When you start a new business, you want to start on the best footing possible. 415 Group Senior Manager Dominic Reolfi, CPA/ABV, MT, explains how properly setting up your accounting system can make or break your business in the end.
You've done the hard work. You have a new business idea or you've found an existing business to purchase. Want to help ensure your business success? Pay attention to correctly set up your business accounting system. Here's how:
- Consider a business entity. Choosing the right legal and tax entity for your business is important. Consult tax experts to discuss your options. On the tax side, sole proprietors use a Form 1040 Schedule C to report their activity, while other business entities such as S-Corporations and Partnerships file informational returns and pass-through profits to your individual tax return. C-Corporations require separate tax returns without pass-through of profits onto your personal tax return.
- Determine if you'll use cash versus accrual basis. There are different approved methods of accounting. You will need to determine which is best for you. Sometimes your business dictates a required method, but not always. The basic difference lies in when you can book revenue and expense. One method (cash) is based upon when you actually receive or make payment. While the accrual method allows capturing this same information when there is an established obligation.
- Separate your books. If starting a business from scratch, remember to set up separate bank accounts and recordkeeping. IRS auditors are quick to disallow expenses when your business expenses are mingled together with personal expenses. The same is true with credit cards. Use a separate credit card for your business transactions.
- Use sub-ledgers. Well-run businesses understand the need to organize elements of their business into accounting categories. These categories often use their own reporting system called sub-ledgers. Common areas are sales, accounts receivable, accounts payable, fixed assets, and inventory.
- Honor cash flow. Often success or failure of your business is predicated on whether you have enough cash to pay your bills. Determining your cash needs means understanding the cash situation of your business. To do this requires a good set of records. This includes recording your current situation on a timely basis and establishing a forecast of cash needs throughout the year.
- Create a fortress balance sheet. Banks love a strong balance sheet. If you think your business may need money for expansion, you will want to focus on developing a strong balance sheet that is low in debt and high in liquid assets like cash and accounts receivable. The irony here is that it's easy to borrow money when your records show you don't need it and it's hard to borrow money when you do need the funds.
- Identify financial pressure points. Every business has a few financial items that drive profitability. Do you know yours? It might be payroll in a labor-intensive business. It might be rent in a retail establishment. Perhaps your margins are low because of heavy promotional costs. A strong accounting system will help you stay focused on the most important financial elements of your business.
- Understand seasonality. By setting up a good accounting system AND forecasting performance over a twelve-month period, you will understand the true needs of your business. This is especially important if your business is seasonal in nature.
Remember, by spending time setting up the accounting system that is right for you, you are increasing your business' chance for success.
Want to make sure everything is set up correctly? Contact us today to learn about our business consulting services.
At 415 Group, we’ve seen what it looks like when a business correctly sets up their accounting system. We’ve also seen what happens when it’s not set up correctly in the beginning and everything that needs done to fix problems that arise. Getting all the pieces in place at the start will greatly benefit you in the long run.
If you’re starting a new business, you’ll want a trusted advisor in your corner. They can make sure you choose the right type of entity, set up accounting software, separate your books and more. This might take longer than you would like in the beginning, but it will save you the hassle of going back and fixing problems that could have been mitigated.
For example, if you choose the wrong type of business entity, there are ways to change it later on. However, depending on what you selected, it can be difficult. And, if you incorrectly set up your accounting records, you’ll incur a lot of time and pain to get things corrected.
We also try to look towards the future when setting up an accounting system. We have multiple databases that we can pull benchmarking data from, and your accounting system needs set up to accurately compare those results to your industry and more importantly your competitors. The extra time we spend up front can really be beneficial in determining how to outperform your peers.
We know that when you have a great business idea, you get really excited about it, and then it’s full steam ahead. You know how to handle everything on the front end, but do you know how to handle things in the background? Again, hiring an advisor – such as 415 Group – can ensure you have a good foundation to get your business off the ground.
At 415 Group, we have experience in all of the areas listed below. As a business owner, you’ll find it easy and helpful being able to come to one place that can help you with all aspects of your accounting system. Reach out to us today to find out how we can help.