Accounting for Small Businesses is oftentimes the biggest stressor for small business owners, especially creatives. Crunching the numbers can feel overwhelming. But without the proper preparation and tracking, not having the right cash flow clarity can be the difference between you being a thriving business and closing your doors.
Did you know that recent studies have shown that 50 percent of small businesses will fail within the first year? How about the fact that a staggering 95 percent will close their doors before they hit their fifth year of operation? That one seems a bit hard to believe, but in today’s economy it could be true. Here are some additional stats that may surprise you (source):
- 40% of small businesses are profitable
- 30% break even
- 30% are continually losing money
These statistics are the reasons why you need to be taking “the numbers” seriously from day one, whether you have a team running a startup or you are just ramping up your side hustle to eventually allow you to leave a full-time job.
The Right Mindset
Having the right mindset, paired with the right set of tools is absolutely key to getting started. Here is a small checklist of things we want you to start implementing and thinking about.
Know Which Category You Fall Into
Before you can nail down a proper way to track any income or expenses, you really must have a clear understanding of which type of company you are running (Sole Proprietor, LLC, Corporation, etc.). Each type has clear implications on taxes, pay structure, acceptable ways to reimburse yourself, etc. We strongly suggest that you do some homework on your options before picking the direction that is best for you and your business.
Separate Bank Account
Regardless of the type of small business you are running, you NEED a separate bank account. Even though Sole Proprietors can (and often do) just operate out of their own checking accounts, it can be a hairy mess if you lose track of time and aren’t recording things properly. There are many great FREE banking options out there. Check in with your local credit union or bank for options. Do not settle for paid checking — if you think this is your only option, you are throwing away money.
Be Prepared to Record all Income and Expenses
It can seem pretty daunting to record every receipt, every mile and every dollar earned, but it is essential. We have some old school methods and some techie options (for the non-techie) to help streamline this process.
Process for Tracking and Collecting Payment
I can’t reiterate enough how important it is to have not only a sales process, but a collection process too. It doesn’t need to be elaborate, but putting things like contracts, invoicing, late fees, etc. in place can make such a major difference. In the beginning, I trusted too many people. Not that people don’t have the best intentions in the beginning, but you just never know what life will throw at you. Have written and signed agreements. Have due dates for payment. Have penalties for not following your guidelines. Please keep in mind these are somewhat structured by state, so don’t forget to check out local laws. Things like sales tax, quarterly filings and late fee percentages are often highly regulated.
Managing Your Cash
If you have ever worked in corporate America, you are used the standard paycheck. The pay slip that already has all your taxes, social security and often even fees for health insurance and retirement deducted. When setting prices and managing cash, it is easy to forget about all this extra overhead. A good rule of thumb to keep in mind if running strictly on your own is 50% of every dollar owned you can keep, 30% must be saved for taxes (more or less depending on your state and local laws), and 20% is essential for padding in your account to pay for things such as marketing, office supplies, meetings, entertainment (for business purposes), education (reinvesting in yourself), etc. I often see people charging what they were used to taking home. To actually continue making the same paycheck, you often need to double or even triple your old hourly rate to come out in the same place.
- Developing a Rhythm
Over time you will begin to see where things are falling short. Perhaps you are spending twice as much time on one project as you anticipated. Sure you may not be “losing” money, but if you are working 80 hours a week, you’re not profitable. I get it! I did this in the beginning. I wore myself ragged until 2, 3, 4 or even sometimes 5 a.m. But working more does not always equal more pay or more profitability. Take a step back and start streamlining systems, perhaps charging more or setting more realistic expectations with your clients/customers. You may eventually start to see a pattern and be able to predict your paycheck. Keep in mind that many industries have slow and busy seasons, so you must be prepared to earn varying amounts, depending on the season. This fluctuation doesn’t mean you're failing, it just means you need to plan for it.
If you have to work 80 hours a week, you’re not profitable.
