Starting a new business is an exciting time, but also a time where you’ll face new and unexpected challenges, stay awake at night, wonder where all the hours in the day went… hey, we know - we’re entrepreneurs ourselves. We meet with a lot of new entrepreneurs who are just starting to get their business off the ground, and find we’re often asked pretty similar questions around best accounting practices.
One problem that entrepreneurs face is not thinking about bookkeeping and accounting until they begin making money. It’s important to track your finances - both receivables and payables - right from day one. It’s also important 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 reporting, or cash based reporting? What’s the difference?
Accrual accounting is when you record the revenue or expense when it occurs, rather than when the cash actually leaves the bank. Cash based accounting records the income or expense when the cash is received. Cash based accounting is often appealing to new businesses, because it’s simple, 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. However, accrual based accounting allows for better long-term planning and really allows you to understand how your business is performing in a period of time.
“We’re big fans of accrual accounting,” says our founder and commander in chief, Omar. “It helps you understand how your business performs within a specific period of time, and that allows you to make informed financial decisions for the future.”
To understand your cash flow, look at this separately from your income statement. Don’t make the mistake of mixing your cash flow and income statements. We love using Xero’s cloud-based accounting software, because of its reporting capabilities which includes the cash summary report. The cash summary report is a great tool to help you understand your cash flow.
I sent my client an invoice but they haven’t paid me yet! What should I do?
Here’s an interesting fact: at Enkel, 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, went to the wrong email address or just got misplaced, this is a more common problem than you may think. When managing accounts receivable (“AR”), we recommend that you follow up with your client within 7-10 days after sending to confirm they received it and ask if they have any questions.
Besides that, here are some tips to ensure your clients pay on time. First, keep your database up to date. Update your contacts within Xero or your accounting software. Update contact information as soon as you are aware of any changing positions. Make this part of your process, because it directly impacts cash collection.
Have clear collection terms with your clients right from the start, including the time frame for paying the invoice and any applicable late fees. If your clients are aware in advance, there will be less excuses down the road. Next, set automatic payment reminders within your accounting software. These reminders can easily mitigate any potential “I forgot” situations without your involvement.
Finally, make it easy for customers to pay. With technology always improving, there are many ways to accept payments online (RIP “the cheque must have gotten lost in the mail”). We like using Plooto.co for recurring monthly payments.
Should I incorporate my business? What are the pros and cons of each?
This is a question we often get asked, and it’s not a simple black-and-white answer for all businesses. It’s a common belief that incorporating is the right answer every time, but sit tight! There are a few things you should know.
“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,” says Omar. “So, contrary to popular belief, incorporating doesn’t necessarily mean you will save tax dollars forever.”
There are benefits though. Incorporating can protect you legally, and does allow you to defer some tax. If your business qualifies as a Canadian Corporate Private Corporation, you are able to claim small business deductions, which attract relatively low tax rates. You’re then able to 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.
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.
By no means are we tax geeks! But if you’re looking for a tax advisor, let us know! We treat our clients like friends, and we’ll 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 solutions to entrepreneurs and small business owners, from complete newbies to seasoned professionals. Enkel helps you get the numbers right, so you can focus on what you do best.