Accounting for Small Business, especially for any creative person I know may be your biggest stressor. Crunching numbers can get overwhelming. But without the proper preparation and tracking not having the right cash flow 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 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 so 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 for tracking 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 have clear implications on taxes, pay structure, acceptable ways to reimburse yourself, etc. We highly suggest on doing some homework on your options before picking a direction that is best for you.
- 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 many 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 techy 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 not only have a sales process, but a collection process. It doesn’t need to be elaborate, but putting in place things like contracts, invoicing, late fees, etc. 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 you. Have written and signed agreements. Have due dates for payment. And 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 filing 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. Often I see people charging what they were used to taking home. To actually continue making the same paycheck it often involves doubling or tripling 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 long 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. Working more does not always equal more pay or more profitability. Take a step back and start streamlining systems, perhaps charging more or setting better expectations with your clients/customers. You eventually may start to see a pattern and be able to predict your paycheck. Keep in mind many industries have slow and busy seasons, so you must be prepared to earn more or less in one month after another. 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 suggest Amy Northard! She even has some great content on her blog you should check out.
There are many great methods out there to begin tracking all the details for your business. Finding a system that works for you and you will use, appreciate and rely on are all important.
Old School - Excel
I personally feel that although it can get a little hairy my overall business isn’t complicated enough financially that I need to spend money on a fancy accounting software. I use excel to track every receipt, every mile driven, all contractors I use, other expenses, etc. I have separate sheets that give me an overview, one that helps me forecast future income, one for promised/paid income and one that tracks when I pay myself and how much. Every business is a little bit different and excel can be easily customized. If this sounds completely overwhelming to you 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 business (they are literally geared towards businesses with less than 9 employees). They integrate smoothly with most banks which allows for 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 QuickBooks is definitely a name you can trust. There is a bit of an investment, but you are sure to find every feature you could 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 $7.99 a month.
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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 always digging around your bag looking for the last Michael’s Craft Store receipt? This app will change your life! Simply open it up and snap a pic through the app of your receipt, it then emails 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. It’s because typically tracking mileage is a 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 a lay the foundation. We’ve created the best FREE tool for you to do this! We’d love to have you inside our free 7-Day Email Course “Spark Your Creativity: 7 Steps to Ignite Your Creative Business”.
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.