Just when more customers and higher sales start translating into an increase in your income, a tsunami of financial paperwork engulfs you. It's not fair!
Ignoring the problem will only make it worse over time; you'll need to establish sound financial practices – even if you're a solopreneur used to managing by the seat of your pants.
Even though sole proprietors are allowed to mix personal and business finances, eventually you'll regret paying personal expenses directly from your business accounts; untangling items can be a tax season nightmare.
The situation is more serious for an incorporated business. A corporation should never pay the shareholder's personal bills. This can have severely adverse tax consequences, even if you are the only employee.
In addition to creating a messy tax situation, this also makes it difficult to make efficient comparisons of your business's performance over time. Tracking expense trends and budgeting for growth is much easier when you eliminate personal items from business records.
Under no circumstances should the business pay for the costs of your personal vehicle, even if you are using it partly for work purposes. Keep a mileage log and reimburse yourself at the rate per mile established annually for tax purposes.
Never fall behind on your bookkeeping. Enter every transaction within a few days. If you don't have time to stay up-to-date, hire a bookkeeper to enter data at least every couple of weeks.
Proper planning necessitates knowing the financial condition of your business, and financial statements convey a lot of information.
Examine your business numbers frequently. Correcting mistakes immediately is much easier than rectifying errors after they occur. Start with understanding what the business balance sheet tells you about your organization. Then graduate to examining other reports.
The profit and loss statement – or P & L – shows all your income and expenses. Even if you use a cash basis for accounting for tax purposes, having accrual basis records is more enlightening. Accounting software can produce both types of reports if you know how to record transactions and do so as they occur.
Your accountant can show you how to spot trends, strengths, and weaknesses from your financial statements. Obtain advice about standard procedures for setting up new client accounts, tracking invoices, recognizing income, recording expenses, and accounting for financed purchases.
Valuable accounting services include verifying bookkeeping entries for accuracy. This involves checking for correct tax classifications, placement of transactions in the right categories, and reconciliation of errors. Never blindly trust your financial data merely because you use accounting software.
Hiring an accountant assures that you have accurate and understandable financial information. You can withstand that tsunami and save your sanity simply by knowing that your financial systems are functioning soundly. As a result, you have more time to work on those aspects of your business that will make it successful.
Unlike the laws of thermodynamics, no rules of the universe compel you to hire an accountant. However, by scrimping on accounting fees, you may end up spending more than your cost-cutting measures save; entrepreneurs who handle their accounting themselves soon discover it's more complicated than they anticipated.
Becoming a do-it-yourself (DIY) accountant means taking sufficient time to assure that every transaction is correctly recorded in accounts created in the required format, with no ambiguity regarding proper tax treatment of any item. That takes away time from the demands of maintaining your business.
Maybe this doesn't seem overwhelming because you've heard that software does everything. One little problem: computer programs only process the input you select.
Questions to ask yourself before deciding to become a DIY accountant.
Do you have the time to learn about tax classifications and account categories? Can you easily discover errors and adjust journal entries accordingly? Do you know how to record liabilities incurred when purchasing new equipment? Can you navigate tax software for handling depreciation and asset sales? Do you know how to prepare a payroll correctly? Could you handle a tax investigation?
If you answered "no" to any of these questions, hiring an expert is your best choice. Your mistakes will cost more in the long run than the accountant's fees. You'll be spending more time – and earning more money for the business – by focusing your efforts on sales and management rather than accounting.