Accounting - the language of business

the language of business is scary

Unless you're an MBA accounting usually doesn't sound like fun. It's not scary but if you're going to play the game you must learn to speak the language of business.

Accounting Crash Course

Okay, here it is, as painless as possible. Accounting and Bookkeeping are different. Accounting is what accountants or CPAs (certified public accountants) do to prepare your taxes. Bookkeeping is what bookkeepers or business owners do to keep your business running smoothly. Bookkeeping is made up of two things (1) Payables: paying bills, paying your employees, contractors, and yourself; and (2) Receivables: sending invoices, sending proposals, getting paid, and making sure your invoices get paid. That’s basically bookkeeping. You can add to it things like categorizing income and/or expenses to see how you’re spending money and how you’re making money.

Here are the things your CPA will want to know:

• How much money did you bring in this year? (Gross Revenue)
• How much money did you spend on wages for employees and contractors? How much money did you spend on everything else?
• Did you take investments or loans?
• Did you make any investments in things like machinery, computers, office equipment or property?
• Hire a bookkeeper when you’re too busy to send invoices and categorize expenses.

Get ready for a plug...

In reality, bookkeeping shouldn’t take you longer than one hour per month with the help of LessAccounting.com...

Okay plug over.

When you’re in the early stages of freelancing, accounting is simple. You always know what you have in the bank, and you only have a few expenses and accounts to manage in receivables. As you become more established, your accounting needs grow. Things can be easier to manage later if you set up a simple accounting protocol early--before financial record-keeping problems arise and start to take over your life.

the language of business, freelancer edition.

• You need a system for billing people. There are tons of invoicing tools online (Hint: http://lessaccounting.com). Most have free accounts for you to try out, so utilize these valuable resources. Web-based systems are the best. Allan once lost all of his 2002 data due to a hard drive crash, and no, he didn’t have backups. It cost him $3500 to recover his accounting data for that year.
• You need to know who owes you money. You need to know who is past-due and who is paid up. Some of these invoicing applications allow for due date tracking. Do not use a calendar app like Google Calendar or iCal to do that for you, because in doing so, you will forget things.
• Track your expenses with a fine-tooth comb. Tracking business expenses will save you thousands of dollars at the end of the year. Save every gas and food receipt, track your mileage on your car, remember parking fees, log computer expenses, watch phone lines, Internet connections, and anything else related to your business. Be aware of the commonly-missed business expenses and what you need to record in addition to receipts (Did you know that “costs of goods sold” are tax deductible?). There are several ways to track expenses. Using a shoebox for handling expenses is asking for trouble. There are many expense- tracking services online. You can also use a Google spreadsheet and enter them by hand.
• Don’t use your personal bank accounts to make purchases for your business. Have at least one business bank account, and use it exclusively. If you violate this rule, you risk “piercing the corporate veil” which means if you get into legal hot water, you could lose your business, your house, your car, and money.
• Find a good accountant--someone you feel comfortable with, who is affordable and available to answer your questions. Having a good accountant might cost you money upfront, but they should be able to save you money every year. No one likes accounting. Designers would rather design and programmers would rather code, but it’s a necessity, so take the time to find a qualified accountant who can help you. Be sure to be upfront about your expectations as a client. Do you need financial planning? Do you need an accountant or just a tax service? Get an estimate on all of the services you may need.

Don’t allow accounting to take over your life. Accounting won’t make you money. If you find yourself too busy to handle it, ask your accountant about bookkeeping services. Do what makes you money. You are not an accountant, so don’t try to be.

Baby Step Into Accounting Best Practices

Here’s what our accountant wrote, regarding what type of business to choose if you’re just starting out as a freelancer or consultant:

1. KISS. Keep it simple starting out. The simplest form of entity for running your first business is called a sole proprietorship. This form of ownership requires NO special communication or filings to the Internal Revenue Service until you start paying employees.
2. As a sole proprietor, you are the owner/entity, which might only require you to attain an occupational license if your county or municipality mandates one. As the owner, you are also liable to remit all state or city tax collections on retail or wholesale sales your business collects. Service businesses and most cross-state sales are exempt from state tax collections; however, you are required to pay state sales tax on Internet purchases.
3. If you are concerned about personal liability as a sole proprietorship, then do the cheapest and simplest thing which is buying a personal liability umbrella policy. The best way to avoid liability is to learn your trade well, and keep accurate records on LessAccounting.
4. Concentrate on building your business, not communicating with the IRS. As a sole proprietor, the IRS will not even know you exist until after you file your first personal income tax return. This return will include a Schedule C which communicates all of the sales and expenses you recorded, using LessAccounting, for your business. These sales and expenses do not have to be in a separate bank account as mandated by the LLC or Incorporation format. The sole proprietor losses offset your day job’s income to provide a possible tax refund.
5. Over 90% of small businesses fail or change ownership within the first five years. Plan for your business to thrive, but if it fails under a sole proprietorship, you simply stop doing business. There are no communications or special forms with the IRS, no additional taxes to get your investment returned, and no high accounting fees to close out your entity. Simply file a final Schedule C with your next personal return. KISS.
6. How do you get paid as a sole proprietorship? Simply take the money out as a draw. No payroll taxes or quarterly forms are needed. Most start-ups lose money for the first several years, so keep your day job to pay your living expenses.
7. After you pass the five year hurdle, then you can talk with a CPA about another entity type that might save you on taxes. Again, a simple book-keeping entry transfers all of the business assets from the sole proprietorship into the new entity, without any tax penalties. After that, you can quit your day job, and celebrate your new livelihood.

The full article Accounting Tips For Small Businesses