3 Financial Questions Every New Entrepreneurs Asks

Omar Visram
3 Financial Questions Every New Entrepreneurs Asks
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Starting a new business is exciting, but it also involves facing new and unexpected challenges and staying awake at night, wondering where all the hours in the day went. We meet with many new entrepreneurs who are just getting their businesses off the ground and find we’re often asked pretty similar questions about best accounting practices for new businesses.

One problem that entrepreneurs face is not thinking about bookkeeping and accounting until they start making money. However, it is important to get your books done right from the start and to plan for the best tax structures for your business.

Here are some of the financial questions new entrepreneurs ask us about their bookkeeping and accounting.

Should I do accrual-based or cash-based accounting?

The decision between accrual-based and cash-based accounting depends on several factors, including the size and complexity of your business and your reporting needs. The main difference between cash and accrual-based accounting is when your revenue and expenses are recognized.

  • Cash-based accounting recognizes revenue and expenses when the cash changes hands.
  • Accrual-based accounting recognizes revenue and expenses when the transaction occurs, regardless of whether you've received payment or paid for the expense.

Cash-based accounting is often appealing to new businesses because of its simplicity. It allows you to know exactly how much cash is in the bank and enables you to defer taxes until you’ve actually received the money. If your business is growing and becoming more complex, transitioning to accrual-based accounting may offer better insights into your financial performance. This additional insight comes at the cost of increased administrative burden. However, accrual-based accounting allows for better long-term planning and allows you to understand how your business is performing over time.

Moreover, most businesses in Canada are required to use accrual-based accounting to prepare their financial statements if their annual gross revenues are over CAD$1 million. And, of course, they must report their income to the Canadian Revenue Agency. Therefore, we would advise new Canadian businesses to use accrual-based accounting to meet the reporting obligations and for better financial management.

If you need help managing your bookkeeping, you should hire a bookkeeper. Hiring a full-time in-house bookkeeper can get expensive, especially when you include benefits, vacation time, and other frills. If you cannot afford that additional headcount, you can consider hiring a third-party bookkeeping firm like Enkel to manage your books instead. Third-party bookkeeping firms typically cost less than a full-time in-house bookkeeper while still providing you with the bookkeeping services you need to get visibility on your financials.

I sent my client an invoice, but they haven’t paid me yet! What should I do?

Here’s an interesting fact: we find that in about 5% of cases, invoices aren’t paid because people just don’t have the invoice.

Whether it was lost in the mail, sent to the wrong email address, or just misplaced, this is a more common problem than you may think. When managing your accounts receivable (AR), we recommend that you follow up with your client within 7-10 days after sending it to confirm they received it and ask if they have any questions.

If your client has acknowledged the invoice but has yet to pay, here are some tips to ensure your clients pay on time.

  1. Have clear collection terms with your clients from the start. This includes the time frame for paying the invoice and any applicable late fees. This reduces the likelihood of them delaying payment due to their ignorance.
  2. Set automatic payment reminders on your accounting software. Most accounting software allows users to send automatic payment reminders to their clients. You can set the automatic payment reminders to go out a few days before the invoice due date. These reminders can easily mitigate any possible "I forgot" situations without your involvement.
  3. Make it easy for your customers to pay. With the advancement in payment technology, there are now many ways to accept payment online. Instead of relying on cheques as your primary payment method, you can use apps like Plooto and Rotessa for pre-authorized debit payments or accept credit card payments.
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We get asked often about legal structures for businesses and it’s not a simple black-and-white answer for all businesses. A common belief is that incorporating is always the right answer. But there are a few things you should know before you get incorporated.

Incorporating can protect you legally, and does allow you to defer some tax. A significant advantage of incorporation is limited liability protection. As a separate legal entity, the corporation is responsible for its debts and liabilities, protecting your personal assets from business-related risks.

Corporations enjoy several tax advantages, including lower corporate tax rates on eligible income, access to small business tax deductions and credits, and the ability to defer personal income tax by retaining earnings within the corporation. If your business qualifies as a Canadian Corporate Private Corporation, you can claim small business deductions, which attract relatively low tax rates. You can then reinvest profits without paying a large chunk to the government. This benefit, while awesome, doesn’t last forever. When you pay out the profits of a company as a dividend, you, as a shareholder, will pay personal tax on the dividends.

"The Canadian tax system is based on the concept of integration, where a dollar earned is intended to attract the same amount of tax earned if it flows through a company, versus if it is earned directly. So, contrary to popular belief, incorporating doesn’t necessarily mean you will save tax dollars forever.”

Omar Visram, Co-founder & CEO, Enkel Backoffice Solutions

Final Thoughts

Tax is complicated, and the rules are always changing. “Be skeptical of tax advice that you get at a cocktail party or from a friend. Incorporating presents a whole new layer of complexity, and that comes with costs,” warns Omar. Just because something worked for another entrepreneur doesn’t mean it’s the right decision for your business.

We are by no means tax geeks, but if you’re looking for a tax advisor, let us know. We treat our clients like friends and will happily point you in the right direction. We always recommend consulting with a qualified tax advisor before setting up your business and meeting with them annually thereafter. Remember that good tax planning begins with good bookkeeping—you need clarity in your financial records before you can understand how to plan.

Are you starting a new business and looking for good bookkeeping to get you off on the right foot? Enkel can help. We’re skilled in providing bookkeeping services to entrepreneurs and small business owners across Canada, from complete newbies to seasoned professionals. Enkel helps you get the financials right so you can focus on what you do best.

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