Financial Mgt for Small Business

Posted on: December 6, 2022

I recently read this post on a Facebook group and, truth be told, while the situation is unfortunate, the issue could have been avoided altogether with a bit of structure and strategy at start-up, or in the early stages of the business’s existence.

Its never too late to reset, so the second-best time to get your financial house in order is today!

Many home-based businesses make one big mistake when setting up their business (whether it be for full or part time income): they use their existing personal bank account to receive revenue and personal credit cards to pay expenses.  

Many professional bookkeepers don’t mind that you have your receipts for personal and professional all smooshed together…they get paid quite well (by you) to sort, organize, and then enter your receipts and invoices prior to actually filing your taxes. One Bookkeeper I knew a few years ago used to make about 30% of her annual income in the 90 days prior to tax filing deadline because of this sift and sort process.

I’m assuming the person who is posting about not being eligible for CERB and CRB because they didn’t have a good system to track revenues and could have proven their income, if they had a better system.

Here are my top suggestions for effective money management as a sole proprietor, home based or Startup business.

SEPARATE as much as possible. When I started my first firm in 2002, I had no financial record for that firm in order to establish it’s own credit. Instead, I chose to open a separate bank account, use one of my existing personal visa cards exclusively for business; and NEVER blended personal and professional expenses. This way when it came to tax time, or post tax when the CRA came calling, I had clean books and a clear understanding of what I had or had not made, what I had and had not deducted and most importantly I could easily provide the statements to prove it.

As part of this philosophy, when you register your provincial / federal tax accounts, keep a unique account for these funds also.

Hire a BOOKKEEPER. As soon as is financially possible, hire a bookkeeper to do your books unless you are accounting savvy. Bookkeepers are usually up to date on the latest deductions, tax rules, and can produce way faster (read that as less expensive) books then the average person. And let’s face it you probably got into your business to do your business, not the bookkeeping. The question I often ask a start-up is: “What is the value of that hour (or 6) if you were to use it for sales instead of administrative work?”

Register for your tax Accounts RIGHT AWAY! In Canada, we have a federal and provincial tax system. In some provinces it is harmonized in others it is not. In harmonized provinces, register right away for the taxation program. This gives you two advantages at the end of the year: 1) You can calculate your tax throughout the year and move it to that unique account you set up so it is always on hand to pay the bill. 2) You have the cash on hand when you have to remit, and always have absolute clarity about what will need to be paid, without infringing on your cash account to cover any differences.

If you are in a jurisdiction where you need to register separately (for the GST) do so. If you do not hit the threshold to pay at the end of the year you retain that cash.  If you do hit the threshold, you have already collected it. Nothing is more difficult than going back to all your clients at year end and trying to collect their GST. Then you also must pay the bank fees and bookkeeping costs to process those transactions. Collect it right from the start and you win both ways. The other thing to keep in mind about GST; it is a credit/debit system. You pay or keep the difference between the amount you collected and the amount your spent on your expenses. However, you can’t go back on the expenses. You can only claim the deduction if you already have the GST account. You can’t backdate transactions to before the account existed.

TAX is not revenue. This is a fundamental small business misstep. Just because it flows into your account, doesn’t mean its yours. Tax should always be held aside as it is technically the government’s money you are collecting on their behalf. If you spend it, they will still want it at years end.

PRE-SORT all of your receipts so the bookkeeper doesn’t have to do it. As noted earlier, not sorting comes with a big cost that has zero upside for you. The simplest way to do this is to have the number of envelopes set side that coincides with each bank/credit account you have. When you get a receipt for each account, put it in that envelope. At the end for the month print your bank statement affix it to each envelope, then put them in a bigger envelope for that month. Now you have fewer loose papers and better overall organization, so when the CRA comes calling (like that person in the post), you can pull your month and provide the evidence.

Make sure you also print your transaction processor statements each month as well. These provide critical evidence of your transactions. Often these firms (such as PayPal or Stripe) will do a bulk deposit while their statement backs up what value each individual transaction had.

Issue Receipts. Especially if you have a cash-based business. Receipts provide critical proof of the transaction if it is questioned. I understand why some business owners run cash only. However, expense justification, long term loss performance, and other considerations should be made before your cash management strategy unfolds. In a similar way that CRA will scrutinize waitress tips, they may examine your relationship with cash management if they feel it seems out of order. This could occur if, for example, you go to a more formal payment system as you grow such as credit card/cheques and you see a sudden significant boost in sales, while your costs remain static. This imbalance could red-flag your account with CRA which may trigger an audit of the books for a period of up to seven years. Bonus tip, keep all financial records for seven years!

Use Software not Excel. You need accounting software, you just don’t know it. Most bookkeepers will use one of two software packages; Sage or Quickbooks, although there are some industry specific platforms also. Quickbooks is much more affordable but lacks transaction editing options at the consumer level (which you shouldn’t need if you have a bookkeeper). The bigger question is: do you want books done onsite or off? Many bookkeepers allow for both options. Once you start growing and have in house financial management you should set up internal books. However, if you have Quickbooks, they are not convertible to Sage, if you Sage they are not compatible to Quickbooks. So, deciding this early on is a great move. Both programs also come in a variety of service levels so adding options such as formal payroll can be done later.

Use an Accountant to do your taxes. This is a more costly, but important fundamental move. The reason you use an accountant is to ensure that there is a tax strategy being employed for yourself and your business. Additionally, the Accountant will represent you with CRA if there are any questions about your returns or you get audited.

As always, if you are having challenges in your small business or start-up, feel free to reach out.