- Seek Out an Advisor
There will come a point in time where you need to seek outside help. This may mean contacting a lawyer to review your contracts. Or maybe you need help with tax preparation or even day to day bookkeeping. It is ok to invest in good help. If you are looking for a talented CPA specializing in helping Creative Entrepreneurs, we highly recommend Amy Northard! She even has some great content on her blog, which you should check out. Or, if you find if your business is a bit more complicated in the online business world (like our own), you might check out the newest addition to our team, Parker & Corey from Evolved Finance — and be sure to tell them we sent you. They specialize in bookkeeping and small business consulting for multi 6-figure and 7-figure online businesses.
There are many great methods out there to begin tracking all the details for your business. Finding a system that works for you, and that you will use, appreciate and rely on, is important.
OLD SCHOOL - EXCEL
Spoiler alert: we built a company from zero to nearly $200k before we stopped using Excel. Why use complicated fancy accounting software when you can easily do it the old school way for $0? For years we used Excel to track every receipt, every mile driven, all contractors we used, other expenses, etc. We had separate sheets that gave us an overview of how we were doing — one that helped us forecast future income (especially when we were still running a client based business), one for contracted/paid income, and one that tracked when we paid ourselves and how much. Every business is a little bit different, and Excel can easily be customized. If this sounds completely overwhelming to you, then we have some other options for you to consider.
Here’s a good middle ground that offers a bit less DIY, but has some great beginner tools integrated. More good news — it’s free! Wave Accounting is the perfect solution for small businesses (they are literally geared towards businesses with fewer than 9 employees). They integrate smoothly with most banks, which means no manual entry of sales or purchases (this is when it’s important to have your separate bank account!).
Wave Accounting covers everything from Invoicing, Accounting, Payroll, Payments and even Personal Finance. Their interface is really easy to learn, but if you get stuck they have a tremendous FAQ and Blog section to help you out.
If you are looking for a more robust option, then QuickBooks is definitely a name you can trust. There is a bit of an investment, but you’ll be sure to find every feature you could possibly need for now and as your company grows. Although they are known for their desktop based software, you never have to worry about your data. It backs up automatically with bank level security, so it is always safe, and always available — from any device. You can even try it free for 30 days (no credit card required). Self-Employed? You can start for as little as $5 a month.
Now, I would be lying to you if I said there weren’t other options on the market. But I, as someone who has shopped bookkeepers and CPAs from around the country, know Quickbooks is the industry standard. So if you end up knee deep and wanting to eventually hand off your books to let someone else manage the day to day or just file in time for tax season, I would go with a name that is recommended by the vast majority of trained professionals out there. Just sayin’. (P.S. This is the solution we transitioned to post-Excel days — bonus, we don’t even manage it, our bookkeeper does IT ALL for us!)
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Hate holding onto every receipt and tracking every mile you drive for business? We have a couple innovate solutions for you.
A tier off of the innovative Wave Accounting is their Wave App for Receipts. Are you the person who’s always digging around your bag looking for the last Michael’s Craft Store receipt? Then this app will change your life! Simply open it up and snap a pic through the app of your receipt, and it’ll email it directly to you. You then have the option of forwarding it on to firstname.lastname@example.org and it’ll flow directly into your Wave account.
According to most accountants we talk to, mileage deduction is one of the highest deductions small business owners miss out on every year. This is because tracking mileage can be a major headache, filled with scattered notes or forgotten resets of the odometer.
Luckily, the Mile IQ App exists for Apple and Google phone users and it’s free! You simply download the app and it knows when you’re traveling. It’ll send you an alert once the trip is over asking you to swipe to the left for “personal” trip or swipe to the right for “business” trip. You can then view your entire (IRS Compliant tracked) mileage on your desktop from the Cloud and even give access to your accountant. GENIUS!
We realize that accounting is just one piece of the gigantic puzzle that makes a small business successful. Sometimes, before we can even begin to learn or implement things like bank accounts, budgeting and tracking, we’ve got to take it a few steps back and lay the foundation. We’ve created the best FREE tool for you to do this! We’d love to have you in our free course, Your Biz On Autopilot.
Stop wasting time and turn your dream into a reality. Let’s turn your side hustle into a soul fulfilling, goal-crushing, freaking profitable creative business. We get it. You work all day and then you come home and you hustle even harder. Balancing essentially two full time jobs is not for everyone. Let’s make a plan, simplify, and start earning what you are worth. Start your free course today.