Separating Business & Personal Finances

When you decide to open a new business, you may not think it is important to create a separation between yourself and the business. Although that may seem easier to start with, longterm, it can actually hinder you, and even be damaging to your personal life. There are many reasons to separate your business and personal finances and it does not have to be difficult to do!

Why it’s Crucial to Separate Your Finances

Separating your business financials from personal has one encompassing importance: a clear understanding of your business. This clarity has many benefits. For one, bookkeeping becomes easier for everyone. The separation of accounts means you don’t have to sift through each transaction to see if it’s business related or not. Thus, saving time on monthly bookkeeping, allowing you to see deductible business expenses, and having more refined reports on your cash flow, budget, and more! Another way having different accounts is beneficial is that it protects your personal assets. If anything were to happen to the company, having intertwined accounts can mean loss of these personal assets as there was no distinction in the beginning. Next, taxes can be time-consuming, stressful, and even confusing for some. By having distinct accounts, it makes tax season a little more effortless and even reduces your risk of filing something incorrectly, or triggering an audit. Finally, having independence as a business can build credibility and show professionalism. This is because some individuals, and even financial institutions, may find business names to be more trustworthy over personal names. Also, by allowing it to run on “its own,” this can show confidence in your company, and gain further trust. 

Where Do I Begin to Do This?

Once you have decided to start the process of establishing your business as its own entity, it may be hard to know where to begin. A good place to get the ball rolling is connecting with a CPA (certified public accountant). CPAs can guide you in what the best type of business set-up (think LLC, etc.) is for your needs (and wants) and ensure your personal finances remain segregated. If a CPA is currently out of the question, as they can be quite expensive, consider speaking to other business owners and where they started as well as researching the different types of business structures. (Feel free to check out this link to decide on what business structure will work for you.) Next, it’s time to create an EIN for your business. EIN stands for “employer identification number” and works similarly to a social security number. You can do this through the IRS’s website or your CPA can do it for you. After this, you’re going to open a bank account solely for your business. Spend time researching what the best bank is for your needs and what type of account will benefit you the most. Furthermore, don’t forget to apply for any credit cards you need and make sure that anyone in the business who may need to use company money has a business card/account as well. Additionally, it may be likely that you will use personal funds to kick off this account. If you are working with a CPA, you’ll want to ensure these transfers are clear and coded correctly for your business. Finally, choose an accounting software that works for your company. There are many different types of accounting software to choose from but it is crucial to pick one to keep your business books clean. Spend time looking up what would work for you and what needs you require for your business. Alternatively, hiring a CPA, or even other accountants/bookkeeping professionals, can aid you by cleaning up your books every month and then regularly reviewing them so you have a greater understanding of where your financials stand. Moreover, keep track of your receipts! While this can be quite tedious, receipts prove that the money you spent is correctly coded, and for some expenses, guarantees the tax write-off for X category is true. Making this habit from the start can make any audit run more smoothly if that were to happen. What’s more is that some software, like QuickBooks Online, allows you to upload receipts from your mobile device. So, again, choose business software that works for you. Once all these steps are taken, you are ready to move forward to start the journey of transforming your (small?) business!

Separation is Very Beneficial!

Overall, maintaining different accounts is vital to the longevity of your business, can help your business grow, save you from difficulty in the future, and isn’t overly complicated to begin with!

Making Businesses Understand why They Need You as their Accountant

A little under half of businesses have never worked with an accountant and have no plans to! On the other hand, in the same study, those who have worked with an accountant, just under 75% of them are very satisfied with their accountant. If a large majority of businesses are happy with their accountant, why are there so many businesses without them? As an accountant, it’s crucial to figure out what these businesses need & help show them why your work is beneficial to them.

So, what do businesses really want?

There are many different things a potential client may be looking for when it comes to wanting an accountant. For starters, every relationship is built on trust, and relationships can not last without it. In the aforementioned study, 78% of business owners said they want a trusted advisor, making this the top rated answer. The next top answers, tying in at 74%, are that they want accountants to understand their industry and respond quickly. Finally, being affordable comes in at fourth at 70% and communicates clearly ranks last at 69%. 

In addition to what clients say they want, it is important to know what the top, long-term issues that your clients face with money are. At the top of the list, and perhaps the most obvious, is cash flow problems (32%) If you have bad cash flow problems, most of the other common issues clients face will follow suit. This is shown by the second top answer being low profitability at a close 31% as well as the fourth and fifth ranking answers, needing capital (21%) and too much debt (11%). Your job as an accountant is to take all these worries and advise your clients to the best decisions they can make.

