Basic Accounting

A leading cause of small business failure in North America today is caused by financial mismanagement, or failing to properly manage the accounting. Small business owners are usually over their heads in work, and simply don’t have the time or patience to deal with accounting matters.

This can lead to serious small business problems, including the following:

Poor cash flow

Failure to file income tax quarterlies

Inability to produce a well planned budget

Lack of adequate records to construct a Profit & Loss Statement

Supplier Disruption due to lack of payment

One Easy Step

An easy way to plan ahead and avoid many of these issues is to start by opening up 2 bank accounts dedicated for your business. Start by choosing a bank that offers free or low-cost business checking, and open an account. Be sure to open both a checking AND a savings account for your business, and fund the savings with one dollar if need be. The checking account should be funded with the money you plan to use for your business. This will be important for the stability of your business, as you will soon see. If possible, link your personal account to the business checking account to enable easy transfer of funds, as will be explained.

Opening the Accounts

In order to open a Business Bank Account, you will need some specific documentation. Check with your local county clerk’s office for the steps you need to file your business name and receive a business certificate. You may or may not need to receive an EIN (Employer Identification Number) from the IRS, depending upon the nature of your business. When opening the account, you will need to bring some verification of the business existence, such as telephone bills or credit card statements in the name of the business.

Using the Accounts

There are two simple rules that you need to follow when using a business bank account:

1. Don’t use the business bank account for your personal expenses.

2. Don’t use your personal bank account for business expenses.

Many business owners make this mistake, and that is why their finances are confused. When spending money for the business, use the business account only. When money is earned by the business, place it into the business account only. DON’T confuse the two, even though you own both. If you are careful about this, accounting for your business will be fairly easy.

Paying Yourself

When taking money home, meaning that you wish to pay yourself from the business, DON’T spend directly from the business account. This will lead to all kinds of problems. Rather, write yourself a check (or transfer the amount you wish) to your personal bank account. When doing so, take another important step. Set aside 25% of the money you pay yourself into the business savings account. This will be used to pay the IRS every quarter, when your estimated taxes are due. If you set aside 25%, that should cover your tax bill up to an annual profit of $60,000. If you make more than that, set aside 30%. By doing so, you will ensure that you always have the funds needed to pay those nasty tax bills when they come due, and you won’t fall behind.

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