8 Financial Steps Every New Business Owner Should Take
20 May 2020
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Setting up separate financial accounts for your small business is a necessary task. Financial accounts will not only make you more aware of exactly what your business is bringing in and what it is spending, but also allow for a clean split between your personal and business finances. Every new business owner should expect to open a few accounts when getting their business off the ground and be able to clearly define its assets and liabilities.
Here are several critical financial steps every new business needs to take:
1. Open a Checking Account
When starting your business you should open up a business checking account right away. Even if you are a sole proprietorship and are funding your business with personal cash, getting this separation right off the bat will make filing taxes so much easier when the time comes. Checking accounts are fairly easy to set up and most banks ask for your EIN number or your Social Security number if you are a sole proprietor. Some may request that your business will be listed as a business with the state, which you can do by filing a form with the state in which you’re operating your business.
Finding the best bank for your small business can be tricky but taking the time to shop around first can help you avoid having to make a more complicated switch to another bank down the line. Always check and see if you are required to have a minimum account balance and if they allow for extras like free checks and cashier’s checks if needed for the future. Be sure to ask about fees you may be charged as well — if you can avoid fees entirely, it’s best to do so to save some money.
2. Open a Savings Account
Just like with your personal finances, your business should actively save cash for a rainy day (or month). It’s important to keep your savings liquid, so a business savings account is your best option. Aim for a high-yield savings account so your savings can earn interest. Some banks may offer promotions if you open both a business checking and savings account with them. Additionally, having all your accounts with one bank makes it easy to transfer money, set up recurring transfers and get a full view of your business’s financial health all in one place.
Related: 5 Reasons to Get Startup Funding Now
3. Get a Business Credit Card
With so many credit card companies offering bonuses for signing up, it is a smart to explore the best small business credit cards so you can find the one that rewards you the most. If you travel frequently for business, signing up for a reward that can give you free flights, free checked bags and major upgrades is your best bet. If you will be taking clients to dinner, finding a card that gives cash back on dining might be better suited for you. Companies that earn money back on small purchases they are already making can add up to big savings.
4. Define Your Assets
Defining your assets allows for predicting any future growth or decisions that can put a favorable outcome in the success of the small business. There are different ways to look at assets and they can be related to the operation of the business, physical assets, fixed and tangible. They can vary at times but all give a value to the business as a whole. Assets include anything your business owns including cash, properties, physical items, company cars etc.
5. Define Your Liabilities
Liability can be tied to other accounts in a sense but will be listed on a balance sheet for record keeping. Liabilities are legal debts your company owes. For example, buying a piece of machinery for the business can be listed as an expense, but the loan you place on the equipment is titled as a liability. Think of liabilities as debts. This can include outstanding loan and credit card balances, mortgages and other forms of debt.
6. Establish Cash Accounts
This type of account takes account of the cash in and cash out of running a business. If you are paid in cash for a service or product, it would be noted on this account statement. This would hold true for any business that has a petty cash drawer to be used for expenses that might be spent on small purchases like stamps. There should be tight restrictions for the spending of this account and every detail should be accounted for.
7. Expense Accounts
Small business owners will take every opportunity to use expenses made on the business for tax purposes or for paying employees if they used their money for things like gas or client lunches. They should be detailed on the expense export and can be listed as a potential deduction. Also your employees will like to be paid promptly on these expenses if they need to be reimbursed for business expenses they personally paid for. Using a business credit card will also help show the charges on an itemized statement and labeled as travel, gas, dining etc. which may make accounting easier. Always keep the receipts for things like dining, with the accounts name you were taking business needs with, so you can write off the expenses on your business taxes.
8. Track Accounts Payable and Receivable
These accounts are the bread and butter of your business. The accounts payable are the amounts of money your company owes to its suppliers such as vendors, freelancers and more. Accounts receivable are the amounts your customers owe your company, such as outstanding invoices.
There is a direct correlation between the two and the farther your accounts are apart, the less cash flow your business has. Profits and cash flow go hand in hand and are what sets those accounts in motion and allows for strength and security in your small business.
The Bottom Line
With so much that goes into starting a new business, getting ahead of the game and setting up accounts before you really get into running your business will be so much easier to manage. You want to have a solid platform for your small business to grow and knowing exactly what you’re working with at any given moment is important and most business owners live by what their reports say.
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