09 Aug How to Set Up Small Business Finances
So you have an idea and you want to start a business. Sounds great, but now what? Where do you take your idea to get it going? You know you’re going to need an official business name and some business cards. Oh, and a logo. Maybe even some supplies to get started.
All that sounds simple enough and most of us figure that part out, but one thing is missing. The financial side of the business. You know, the part that most of us forget about until we’re in trouble with the IRS auditor… Setting your small business finances up correctly from the start can save you a ton of headaches down the road.
Keep business and personal accounts separate
So where to start? Well, the first step is to separate your business finances from your personal finances. The reason for this is mainly audit related. If your business is ever audited, you’ll need to show a clear difference between business transactions and personal transactions. If you have separate accounts, it’s easier to keep the transactions straight. If you are using one account for both business and personal expenses, a red flag goes up to the auditor because it looks like you may have been buying personal items and counting them as business expenses. Red flags mean they dig deeper, which is almost never good for you.
Business Checking Account
This one is pretty obvious, but you’ll need a checking account. This is your main account for income and expenses. Most banks charge fees for business accounts, which is annoying when you have a micro-sized business or you’re just getting the business off the ground. With a little shopping around, you’ll find that free business banking is available at quite a few banks. While I like to pay with my debit card for convenience, I’ve found that many business transactions work best with good, old-fashioned checks. Often the bank will get you started with some for free but you’ll want to order some soon after.
Business Savings Account
Just like your personal finances, you’ll want a business savings account. It’s nice to be able to set aside money for infrequent expenses. It helps keep the money out of the checking account, which helps you avoid the temptation to spend the money. Estimated tax payments, large purchases, and emergency funds are great examples of things you might set aside and have to pay in one large chunk.
Business Emergency Fund (Operating Buffer)
Speaking of emergency funds, your business is no different than your household. You need an emergency fund. Whether it’s to cover things like vehicle or equipment breakdowns or to cover a loss of income from fluctuating sales, it’s important to have 6-12 months of expenses saved up as an operating buffer. It keeps you out of trouble when either your income or expenses fluctuate (or both). Keep this in the savings account so it doesn’t get spent unless absolutely necessary. You may even consider keeping it in a second savings account just for extra separation from your other business financials.
Avoid Business Debt
Much like personal finances, debt is one of the things that will get you in trouble the quickest. Having to borrow money means you may not have been completely ready to start the business in the first place. Debt payments lock you into a rigid cash flow situation. So when revenues drop unexpectedly, you still have to make the debt payments. Even if you have an operating buffer, you need more in the buffer because you have to make those business debt payments. While it’s much harder to operate your business debt free, it’s definitely doable and absolutely worth the effort.
With the basics of your small business finances set up, you’re ready to attack the next steps: finding the right bookkeeping software, the right accountant, the right group of advisers, etc. Not to mention marketing, sales, revenue assurance, hiring employees, and more. These can all be intimidating, but are much easier when you’ve got the financial side of things already in place.
Do you have a small business? How do you have your accounts set up?