Launching a startup and steering it through the early years is no easy feat. As a business owner, you’re likely juggling multiple roles while facing numerous unexpected challenges along the way. Amidst the chaos, one aspect that demands your immediate attention is the management of your business’s finances. While not every entrepreneur starts with a background in bookkeeping and accounting, these skills are vital for long-term survival and success. This article aims to provide you with a fundamental understanding of how to manage your money and how to help you steer clear of the pitfalls that can ensnare ill-prepared business owners.
Differentiating Between Accounting and Bookkeeping
Many people mistakenly use the terms “accounting” and “bookkeeping” interchangeably. While both roles involve managing financial data and tracking transactions, there are key distinctions between the two. Bookkeeping primarily focuses on the day-to-day management of financial data, while accountants assist businesses in navigating the tax code and devising long-term financial plans.
What Do Accountants Do?
Accountants primarily handle long-term financial matters, such as filing taxes, securing loans, and developing strategic business plans. They often work closely with bookkeepers, requiring access to your business’s financial records to assist with tax compliance, profit and loss tracking, and data-driven financial decision-making.
Accountants play a crucial role in:
Ensuring accurate tax filing and helping businesses avoid penalties from the IRS.
Conducting audits to ensure financial compliance.
Advising business owners on long-term financial matters and optimal business structures.
Analyzing data compiled by bookkeepers to make informed financial decisions.
What Do Bookkeepers Do?
Bookkeepers have a central responsibility of tracking and recording all financial transactions. To carry out their duties effectively, bookkeepers require a deep understanding of your business’s structure and operations. They are often actively involved in routine business operations and may even handle payroll.
Specific tasks performed by bookkeepers include:
Managing financial data, such as transactions and bank statements.
Facilitating communication between the business and banking services.
Preparing regular financial statements and reports.
Providing day-to-day, industry-specific financial advice.
Managing payroll.
Bookkeepers and accountants can work as full-time or part-time employees, or they can be hired as freelance independent contractors. Additionally, numerous online platforms offer outsourced bookkeeping and accounting services for business owners.
While the assistance of a professional bookkeeper is invaluable, if you’re unable to afford one or utilize bookkeeping or accounting software, you can still assume some of the responsibilities on your own.
Best Practices for Entrepreneurs in Bookkeeping (Beyond Impeccable Records):
Separate Your Personal and Business Accounts
In the early years, the line between personal and business finances can often blur. Even if you have a dedicated business bank account, it’s crucial to keep your personal and business finances separate. Establishing a distinct legal entity, such as an LLC or an S corporation, is a solid starting point, but it’s essential to uphold the separation by maintaining distinct financial activities for your business.
Using your personal account for business purchases, no matter how small, makes it challenging to identify them as legitimate business expenses during tax season. Over time, these expenses can accumulate and impact your finances, especially in the early stages when margins are thin.
Gain Control Over Accounts Payable and Accounts Receivable
To ensure your business’s financial health, it’s vital to maintain a balanced relationship between accounts payable (AP) and accounts receivable (AR).
AP refers to the money your business owes to creditors and suppliers, excluding costs like payroll and mortgages. On the other hand, AR represents the money owed to your business in exchange for products or services rendered. Monitoring AR is particularly critical, as it directly impacts your ability to fulfill financial obligations.
Maintaining a healthy balance between AP and AR serves as a gauge for your company’s overall financial well-being and influences lenders and investors when evaluating your business’s worth and credibility.
Implement systems and processes to ensure prompt payment of invoices
Aim to keep unpaid invoices to no more than 10 to 15% of the total. Consistent follow-ups and proactive communication are crucial to tracking outstanding payments. You may also consider incorporating late payment fees or penalties into your business contracts to incentivize timely payments.
By adopting these financial management practices, even without formal expertise, you can establish a strong foundation for your startup’s financial success and manage your money properly. Remember, understanding and actively managing your business’s finances are key to steering it towards long-term growth and profitability.
Need a hand? Reach out and our team would be happy to help you work through any bumps in your business!