Starting a business is more than choosing a sole proprietorship, LLC, PC, or LLP. Another crucial element is efficient financial tracking. Without proper financial tracking, it can be challenging to understand your business’s financial health, make informed decisions, and plan for the future.
This guide will walk you through the step-by-step process of starting a business alongside robust financial tracking from Day One.
1. Lay Out the Legal & Strategic Framework
Before you devote one cent to your business, you need to have a comprehensive business plan outlining your vision, mission, market research, and financial projections. You’ll need this to attract investors and head to the bank to get a business loan.
Next, choose an appropriate legal structure for your business, such as a sole proprietorship, partnership, LLC, or corporation. This decision will impact your liability, tax obligations, and the level of regulatory paperwork and scrutiny required.
Then, you’ll need permits and licenses to operate legally in your location. This might involve registering your business name, obtaining a tax ID number, and adhering to local zoning laws.
2. Set Up Your Financial Tracking System
Once you receive funding, it’s time to move forward with any infrastructure, employees, team members, and other items you need to launch your business. But before you get people on board or purchase the first paper towel roll for the break room, you must establish an effective financial tracking system to cover every penny you spend and bring in. We recommend QuickBooks Online (QBO) as the top financial management software on the market. It can track every transaction, including sales, purchases, payments, and receipts. QBO also handles monthly reconciling and reporting as part of basic bookkeeping.
Integrating your financial tracking system with other business processes for efficiency is crucial. This includes linking your accounting software with your point-of-sale system, bank accounts, and payment processing tools to automate data entry and reduce errors. QuickBooks Online fosters these integrations.
Additionally, at least every month, set up a routine schedule for updating your financial records. Consistency is critical to accurately understanding your business’s financial health. This habit will assist you in making data-driven decisions, forecasting future financial needs, and preparing for tax time with ease.
3. Understand & Manage Business Expenses & Revenue
Establishing your financial management system to track relevant data is crucial as you measure expenses and revenue. How much revenue do you need to meet your financial obligations? What’s left over after that? Do you need to decrease or increase spending to meet the goals laid out in your business plan? Are you paying back any business loans you obtained?
Tracking expenses begins with documenting every expenditure, from operational costs like rent and utilities to variable expenses such as advertising and employee wages. Utilize the financial tracking system you’ve established to categorize these expenses, making it easier to assess your spending patterns over time. This level of detail aids in identifying potential areas for reducing costs, thereby enhancing your overall profitability.
No matter your business structure, it’s imperative to distinguish between personal and business expenditures. This distinction not only simplifies financial analysis but also fortifies your company’s compliance with tax regulations, enabling a more straightforward tax filing experience.
Regularly reviewing your categorized expenses sheds light on your financial trajectory and empowers you to make informed decisions regarding budget allocations. When you have extra revenue during certain months, do you want to reinvest it or make higher profits? Are you spending too much on procurement? Do you need to raise prices or wages?
4. Implement Regular Financial Reporting & Analysis
Your chosen financial software should be able to generate comprehensive reports monthly or quarterly, focusing on critical financial metrics such as sales revenue, operating costs, and net profit margins. These reports serve as a snapshot of your financial status, allowing you to track growth and identify any areas that may require attention or adjustment.
Regular reports can uncover trends and patterns in your financial performance. This analysis will enable you to pinpoint strengths to capitalize on and weaknesses to address, facilitating strategic planning and decision-making. For example, a consistent increase in expenses without a corresponding rise in revenue may signal the need for cost-cutting measures or operational adjustments.
Make sure to set up your financial dashboards correctly, with proper alerts, in case something goes awry outside any parameters you set. For instance, you should be able to set an alert if revenue or expenses increase by a certain percentage over a period of time, say 5% over one month.
5. Navigate Taxes & Regulatory Compliance
Navigating the complexities of taxes and compliance is crucial to effectively managing your company’s finances. Accurate records of all transactions, income, and expenses are essential for tax purposes. These records facilitate the correct filing of tax returns and enable you to take advantage of eligible deductions and credits, potentially reducing your tax obligations.
If your business needs extra regulatory compliance, you may need the help of an attorney to navigate those issues.
6. Outsource Your Bookkeeping or Accounting
Another important aspect of financial management for your startup is to consider managing your accounting in-house or outsourcing it to an experienced professional. While handling it yourself can be cost-effective initially, hiring an accountant or a bookkeeper can save you time and ensure accuracy as your business grows.
An accountant is well-versed in the relevant federal and state tax deadlines, ensuring that you meet all filing requirements promptly, thereby avoiding late penalties and interest charges.
The business advisors at The Whitlock Co. can help you manage the sometimes complex financial details needed to start a business. Our team can help you develop a business plan ahead of applying for a commercial loan, consult with your legal team about what type of business you want to form, and assist with any tax planning.
Contact the business advisors at The Whitlock Co. to request a consultation today. We’re happy to help in any way we can.
