5 accounting tips to help startup founders manage their small business finances better
There are a variety of things that can contribute to the failure or success of a startup company business. But one of the most important factors is financial management being able to effectively allocate and budget their money. So maybe you have decided to launch a food truck business because you have cooking skills, or yoga studio because you have spiritual coaching abilities, unfortunately founding a startup does not turn you into a financial or accounting professional. Owners of emerging businesses aren’t naïve. However, with so many demands on your time, staying focused on accounting needs may be difficult. Here are 5 tips that small business owners and startup entrepreneurs can use to learn to manage your finances more effectively.
Budgeting is important for small businesses owners
One of the most crucial components of financial planning for a startup is a budget. But if it might be hard to formulate a budget when you don’t know how much money is going to come in. One thing a founder can do to start, start to minimize your personal expenses as much as possible. You can think of a budget as a framework, not worrying about where every single dollar is being spent but a plan or guide to make rational decisions of how your money is going to be allocated.
Simply put, bookkeeping is the process of organizing and recording all your financial transactions so you can accurately report them to the government and have better insight into your finances. This will help you make better decisions for your business. Financial transactions include:
- Sale of goods and services
- Bill payments
- Loan repayments
- Owner draws and equity
You can create a personal budget and break it up into different categories such as housing costs, food, travel, memberships and entertainment, and figure out a way to cut some costs in each category as much as possible. After that, you should calculate much you need to earn and pay yourself to cover these expenses and still have cash left over to either save or invest it back into your startup business. This is a way to plan and budget spending to a path towards profitability.
Pay attention to what income is coming in compared to what is going out. And make sure that your essential overhead expenses are covered, or that you have an emergency fund that you can dip into to cover, if there happens to be a slowdown in sales or revenue.
The importance of having a rainy day emergency fund
For the past 8 months of this Coronavirus pandemic, many companies experienced a slow down, so what should small business owners do during times of economic downturns when you can’t turn a profit? These are stressful things to deal with, but the reality is they’re very common scenarios for a lot of small business owners who can’t make sure they generate a steady or consistent income.
Having an emergency fund setup can help you ride out when times get tough. So once you have calculated how much cash you will need to cover your business as well as personal expenses for a month’s time, then you can simply multiply that number by six, and make sure you have that amount saved in your emergency or rainy day fund. During times when your business income slows down, or if an unexpected expense pops up, you might need to draw from your emergency fund. Which is the reason you have this savings account setup, but make an effort to replenish those funds to protect yourself against future unforeseen costs or circumstances. Having a good line of credit setup as a safety net is another helpful thing to have. Obviously, the goal for many would be that you never get in a situation where you need to tap into it.
Hire or outsource to professionals when you need them
Plenty of startup founders hold onto tasks for too long and fail to properly delegate, wasting energy that would be better spent elsewhere. Here’s why it matters – and how to do it so everyone in the business benefits. Now chances are if you’re reading this article that you are not a professional CPA or chief financial officer. And why it is common for entrepreneurs to wear many hats and handle many tasks on their own (especially in the beginning by trying to minimize costs), although trying to manage your company’s accounting or filing taxes on your own could actually end up costing you a lot more in the end.
You only have so many hours in the day. Shouldn’t that time be spent focusing on your core business rather than dealing with the administrative headaches of day-to-day accounting? At some point it makes sense to either hire an in-house bookkeeper or accountant to organize your records, choose an accounting software that works best for your business. It can also be more cost effective to outsource it to a startup CPA firm to help manage your books, payroll, and plan your tax and business strategy. To also help manage tasks such as your company’s day-to-day billing and accounting, month-end closing, cash management and more, all in accordance with GAAP. An experienced startup CPA professional can save you money by not only finding you more deductions and tax savings, but will also ensure you remain penalty-free and don’t get yourself into trouble inadvertently. As a startup business owner, trying to juggle managing the books and growing the business can be a huge headache, so If taxes, bookkeeping, or numbers are not your strong points, pay a professional to help you!
Anybody can put in a bunch of numbers into QuickBooks and generate a financial statement. But it’s interpreting those numbers so make strategic decisions to better run your business with financial knowledge of your company’s cash burn rate.
Set money aside for taxes
Getting all of your proverbial ducks in a row for tax season can nail biting, stressful, challenging just to name a few adjectives. Now depending on your expenses sometimes even something as small as a lost bill or receipt can have a negative impact on your tax filing process and could even get you into financial trouble. Updating the books daily helps avoid mismatched transactions or forgotten expenses. Let’s be real, no one enjoys paying their taxes, but unless you are Donald Trump none of us can avoid it.
The IRS isn’t very forgiving; when you owe, you owe, and you don’t want to be blindsided by an expense you didn’t expect or see coming. Your rates will be different depending on your location, but the general rule of thumb is to set aside at least 35 percent of your income for taxes. According to an article by Bench.co, John Hewitt, founder of Liberty Tax Service, the total amount you should set aside to cover both federal and state taxes should be 30-40% of what you earn. One tip is to do your taxes as early as possible, that way there will be no nasty surprises and you can forecast how much extra income you may need to cover when the payment is due.
Make sure you are getting paid on time
There’s nothing that feels as good as knowing you’ve made a client happy with your services. Except of course, knowing that they paid their invoice for said services on time. When you’re running your own business, client payments are your lifeline. If your invoices don’t get paid, your bills don’t get paid, and if your bills don’t get paid, your business can’t run. One of the most important things you can do is have a clear and defined payment policy in place. Your clients should know what payments are due, when they’re due, how they can be paid, and what happens if payments are late or missed.
You can’t force anyone to make a payment, but what you can do is:
- Send invoices as soon as you can
- Set payment timelines that ensure payments aren’t forgotten
- Follow up on sent invoices or late payments
One of the most challenging aspects of running your own business is the unpredictability of client payments. In the beginning, when clients aren’t paying on time, you find yourself paying out everyone else, leaving you with just enough to keep your doors open. When clients pay you late, you may find yourself incurring debts because you’re paying your own loans or bills late. Running a business isn’t easy; that’s why not everyone can do it. Successful entrepreneurship requires focus, dedication, and passion, and of course, a few ways to deal with the ups and downs of your cash flow.
If you are small business or startup founder and you want to advice on how to make sure the books are in order for your small business ahead of upcoming tax deadlines, feel free to contact Huckbee CPA for a free consultation.