When you have so many different hats to wear as an entrepreneur, it can be easy to leave the accounting one in the closet!
Let’s face it, most entrepreneurs don’t start a new business for the gleeful pleasure of carrying out accounting tasks and functions. In fact, between the excitement of building a new enterprise and the challenge of juggling so many moving parts, accounting can often find itself right at the bottom of the business checklist.
But accounting is a vitally important aspect of running a successful business. It’s not just about recording transactions and preparing financial statements, it is also about making informed decisions, complying with tax laws and managing cash flow.
By neglecting your accounting duties, you expose your business to some potentially serious problems like inaccurate reporting, missed deadlines, cash flow issues, tax penalties, and even fraud. To help you avoid these pitfalls, here are our top 8 accounting tips to help your new business operate more efficiently and effectively.
1. Understand Accounting Methods
There are two main accounting methods: cash basis and accrual basis. Cash basis accounting records transactions when cash is received or paid, while the accrual-basis method records transactions when they are incurred, regardless of cash flow.
In Canada, most businesses are required by the CRA to use the accrual method, however, if you are recording farming, fishing or commission income, then you have the choice of either method.
2. Separate your Personal and Business Finances
In order to maintain a clear distinction between your personal and business finances, you should open a separate bank account and credit card for your business. This simplifies record keeping and allows you to track cash flow, prepare financial statements and file taxes more efficiently. Plus, you won’t have to explain to your spouse why you bought a new laptop with the grocery money!
3. Accounting Software is your Friend
If crunching numbers, creating detailed spreadsheets and tracking financial metrics isn’t your cup of tea (not everyone appreciates the finer things in life), then we suggest utilizing reputable accounting software whenever possible.
By automating many of your accounting processes, you can save time, reduce errors and maintain an accurate picture of your overall financial situation. Accounting software can streamline your bookkeeping, help with payroll, generate reports, track invoices and payments, manage inventory and calculate taxes.
There are many options available for different types of businesses and budgets, such as QuickBooks, FreshBooks, Xero and Wave. You should research the features, benefits, and costs of each option before choosing one that suits your needs.
4. Keep Accurate and Organized Records
When you start a new business, you can quickly become buried under an avalanche of documents and paperwork. Put a system in place as early as possible to keep accurate and organized records of all your business transactions. Whether using the latest accounting software or the oldest filing cabinet, you’ll want to save all documents relating to business operations, including invoices, receipts, bills, bank statements, contracts and tax forms.
You should keep both digital and physical copies of these documents in a secure place for at least six years (as required by the CRA). You should also categorize your transactions by type i.e. revenue, expenses, assets, liabilities, and equity. Be sure to reconcile your records regularly to ensure they match your bank statements.
Maintaining accurate and organized records is crucial for monitoring financial performance and complying with tax obligations. And as an added bonus, it’s also your best defence against the much-feared CRA business audit!
5. Review your Financial Statements Regularly
Financial statements are reports that summarize your business’s financial activities and position at a given period of time. Accounting software can generate these reports for you, or you can use your financial records to create your own.
The main financial statements are the income statement (or profit and loss statement), the balance sheet (or statement of financial position), and the cash flow statement (or statement of cash flows). These statements provide valuable information about:
- Profitability – how much revenue you generate versus how much expenses you incur
- Liquidity – how much cash you have available to pay your bills
- Solvency – how much debt you owe versus how much equity you have
- Efficiency – how well you use your resources to generate revenue
- Growth – how much your revenue and expenses change over time
By generating and reviewing your financial statements regularly (at least monthly or quarterly), you gain a better understanding of how your business is doing financially. This information can be used to make informed decisions, identify trends or issues that need attention and to set goals and budgets for the future. You should also compare your financial statements with industry benchmarks and competitors to see how you stack up against them and identify areas for improvement.
6. Monitor and Improve your Cash Flow
Cash flow is the amount of money that flows in and out of your business over a period of time. It is different from profit, which is the amount of money that remains after deducting all expenses from your revenue.
As we saw above, regularly preparing and analyzing cash flow statements will help you monitor how much cash you generate and spend from operating, investing, and financing activities.
