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Finance and Accounting

We’ve said it before and we’ll say it again: It is absolutely impossible to succeed in small business over any significant period of time without getting the fundamentals right. And the fundamentals of small business are dollars and cents.

Every single aspect of your business can be understood in terms of cash coming in and cash going out. Like a money-focused Keanu Reeves in The Matrix, a finance-savvy small business owner will look around his or her store and see not customers, employees, and equipment – but dollars and cents stacking up in the plus and minus columns.

Funding: Putting Your Best Foot Forward

Many small business owners get started on a shoestring, intertwining their personal and business finances, supporting the business with their personal credit cards, accepting payments into their personal checking account, and even submitting tax returns that mix up personal and business finances. While this is common, it can create tax headaches, make bookkeeping much more time-consuming, and, perhaps most importantly, it can also interfere with the proper evaluation of your business opportunity.
Set up a separate business bank account from day one. That way all money coming in and out of your business will be clearly accounted for. If you don’t know your cash flow, you’ll never be able to really understand how your business is doing.
When you are looking for funding, be it from the local bank, an angel investor, or even a family member, one of the first things you will be asked to present will be any existing financial records. Make sure you are putting your best foot forward by keeping meticulous records – with your business finances completely distinct from your personal arrangements.

Debt vs. Equity Financing

There are essentially two types of financing available to the small-business owner: Equity or Debt.

Equity financing is money raised in exchange for a share of ownership in your business. The core benefit of this type of funding is the lack of debt. You won’t have to worry about those pesky monthly repayments. The downsides? You are giving up total ownership of your business, you are giving up the rights to part of the ongoing profits of the business, and you are potentially giving up some control of how your business is run.

Debt financing involves borrowing capital that must then be paid back over a set period of time, most commonly with interest. The key benefit of this arrangement is that you, the business owner, typically maintain complete control over your business. Your only ongoing obligation is to repay the loan with interest. The downside? If you fail to keep up with those repayments, the loan (often secured against your assets, savings, property, etc.) can put you in very dangerous financial waters.

While recent economic uncertainty has brought with it a well-documented squeeze on small business lending from banks, there are a number of alternative funding sources available to the prospective small business owner. Loans and/or equity investments can be obtained from multiple sources, including credit unions, savings & loan associations, and private financial companies. Family members, friends, and colleagues are also potential avenues to explore.

The Small Business Association provides excellent tools and support related to funding for all aspiring small business owners. They also offer particular programs to assist Minority-Owned, Women-Owned, Disadvantaged and Veteran-Owned businesses, including a government backed financing scheme to qualified participants. Additionally, local and state authorities have a range of programs designed to encourage the growth of your small business.  Make sure to research your local authority’s website.

One note on financing from ShopKeep CEO, Jason Richelson: “Banks are often reluctant to give long-term loans to small businesses. They prefer short-term loans that are associated with physical assets, which can then serve as collateral. So instead of just asking for a generic loan, maybe consider raising capital for specific equipment that will kick-start your new business, like an espresso-machine or delivery vehicle.”

Read: Financial Help Minority Business Owners Need to Know About

The Bookkeeper and The Accountant

They say nobody ever got into small business out of a love for numbers, but if you really want to stay the course, you’re going to want to fall in love fast. It’s only by keeping detailed accounts and tracking your business numbers over time (Net Sales, Cost of Goods Sold, Avg. Transaction Size, etc…) that you’ll start to gather the actionable insights you need to make intelligent business decisions.

What’s more, your books are also how the IRS will evaluate your business, so it’s not just good practice, it’s also a legal requirement to track certain basics about your business. These include revenues and expenses, cash expenditures, inventory, accounts receivable and payable, and employees.

If you’re new to the world of small business, your new best friends in life should be your bookkeeper and your accountant. The former should be engaged for a few hours every week (especially at the start of your business) to compile your books and ensure your records are maintained to the required standard, while the latter will help review your tax situation and prepare financial statements. Both can also be used as invaluable sources of actionable intelligence about ways to reduce costs, increase margins, and generally streamline your finances. What’s more, you’ll be able to spend all that time you save doing what you really love and thinking strategically about your business.

As with all things, the team at ShopKeep strongly believes that a technology-led approach will leave you with more data, more time, and ultimately, more money. For details on the cloud-based technologies that more and more business are relying on, make sure to check out our cloud-based business guide.

When it comes to money management, cash is king. So collect what you’re owed quickly and only pay your bills when they’re due. Remember: A sale doesn’t really count until you collect the cash!

Death and Taxes

As the old saying goes, “nothing can be said to be certain, except death and taxes.” Almost all small businesses in the United States are subject to some form of corporate income or gross receipts tax on a state level. Unless you happen to be a lucky inhabitant of the great states of Wyoming, Nevada, or South Dakota, that is. Actually, even those states will require you to pay state workers’ compensation insurance and unemployment insurance taxes. Oh, and of course every small business in the country is subject to some form of federal taxation.

Make sure to utilize the tax-specific resources provided by the SBA and the IRS to fully research your federal and state tax obligations. These include, but are not always limited to: corporate income tax, “employer tax”, and excise taxes. For most small businesses, the right first step is applying for an Employee Identification Number, which you can do using this IRS EIN online application. Depending on your state you’ll also need to register for a sales tax license.

For many entrepreneurs, a home office is a deductible expense. However, it has to be used solely for business. If you’ve got a day-bed in it for guests, it just won’t fly. The point? Get a small business tax accountant specialist and you’ll be able to really optimize your tax filings.

The Bottom Line

Starting out with a solid business plan, the right business structure, and well-organized business finances will put you in the best position to secure the startup funding that is often crucial in starting a new business enterprise.

Research your tax obligations thoroughly and then consult with a bookkeeper and a tax accountant to ensure you are abiding by those obligations and gaining the financial insights you need to maximize profitability.

The language of business is dollars and cents and you need to get fluent quickly. That’s why we’ve provided this small business cheat sheet with a glossary defining key terms and associated calculations. Study it closely.

Guide to Running Your Business With Your Head in The Clouds
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