Bookkeeping 101: What you Need to Know for Your Small Business – Part 1
You have decided to start your own business. You have a product with tremendous market potential, start-up capital, a lease on a fantastic workspace and business cards fresh off the printer. However, all that drive and enthusiasm isn’t going to take you far if you lack basic bookkeeping skills.
One of the main reasons small businesses fail is lack of money management, however, it may not always be a lack of money. A business can turn great profits, but if the cash flow is not managed wisely, it undermines the entire scope of the operation. Avoid making this mistake by knowing the bookkeeping basics for your business.
The income statement
The income statement is the foundation of all your day to day operations and whether you create one using software, use an Excel spreadsheet or write it out by hand in, you cannot do without it.
The most basic income statement is separated by sales, cost of goods sold, and operating expenses. Sales generally include sales, interest and investment revenue. Cost of goods sold lists all your direct expenses, such as supplies, subcontractors or purchases. Your operating expenses include monthly office supplies, wages and salaries, the stamps you buy and the coffee you treated a client to are all expenses. Make sure you have a category for each and every expense or you will find yourself wondering why you keep coming up short when money is coming in. Total your income and subtract your expenses. If the number is positive, you’ve made money. If your number is negative, see how you can increase income or reduce expenses.
- TIP: Estimate how much you will spend on expenses each month and track the difference between your projections and the actual dollar amount so you get an idea, going forward, how much to set aside for expenses.
If you forget to collect applicable taxes from your clients or fail to pay income tax on your earnings, the Canadian Revenue Agency (CRA) will be more than happy to remind (and penalize) you!
When you reach a certain dollar figure in earnings, you must collect and pay GST/HST/QST etc. This process can seem daunting at first, but with the CRA’s online submission options and forms, once you have paid your taxes a few times, it becomes an easy part of your financial routine.
Before you launch your business, talk with a professional to see if your products and services are exempt. For instance, you may not have to charge taxes on services sold in certain locations if the location of their origin differs from the country where they are sold. Also ask your professional at what point your profits necessitate tax collection.
Never neglect to account for income tax. You can avoid a huge tax bill at the end of the year by simply calculating how much income tax you owe each month and setting it aside. You can even call your bank and set up an account where the tax money is held by the CRA and then applied at tax time. You can get an idea of how much to set aside from your salary (or what you pay yourself from your company each month) by filling in this online CRA tool.
More to come
Working with an income statement and paying taxes quarterly and annually are just two of the things you need to know before you launch your business. Part two of our Bookkeeping 101 blog will address which receipts you need to keep (and why) along with depreciation on capital purchases. There is more to come, so stay tuned.
AF Accounting helps small businesses start strong and remain successful by providing a wide range of bookkeeping advice and services. Let us help you with the basics of bookkeeping, and more.