You’ve done it! You came up with the perfect business idea. Now, how do you turn that idea into a successful business? Your first step isn’t choosing a catchy name or designing the perfect logo—it’s putting together a financial plan. That’s where The Essential Guide to Accounting for Entrepreneurs comes in.
As a business owner, you’re going to have a lot of questions about finance and accounting – fixed costs, cash flow, financial statements, and more. Understanding these concepts is key to making informed decisions and ensuring your business stays financially healthy. Before launching your business, you need a clear picture of your financial position. Here’s a quick overview of business expenses and how to manage them.
Fixed Costs and Variable Costs
Fixed costs are the costs your business must pay, no matter how much of your product or service you sell. Overhead, such as rent and payroll, is a fixed cost. Many entrepreneurs start out as a very small team working out of their homes and have lower fixed costs. Even so, it’s wise to calculate what the cost would be in the future when your business grows beyond your home office so that you can better prepare for this growth.
Variable costs change based on how much of your product or service you sell. Costs of labour, materials, and delivery are good examples of variable costs. Since you’re just starting your business, this will be an estimated amount. As your business grows, your variable costs will be more predictable and set.
Managing Cash Flow
Once your business is rolling and you generate revenue, it’s time to manage your cash flow accurately. You can keep cash flow in check with an invoicing strategy that puts accounts receivable (money owed to you) on a set schedule. Making this schedule and any retributions that may come from late payments clear to your clients from the beginning sets the tone for a successful working relationship. It also avoids unexpected overdraft fees on your account because a payment came in late.
A common business strategy is to accept some of the money upfront before finishing the task. This is called unearned revenue, and you need to be very careful with this money since the goods/services promised have not yet been delivered. Keep a detailed record of this in case of future disputes between the client and your business. This is where a tool like QuickBooks or Xero comes in handy because it allows you to create billable entries such as delayed charges. That way, you’ll never forget to bill when a project is complete. Customer satisfaction helps a business succeed, but protecting the future of your business with diligent accounting is imperative.
On top of your accounts receivable, you also have accounts payable to manage. This is the money that you owe, and it is everything from your rent to creditors. Keep on top of this by simplifying the process—set up all your payments to be due on the same date. Most companies are happy to do so with a simple phone call.
Understanding Financial Statements
Every entrepreneur should familiarize themselves with three key financial statements:
- Income Statement: Tracks revenues and expenses over a specific period.
- Balance Sheet: Shows a snapshot of your business’s assets, liabilities, and equity.
- Cash Flow Statement: Details how money flows in and out of your business.
Understanding these statements will help you assess your business’s financial health and make informed decisions.
Choosing Accounting Software
When it comes to managing your finances, choosing the right accounting software can make all the difference. While QuickBooks and Wagepoint are great technology solutions, the options for accounting technology are endless.
Registering for Taxes and Payroll Systems
Make sure your business is registered for a business number with the Canada Revenue Agency (CRA). This will enable you to handle GST/HST, payroll, and other tax obligations. If you plan to hire employees, setting up a payroll system is essential to ensure proper tax deductions and compliance with Canadian labour laws.
Consulting with Professionals
This is a lot of important work for one entrepreneur to handle. Having a dedicated accounting team can make this easier, but for small businesses, it’s not feasible. When you outsource your accounting team, you get more flexible billing and a team of experts that you pay when you need them, which makes it easier. They can also guide you through important financial milestones in your business to ensure future success.
Accounting for your small business can be overwhelming, and more often than not, it’s best to trust the professionals so you can focus on your business. At SBLR, we use top-tier accounting software and have worked with entrepreneurs at every stage of their business. No matter which stage you’re currently in, we’re here to help. Request a consultation to get started.