You can then use this data (alongside realistic assumptions) to generate a cash flow budget that forecasts how much cash you expect to receive and spend over a future period of time. By comparing your actual cash flow with your projected cash flow you can uncover any gaps or discrepancies that need to be addressed.
There are also certain cash flow strategies and best practices that you can implement to maintain a healthy cash flow, such as:
- Invoicing promptly and accurately
- Offering discounts or incentives for early payments
- Collecting payments electronically
- Following up on overdue accounts receivable
- Negotiating favourable terms with suppliers and creditors
- Minimizing inventory and overhead costs
- Diversifying your income sources
By monitoring and improving your cash flow, you can ensure that you have enough liquid funds to cover your expenses, meet your obligations, seize opportunities, and grow your business.
7. Plan Ahead for Taxes
If you’re going to run your own business, then you’re going to have to deal with taxes. This can be a stressful and complicated process, especially if you don’t plan ahead and prepare for tax season throughout the year. Here are a few tips to get you started:
- Register your business with the CRA and obtain any necessary tax identification numbers, such as a business number (BN).
- Register for a GST/HST account once your total revenue (before expenses) exceeds $30,000.
- Determine your tax obligations and deadlines, including income tax, sales tax, and payroll deductions.
- Track and report your taxable income and expenses, and keep receipts and records of them (this is where all your hard work from Tip #4 pays off!).
- Estimate and pay your taxes on time, either quarterly or annually, depending on your business structure and income level. You can use online calculators or software to help you estimate your taxes, or consult with a tax professional for guidance.
By planning ahead for taxes, you can reduce your tax burden, avoid interest and penalties, and claim any deductions or credits that you are eligible for (see more below).
8. Know your Tax Deductions and Credits
One of the most important accounting tips for entrepreneurs and startups is to maximize their tax deductions and credits. Tax deductions are expenses that you can subtract from your income to reduce the amount of tax you owe. Tax credits are amounts that you can subtract from your tax payable to lower your tax bill.
Entrepreneurs should be utilizing these powerful tools wherever possible to maximize their tax savings and improve overall cash flow. Here are some of the most important credits and deductions that can save your business money:
Business expenses: You can deduct any reasonable expenses that you incur to earn business income, such as rent, utilities, supplies, advertising, travel, meals and entertainment. However, you must keep receipts and records (again, Tip #4) to support your claims and show that the expenses are related to your business.
Home office expenses: If you use a part of your home as your principal place of business, or to meet clients, customers, or patients, you can deduct a portion of your home expenses, such as mortgage interest, property taxes, insurance, utilities and maintenance. You must calculate the percentage of your home that you use for business purposes and apply it to your total home expenses.
Capital cost allowance: If you buy or lease assets that are used to earn business income, such as equipment, furniture, vehicles, computers, etc., you can deduct a percentage of their cost over time as depreciation. This is called capital cost allowance (CCA) and it varies depending on the type of asset and the rate assigned by the CRA.
Investment tax credit: If you invest in certain qualified properties or activities that support economic development or innovation in Canada, such as manufacturing, processing, mining, energy conservation and clean energy, you may be eligible for a generous investment tax credit.
Scientific research and experimental development (SR&ED): If you conduct research or experimental development activities that advance the knowledge or technology in your field, you may be eligible for an investment tax credit or a deduction for your SR&ED expenditures. These include wages, materials, overhead, contracts, and capital equipment.
Input tax credit: An input tax credit (ITC) is a mechanism that allows businesses to recover the GST/HST paid or payable on their purchases and expenses related to their commercial activities.
Small business deduction: Canadian-controlled private corporations (CCPCs) that earn active business income in Canada may be eligible for a lower corporate tax rate on the first $500,000 of income. This is called the small business deduction and it reduces your federal corporate tax rate from 15% to 9%.
Final Thoughts
Accounting is an essential part of running a successful business. By following these tips, you can improve your financial management skills, avoid common accounting mistakes, comply with tax laws, and make better business decisions.
However, accounting is not a one-size-fits-all solution – the practices you use must be tailored to suit your specific business needs and goals. While these tips provide a great place to start, you should also seek professional advice from an accountant or a bookkeeper when needed. They can provide you with high-level industry knowledge, expertise, and support to optimize your accounting processes and help you achieve your entrepreneurial dreams.
