In starting your business, be sure to begin with establishing a bank account designated purely for business purposes. This will make it simple to keep business activity - deposits and payments - separate from personal activity. It will allow you to find business transactions more easily. It will allow you to pay yourself and know more readily that a certain payment is not for business use. In addition, it becomes a tool to help in building a business relationship with a bank and its staff as your business develops. Another thing to keep in mind comes from conversation with a former employer. This person told me that a bank will work diligently to attract you as a new customer but after that, you are often "forgotten". On the banks side, the sale has been made. You have been brought in as a customer. The employer mentioned this to his banker and it was confirmed by the banker. Consequently, be open to moving from one bank to another - only as necessary - to get the best service, interest on your deposits and investments and to get the best financing rates you can. Remember: the goal is to do all you can to keep your bottom line as big as possible.
Other things to consider is the variety of services available from your bank. Multiple accounts. Bill payments. Investments. And, if necessary, loans. (I'm extremely big on avoiding debt at any cost!) Having a separate account for payroll and payroll taxes will be a smart move, adding cash on a regular basis to cover necessary net payroll, federal taxes - income & FICA and unemployment, state income and unemployment taxes, and local taxes. These tax payments come due mostly on a quarterly basis until your liabilities are large enough to require payments to help keep your cash flow - and the government's cash flow - running smoothly. Having a separate account for payroll will also allow you to keep a clearer picture of what you will need to consistently keep your vendors paid. This will help you maintain good relationships with vendors and will also give you leverage in negotiating better pricing, purchasing arrangements, and payment terms. All of these will contribute to keeping your bottom line larger. As you can guess, this will make room for you to make a better product, do better marketing and advertising, provide better benefits and pay for your employees, and take more home for yourself.
Last is the subject of financing. This goes back to relationship with your bank and its staff. As your business grows, it may be necessary and maybe even advantageous to borrow money to make payments. If you have been managing your money well, your bank will know you have sufficient assets and a good credit history. Using this to your advantage will mean borrowing money at a lower interest rate, saving you a lot of money which can then be used toward a downpayment for a location of your own instead of a rental. Or, maybe you can buy a piece of machinery that will make your operation more productive. In any event, handling your money carefully will give you greater control and lots of advantages to be as profitable as you can.
Have a good week.
Tuesday, September 16, 2008
Thursday, September 11, 2008
More on the Chart of Accounts
Continuing on from my last entry, I would like to explain a little more about setting up your chart of accounts.
Usually, an accountant will have a preferred format for a "standardized" account list or chart of accounts. As I mentioned previously, a lot of accounting packages allow you to use account names without assigning numbers to the individual accounts. My personal preference is to use a numbering system that sets up your account list in the sequence of the accounting equation: Assets, Liabilities, Equities, Revenue and Expenses. There are numerous ways of doing this. Often the easiest route is to simply use a three- or four-digit system until your records require something more sophisticated. I like to have lots of room, so I will use a four-digit system, establishing Assets as beginning with 1, Liabilities beginning with 2, Equities with 3, Income with 4 and Expenses with 5. It is common for "Other Income" and "Other Expenses" to begin with 9, segregating them significantly from the remainder of the categories. Some people prefer a simpler structure, using only three digits. An accounting firm will likely use a simpler system since they may be providing only the information required for the tax return, resulting in putting several of the accounts you use into one larger, single bucket.
As you develop your list, you will want to look ahead at areas that you will anticipate having more accounts that other areas. You may have a lot of fixed asset accounts or inventory accounts, so you will likely want to give those groups a greater range of numbers than your cash or receivables accounts. If you only have one or a few cash accounts, you can get away with accounts 1001, 1005 and 1010, leaving room to add more in between at a later date, if necessary. On the other hand, you may have a variety of types of receivables and use all of the 1100's to keep them together. I think you get the idea. This will work with Equities, also. Rather than using all of the 3xxx account numbers, you may only want to use the 2900's for these accounts. Similarly, the Revenue accounts might be all of the .xxx's or 4xxx's. The next accounts might be the "Cost of Goods" accounts, assigned the 5xxx's, after the revenue accounts have been assigned the 4's.
Once you get into your departmental structuring, you can go down the line, using 6xxx, 7xxx, 8xxx groupings for each department. If you have several parts of a department making all of one parent department, the 7xxx's may be all of the, so you could use the 7's for Sales & Marketing and then break it down to 71xx for Sales, 72xx for Marketing, 73xx for Advertising, etc.
In any event, it's your chart of accounts. Make it easy for others, like your banker or your accountant, to understand and for you to know where to find certain things on your financial statements. Set it up to follow the KISS method: Keep It Simple, Stupid.
Usually, an accountant will have a preferred format for a "standardized" account list or chart of accounts. As I mentioned previously, a lot of accounting packages allow you to use account names without assigning numbers to the individual accounts. My personal preference is to use a numbering system that sets up your account list in the sequence of the accounting equation: Assets, Liabilities, Equities, Revenue and Expenses. There are numerous ways of doing this. Often the easiest route is to simply use a three- or four-digit system until your records require something more sophisticated. I like to have lots of room, so I will use a four-digit system, establishing Assets as beginning with 1, Liabilities beginning with 2, Equities with 3, Income with 4 and Expenses with 5. It is common for "Other Income" and "Other Expenses" to begin with 9, segregating them significantly from the remainder of the categories. Some people prefer a simpler structure, using only three digits. An accounting firm will likely use a simpler system since they may be providing only the information required for the tax return, resulting in putting several of the accounts you use into one larger, single bucket.
As you develop your list, you will want to look ahead at areas that you will anticipate having more accounts that other areas. You may have a lot of fixed asset accounts or inventory accounts, so you will likely want to give those groups a greater range of numbers than your cash or receivables accounts. If you only have one or a few cash accounts, you can get away with accounts 1001, 1005 and 1010, leaving room to add more in between at a later date, if necessary. On the other hand, you may have a variety of types of receivables and use all of the 1100's to keep them together. I think you get the idea. This will work with Equities, also. Rather than using all of the 3xxx account numbers, you may only want to use the 2900's for these accounts. Similarly, the Revenue accounts might be all of the .xxx's or 4xxx's. The next accounts might be the "Cost of Goods" accounts, assigned the 5xxx's, after the revenue accounts have been assigned the 4's.
Once you get into your departmental structuring, you can go down the line, using 6xxx, 7xxx, 8xxx groupings for each department. If you have several parts of a department making all of one parent department, the 7xxx's may be all of the, so you could use the 7's for Sales & Marketing and then break it down to 71xx for Sales, 72xx for Marketing, 73xx for Advertising, etc.
In any event, it's your chart of accounts. Make it easy for others, like your banker or your accountant, to understand and for you to know where to find certain things on your financial statements. Set it up to follow the KISS method: Keep It Simple, Stupid.
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