A peek at my home office. Will be sharing a full tour next week!
Last week I wrote about my relationship to money. One thing that I didn’t really touch on is that in the fact that owning a business really complicates everything. I’ve been making money from Lemon Stripes for about four years now but have only started to feel fully comfortable and on top of my finances in the last four months.
What changed? I hired a new accountant, Brittany, who has not only cleaned up my bookkeeping, but has taught me a lot along the way. Plus I just like her a lot personally which is an added bonus!
I asked her if she would write out her tips for bloggers (also applies to any entrepreneur/small business owner) because she knows what she’s talking about way more than I do about accounting… obviously and I’m always getting asked about this topic. I was so excited when she said yes! So with that, I hand it over to Brittany:
Hey everyone! I’m here to talk about something that’s crucial to the continued success of your business. A lot of small business owners think that accounting isn’t a necessity – as long as income is coming in and the bills are being paid, the rest of it can be hashed out later. Or that it’s more important to focus on revenue generating activities. Or maybe after this most recent tax season, you’re so jaded that you don’t even want to think about it. I get it.
While accounting may not bring in more cash immediately, it will help keep you in business and make a big difference long term, and will save you money. I like to think of it as the foundation. I’m going to share a few tips with you that aren’t too difficult to implement and will make a big difference for your business.
1. Don’t mix business and personal finances
If you’re freelancing and don’t have a separate checking account for your business funds, open one today! You should be able to open an extra checking account with your current bank online. If you’ve incorporated as a business (aka you’re officially a business), you must keep your funds separate. If you use credit cards, designate one card that you use strictly for business. It doesn’t necessarily have to be a “business” card.
Comingling funds often leads to missing out on business expenses which in turn leads to higher taxes and we definitely don’t want that! Comingling also makes the tax filing process much more difficult, especially if you’re doing it on your own. Treat your business like its own entity (because it is). It has a personality, a heart, a soul – and it needs its own bank account.
2. Keep records
This might seem obvious but you’d be surprised at how many people don’t keep records on their business finances. Most importantly, use invoices with clients and sales, and save your receipts. Simply having the charge on your bank or credit card statement is not enough – in an audit, these expenses will be disallowed (scary thought!). Any expense that is $75 or more must have a receipt. You can either store these electronically or in paper form, whatever works for you. Either way, organize them chronologically by month so referring back to them will be a breeze.
If you have contractors, make sure you get a W9 from them, keep track of what you’re paying them, and issue them a 1099-Misc at the end of the year. If you don’t, the IRS will disallow the expense. A good rule of thumb is that you can never have too much information when it comes to your business’ finances. There’s no such thing as overkill.
3. Use software to stay organized
If you don’t currently use any type of accounting software, you’re missing out! The most popular ones for small businesses are QuickBooks, Xero, and FreshBooks. I suggest visiting each of those sites and testing them out – see which one you vibe with the most. At the end of the day, they all essentially do the same thing so it’s just a matter of finding one that you feel the most comfortable with.
Once you create an account, link your bank accounts to enable the magic of automatically importing your transactions. Even if you sign up, link it, and don’t look at it again until next year when it’s time to file your taxes, you will be so grateful that you have a detailed list of everything that came in and went out of your business. If cost is a factor, and/or you just want something super low-maintenance, Mint is always a good idea.
4. Review your finances monthly
I know, I know – this is totally asking a lot. Especially after I was just all like, “Oh, set it and forget itâ€ but – you should really be reviewing your finances. I promise it’s super easy; all you have to do is run a Profit and Loss/income statement (P&L). This report breaks down your income and expenses. All of the software platforms I mentioned about do this easily.
It will uncover things that you may not notice in the day to day. Are you charging enough for your services? Is this one revenue stream generating more than the others? Are your advertising investments really paying off? As a business owner, I have this idea of how I think my business is performing. Sometimes I’m right but other times, I’m not. Seeing the truth in black and white is powerful. I make a routine out of it for myself and my clients because I find that it’s invaluable. (Note from Julia: True story!)
5. Save for taxes and for yourself
As I’m sure you know, taxes eat-up a lot of your profits and can cause a lot of stress (Note from Julia: Another true story!). I promise they will be less scary and less stressful if you put a plan of action into place. If you don’t have a lot to save, just save whatever you can for taxes. This is one expense that you can’t get away from, so it’s worth it to work it into your budget.
On a monthly basis, when you review your P&L statement, put aside a percentage of your profit for taxes into a separate savings account. A safe percentage to put away of your profit for taxes is about 30%. Your actual percentage may be more or less, depending on a number of factors, such as your total exemptions, your incorporation status, and your itemized deductions. It is best to seek professional advice on this matter. (Note from Julia: Brittany sends me a number at the end of each month and I put that much away. Then I’m all set when it’s time to pay. It’s so helpful!)
As a side note, try to save for yourself and your future. Not only is it important to save for retirement, but also as business owners we have to save for dry spells which happens even to the best of us.
6. Hire a professional
A good accountant will save you time and money. You may not need someone on a regular basis to do your bookkeeping, but it’s a good idea to have someone at least review your books on a quarterly basis. Your accountant will become your greatest ally. You will consult, plan, receive training, and feel confident that you’re maximizing your tax deductions. Knowing that you’re doing everything right will bring about a sense of peace that frees you up to truly focus on growing your business. (Note from Julia: Hiring Brittany has been the number one best thing I’ve done for Lemon Stripes in the last few years. It has completely changed the way I look at my business.)
Brittany is a self-employed accountant that caters to creatives and entrepreneurs. She left Corporate America earlier this year to follow her dreams of working for herself and saving other entrepreneurs from their accounting woes. Love that!