Accounting 101: 8 Steps to Set Your Business Up For Success

Congratulations on launching your business! It takes courage and determination to reach the point you’re at, and you’re already that much closer to achieving long-term success.

To put your business on track for fast, sustained growth, it’s critical that you establish an effective accounting setup during the early stages of operation. How will you track and manage your money effectively? What accounting tasks should you outsource, and which ones can you automate? And who do you turn to for help in using all of your business’s financial data to make strategic decisions that take things to the next level?

I.

Open a Business Bank Account

As soon as you register your business, it’s time to figure out where you’ll be keeping your income. Corporations and LLCs are legally required to manage their income in separate business bank accounts. Although sole proprietors can manage personal and business income in the same bank account, we strongly advise against it.

Why? Having separate bank accounts will make tax season far less complicated. Come tax time, you won’t have to worry about untangling your personal and professional expenses, because your business transactions will be neatly contained in a separate account.

Additionally, managing your business finances in a separate account allows you, your bookkeeper, and your accountant to monitor and improve your business’s financial health with ease.

II.

Track Your Expenses

Plenty of small business expenses are tax deductible. You can also deduct certain business startup expenses (for example, the expenses you incur while researching and setting up your new business). But, in order to claim an expense as a deduction on your tax return, you’ll need to keep a record of the expense.

Understand What Expenses You Need to Track

The IRS requires that you keep documentation that proves income, credits, and deductions shown on your tax return. Although the records and receipts you need to keep will depend on the nature of your business, generally you’ll want to keep the following:

• Receipts

• Bank and credit card statements

• Bills

• Canceled checks

• Invoices

• Proof of payments

• Financial statements from Bench or your bookkeeper Previous tax returns

• W2 and 1099 forms

• Any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return

III.

How to Track and Store Your Expenses

Technology has put an end to the days of hoarding paper receipts and keeping documents in creaky filing cabinets.

• Take a picture of your receipts with your phone and email it to your self.

• Another popular choice is Expensify, a mobile app that allows you to capture receipts and track mileage while you’re on the run. Get into the habit of snapping a photo of your receipt and saving it to Expensify as soon as you’ve made a business expense, and you’ll never lose a receipt again.

• If you simply need a place to store your business records, cloud storage services Box, Google Drive, Evernote, and OneDrive can help you store large volumes of files online, which can be accessed from anywhere.

IV.

Establish a Bookkeeping System

Bookkeeping. Few business owners love it. But every business owner is required to do it. Before we get into your bookkeeping options, it may help to establish the difference between bookkeeping and accounting.

Bookkeeping is the day-to-day process in which you record business transactions (money coming in, money going out), categorize them, and reconcile bank statements. Accounting is more high-level. It uses data from your books to examine your business’s financial health and strategically plot your business’s growth.

Bookkeeping is an ongoing task. Ideally you’ll need to make sure it’s complete each month, so that you have fresh financial statements on hand, as well as an up-to-date understanding of how your business is performing.

V.

Determine How You’ll Get Paid

These days it’s highly unlikely that you’ll perform all of your business transactions in cash, so you’ll need to find a payment solution that works for your business.

First, determine whether you’ll be accepting payments in person, through a POS system, or online:

POS System & In-Person Payments: If you’ll be doing both, consider a mobile credit card reader like Square.

This is ideal if you don’t expect to process a high volume of in-person purchases on a daily basis.

POS Payments Only: If you will only be performing POS sales, look into a POS system—which works with a cash register—or just a credit card reader, which is independent of any cash collection system. For the in-person payment methods—POS systems or credit card readers—you will need to open a merchant account with your bank. This account essentially acts as an intermediary between the payment system and your bank account, withdrawing and depositing funds.

Online Payments Only: If you’ll work exclusively in online payments, Paypal is fairly standard. Shopify is also an excellent platform for online retailers.

VI.

Set Up a Payroll System

When your operation grows, you may hire a part-time employee or an independent contractor to help out with the business.

Just like bookkeeping, payroll is a hands-on task that can drain your time and energy. There are plenty of cloud-based solutions you can use to make payroll easier. The most effective one we’ve come across is Gusto. The online service automates many of the tasks involved in payroll and employee benefits, which can save you plenty of time in the long run.

VII.

Determine Your Tax Obligations

Your business’s tax obligations are dictated by the legal structure of your business. If you’re self-employed—a sole proprietor, LLC, or partnership—you’ll likely claim business income on your personal tax return. But, if you run a corporation, it’s considered a separate tax entity, and the income you receive from the corporation will be taxed independently, as though you were an employee.

Self-employed individuals need to withhold taxes from their income, and remit them to the government in the same way as an employer withholding taxes from an employee’s pay. If you owe more than $1,000 in taxes, you will need to pay quarterly estimated taxes four times a year.

Sales Tax Collection

Heads up: it’s highly likely you’ll need to collect sales tax. Thankfully, sales tax is relatively straightforward if you’re operating a traditional brick-and-mortar store. A customer walks in, buys something, and you charge them percentage points in line with state regulations.

VII.

Calculate Gross Margins

An effective way to generate more income is to increase your company’s gross margins. Calculating your gross margins means knowing how much it costs to produce your products or services. This will be easier to understand once we define Cost of Goods Sold (COGS) and gross margins themselves.

Cost of Goods Sold (COGS): The direct costs a company incurs during production. This includes the prices of both raw materials and labor.

Gross Margin: Expressed as a percentage, the total revenue a company collects after factoring in the COGS.

Here’s how you calculate gross margin:

Gross Margin % = (Revenue - COGS)/Revenue

Your ability to sustain your business depends on the difference between what you sell a product for and the costs you incur to produce it.

VIII.

Continually Refine Your Methods

Reviewing—and, if necessary, modifying—the way you handle your approach to small business accounting is going to help you maintain a successful business. With apps and online services tracking and automating most of your accounting tasks, you will always have an up-to-date snapshot of the financial health of your business. And with a bookkeeping team and a CPA on your side, you’ll be able to use the data in your financial statements to run your operation in an efficient manner and make smart, long-term decisions that support long-term success.

Even though the first few years in business can feel overwhelming at the best of times, a smart accounting setup can help ensure that the path ahead is smooth–now, and well into the future.

Disclaimer

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor or tax advisor with respect to matters referenced in this post. Valkyrie Accounting assumes no liability for actions taken in reliance upon the information contained herein.