How do you help as an accountant?

The most considerable hurdle for accountants is that many business owners do not know why they need you. Clients need to understand that you bring more to the table than help in filing taxes and making the books look clean. There is no better place to start than being a great listener and truly understanding their issues as well as being sympathetic towards them. Furthermore, ask open-ended questions to let the client steer you in what they really need and to grasp a better understanding of what to do to help your client. Next, we all know that prompt responses are important but it is also important to streamline finances and ensure your accounting software is efficient too. If a client hasn’t moved onto the cloud-based world, it is time for them to move to online accounting software. There are many different choices out there, like QuickBooks Online or Xero, but no matter the software you will want to see to it that it fits the client’s needs, they understand it (and/or can learn too), and that is within a client’s budget. Using an accounting software reduces the chance of human error, subtracts the amount of work that has to be done from manual adding in information, and overall streamlines processes in day-to-day accounting. Additionally, as the financial advisor, you can help a client develop better financial procedures and systems to really help all these processes. On the topic of quick responses, it is vital to ensure that you have an easy, yet secure, way of communicating. You will want something where it makes it simple to send and view any financial reports, ask questions, and see if any tasks that either side (meaning you or the client) need to be done. Finally, clear communication means being able to talk to your clients in a way they can understand. This means taking your time to ensure they really comprehend what you’re doing and you are not confusing them with common work jargon. (Check out our blog here for very common accountant words when it comes to reviewing financials for some on how to explain these!)

Businesses need your accounting!

Trust comes from taking the time to get to know your client’s needs and delivering quick & efficient solutions. By guiding them through their finances at every step, and learning with them as you deliver great service, trust is bound to happen, and you will have clients who love you!

Financial Reports – P/L & Balance Sheet

When it comes to the world of accounting, some of the most common reports include the profit and loss report and the balance sheet. Whether you are working with someone or trying to figure out your finances on your own, knowing all about these reports can be beneficial to improving your finances.

What is a P/L and Balance Sheet Report?

A profit and loss (P/L) report can capture how much money you’re making (or losing) within a certain time period. (A month, quarterly, a year, etc.) A P/L report may also be known as an income statement, statement of earnings, or statement of operations. Some key components of a P/L report are revenue, cost of goods sold (COGS), Gross profit, Expenses, and Net profit(loss). Revenue is how much money you’ve made without including any COGS or expenses. COGS are the costs for your business to deliver goods and services. This includes things like materials, labor, and shipping. Gross profit is the money you’ve made by subtracting COGS from your Revenue. Expenses are split into two categories: Direct & Indirect. Direct expenses are typically COGS as they are the items needed to make/deliver the service. Indirect expenses include things like utilities, rent, and fuel. Indirect expenses will never be counted as COGS. Net profit is the remaining money after you have subtracted COGS & expenses from your revenue. Net profit would be the actual profit (or loss) for your business in said time period. nn The balance sheet is the overall financial position of the business. It shows what you owe as well as what you own. This is determined by assets and liabilities. An asset is something you own. There are two types of assets: Current and noncurrent. Current assets are anything that can be converted into cash within a year whereas noncurrent is anything that takes longer than a year. There are also current and noncurrent liabilities as well. With current liabilities being items due within a year and noncurrent due after a year.

How do these reports help me determine my finances? How do I use them effectively?

The P/L report is a clear way to see whether you have gained or lost money that month. Additionally, the P/L report allows you to see what expenses are costing more and see how often money is coming through. This is beneficial because it can make predicting future revenue trends more accurate, thus allowing you to budget better and stay on track with your goals. nn The balance sheet is helpful for quite a few reasons. For one, it can help you decide if you are able to expand your business by knowing if you can manage the money that floats in and out or if you need to focus on receiving more cash. Another way the balance sheet is useful is by helping the company see if they are prospering or failing. This can give way to a company changing its policies, correcting more mistakes, and refocusing its goals to better align with the state of the business. Additionally, the balance sheet is important to potential investors or those looking to buy your company because it allows them to see whether the business is worth the investment since you can see everything due, paid, and what the business is like without these things.

Financial reports are helpful

Although there are many ways to look at financials in a business, knowing the fundamentals of the P/L report and the balance sheet is a very helpful step in knowing the state of your business