In this blog, we regularly talk about the need for personal budgets. Business is no different. Like individuals, companies with a budget have fewer financial problems and even tend to be more innovative.
Of course, establishing a business budget is different from creating a personal one, which brings up the next topic.
Hire professionals when needed
Startup business budgets can be tight. So, it’s tempting to try and do everything yourself. But don’t skimp on the things that can pay for themselves in either time or money.
For example, it may be worth your time to get contract help with bookkeeping.
Weigh the opportunity costs by asking yourself a few questions. Will hiring help you focus on growing your business? Will the time you spend developing your business offset the cost of hiring a professional?
This thinking will help you better establish spending, set priorities, and become a better problem solver.
There’s a lot to unpack in this accounting primer, but getting started and being consistent is the key to success. So keep practicing, keep learning, and your business will benefit from these practices.