Business Guide: Run Your Business. Don't Let Your Business Run You.
Chapter 13

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:

Get ready for a plug...

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

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.

Allan says...

“Over the past few years, our company has grown rapidly. I’ve gone from a freelancer fresh out of college to co-running a business with employees, constant expenses, and a payroll.”

the language of business, freelancer edition.

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.

6 Rules To Save
Your Business

Cashflow is the lifeblood of your business, here's how to avoid cashflow issues.