As an ex-CPA, Ryan understands the financial challenges of running a small business. Recognizing that existing banks struggle to provide a combination of great technology and extraordinary customer service, Ryan founded Seed as a customer-centric digital bank that makes it easy to start, run and grow a business.
Latest posts by Ryan Hildebrand
- Accounting Errors Small Business Owners Make in the First Year - November 10, 2017
I’ve worked in accounting my whole career, so I can say this without shedding a tear: hardly anybody starts a business because they love balancing books. (Some of us do, sure, but we’re the minority). Accounting is a necessary evil and, when put up against all the other demands of getting a business off the ground, it can take a back seat. However, if you don’t get a handle on your finances early, it can rise up to bite you before you even know it.
There are a few negatives that can be avoided with a little foresight. This isn’t an exhaustive list, but these are certainly some of the biggest pitfalls into which an entrepreneur can fall while trying hard to focus on the parts of the business he or she really enjoys. Luckily for you, this is the stuff I like.
Personal vs. business accounts
Some people start a business; others end up as one. If you want to start a soap shop, you’re deliberately leaning into that. You’ve probably thought about starting a business account. But what if you ease into small business — or tumble into it?
This happens all the time: you’re a journalist who decides to go freelance, or a graphic designer doing some work on the side, or somebody making soap for fun and people start asking to buy it because you’ve developed a formula that smells like popcorn. You may not necessarily think of yourself as an entrepreneur, so you don’t take the necessary steps to partition your life. But you need to.
As you business grows, it gets harder to keep those expenses separate. But you should! Creating an LLC or corporation offers you certain legal protections, and a business account is an extension of that. It also makes life easier come tax time (more on this later). Even if you’re a freelancer, running your work through a business account will organize your life and make your business official in the eyes of the government, the IRS and your clients.
You’ll need help. There are tools like Quicken and FreshBooks that do a lot of the work. Mobile apps like SPENT Money allow you to separate personal and business transactions with a swipe, like Tinder, while MileIQ automatically logs your mileage if your work requires a lot of driving.
File with the proper local and state agencies
You can score some big fines if you wade into the business world without properly announcing yourself. Your state and local tax boards want their pound of flesh, after all, and if it’s discovered that you’re running a business without filing the proper paperwork, you’ll face penalties of all sorts. And you may not even be recognized as a business at all.
California’s Franchise Tax Board spells out a danger faced by unregistered businesses in that state (and others): “Since it is not fully recognized as an ‘entity’ in California, any contracts entered into by the nonqualified or nonregistered company can be voided by the other contracting party.”
Once you start working with other businesses, you need to be able to meet them on an equal playing field or you just won’t have the same rights. That’s true even if you’re a freelancer.
Avoid payroll tax issues
The IRS is always on the lookout for businesses that don’t pay the proper payroll taxes. That has been particularly true of small businesses, which represent a huge source of uncollected taxes. Payroll taxes that go unmanaged create nightmare scenarios for the business: tax debt can accrue, the IRS can swoop in and lock your doors, or even seize your property. The IRS doesn’t take debt lightly, and if you’re running a small business, be aware that they may be paying you particular attention.
This is the internet age, though, and there is all kinds of help out there. One of my favorite payroll tax resources is Gusto, a company that helps businesses manage payroll and the other joys of HR. Even their free resources offer a good guide to starting out and keeping clear of the IRS.
Maintain good records
This is just big-kid stuff: keep track of your bank records, save your receipts, keep up with your taxes. Hire a bookkeeper if need be. (Which you probably “need be.”) Accounting software is a necessity, unless you have an accountant sibling who owes you one after that time they knocked a wasp’s nest on your head when you were kids.
This is the obvious stuff, but it boils down to staying aware of the physical artifacts of the business (receipts, invoices, tax forms) as well as the digital (that accounting software) and merging them. Bringing all your financials together is one of the trickier parts of getting a business off the ground, but being smart about this out of the gates will help establish a system that carries you through successive stages of growth.
Know your receivables
This is an extension of tip number four, and it is very important: keep track of who owes you. It is good to have a bunch of customers; it is bad to forget about them when it’s time to pay up. Develop a solid system of tracking your customers, sending invoices and following up to make sure customers are paying in a timely manner. The name of the game here is communication. Do not let the other demands of the business make you go radio-silent at this essential stage of the customer interaction.
Understand cash flows
Combine your accounts payable with your accounts receivable and you’ve got a sense of the cash flow of your business. This, too, is hard to get a grasp on at first, because maybe you’re not making any money but you’re shelling out a lot for bills and so on. It’ll seem unbalanced and you’ll forget to develop visibility into the way money moves into and out of the “system” of your business.
Cash flow is affected by the seasons, by line of credit, by your number of customers and all sorts of other factors both big and small. There may be no better snapshot of the health of your company than to sit back and analyze how and when money comes through the business.
Understanding cash flow may seem obvious, but it can present some of the most insidious traps. Misread your cash flow and you may not pay the right amount in taxes, you may miss making payments or you may not collected money owed. Cash flow represents the culmination of these other issues. Misunderstand it and you’re scrambling to put out fires. If you get it dialed in, you understand the totality of your ever-evolving business, even if you aren’t an accounting freak like, ahem, some of us.