You’ve done the hard work. You have a new business idea or you’ve found an existing business to purchase. Want to help ensure your business success? Pay attention to correctly setting up your business’ accounting system. Here’s how:
Choosing the right legal and tax entity for your business is important. Consult experts to discuss your options. On the tax side, sole proprietors use a Form 1040 Schedule C to report their activity, while other business entities such as S-Corporations and Partnerships file informational returns and pass-through profits to your individual tax return. C-Corporations require separate tax returns without pass-through of profits onto your personal tax return.
“The new Tax Cuts and Jobs Act of 2017 offers attractive new deductions for owners of some pass-through entities. Many of these owners will only be paying tax on 80% of their business income. The rules are complicated and there are many exceptions and limitations, so you will need to make sure you consult a professional.” – Julie Strohlein, CPA
There are different approved methods of accounting. You will need to determine which is best for you. Sometimes your business dictates a required method, but not always. The basic difference lies in when you can book revenue and expense. One method (cash) is based upon when you actually receive or make payment. While the accrual method allows capturing this same information when there is an established obligation.
“It is also possible to keep your books with one method and file your tax returns under another. For instance, many businesses may want to keep accrual basis books so that they are tracking amounts owed to them by customers and expenses which haven’t yet been paid. This doesn’t prevent them from filing tax returns on the cash basis, which means they would only pay income tax on the income actually received during the year, and not the uncollected receivables.” – Julie Strohlein, CPA
If starting a business from scratch, remember to set up separate bank accounts and recordkeeping. IRS auditors are quick to disallow expenses when your business expenses are mingled together with personal expenses. The same is true with credit cards. Use a separate credit card for your business transactions.
“It is common for a start-up business owner to pay initial expenses with personal funds since the company hasn’t earned any income yet. Just be sure to keep careful records so that these items can be recorded in the company books.” – Julie Strohlein, CPA
Well-run businesses understand the need to organize elements of their business into accounting categories. These categories often use their own reporting system called sub-ledgers. Common areas are sales, accounts receivable, accounts payable, fixed assets, and inventory.
“After your initial setup of your accounting system, you are able to modify your chart of accounts if needed down the line. As your business grows or creates new revenue streams you may want to break down the accounting in more detail. This typically can be changed in modern accounting systems without much of a hassle. Speaking with your CPA before making substantial changes to the accounting system during the year is always recommended to avoid any issues at year end.” – Chris Cicalese, CPA
Often success or failure of your business is predicated on whether you have enough cash to pay your bills. Determining your cash needs means understanding the cash situation of your business. To do this requires a good set of records. This includes recording your current situation on a timely basis and establishing a forecast of cash needs throughout the year.
Banks love a strong balance sheet. If you think your business may need money for expansion, you will want to focus on developing a strong balance sheet that is low in debt and high in liquid assets like cash and accounts receivable. The irony here is that it’s easy to borrow money when your records show you don’t need it and it’s hard to borrow money when you do need the funds.
Every business has a few financial items that drive profitability. Do you know yours? It might be payroll in a labor-intensive business. It might be rent in a retail establishment. Perhaps your margins are low because of heavy promotional costs. A strong accounting system will help you stay focused on the more important financial elements of your business.
By setting up a good accounting system AND forecasting performance over a twelve-month period, you will understand the true needs of your business. This is especially important if your business is seasonal in nature.
“There are many accounting software packages to choose from. Setting up your books in the cloud will offer maximum flexibility, collaboration, and automation. Consider a system like Xero which offers a core general ledger system as well as hundreds and hundreds of custom apps that can solve very specific business needs.” – Julie Strohlein, CPA
Remember, by spending time setting up the accounting system that is right for you, you are increasing your business’ chance for success. Contact us today for an accounting partner that can help you create an effective system from scratch or to review your current system and recommend improvements.
Empowering business owners and individuals in South Jersey and Philadelphia to feel confident through proactive accounting and advisory solutions.
