In 2014, my friend started her first company. She used her personal savings to fund development, buy computers, and hire a UX designer to help her get off the ground. For a while, things went very well. Then, a few months in, my friend decided to open a business bank account. She called in a favor to a mutual friend who was an accounting major in college: “Will you help me deal with my mess?”
And what a mess it was. She had been using various personal credit and debit cards to pay vendors and employees and letting late fees and interest pile up. She had “kept track” of her expenses by stuffing some of her receipts into the bottom drawer of her desk. She couldn’t remember which receipts were personal or business-related, so her financial history and profit-and-loss reports were unreliable, to say the least. Our accountant friend helped her untangle the mess, and things are better now, but without a real accounting strategy in place, the nightmare is inevitably going to creep back up.
When I started talking to entrepreneurs through my work at inDinero, I realized this was a common predicament. The number one mistake that young companies make is failing to completely separate business and personal finances. Once that cardinal rule is burned into your mind, there are seven more accounting basics you need to know before you launch that new startup.
7 accounting prerequisites entrepreneurs should know pre-launch
1. Plan your expenses ahead of time
Even though there’s still so much to be determined, it is possible to build a semblance of a budget in your startup’s first year. Once you have an idea, start building a list of the costs you’ll need to account for: salaries, web hosting, server costs, and office or coworking space, of course, but also legal advice, CRM software, branding and customer acquisition costs, third party integrations, outsourcing your accounting—anything you can think of to start.
This will help you more easily identify your business expenses and keep you from mingling your personal and business financials together.
2. Don’t wait to open a business account—or a few
When you start a business, you need to separate your company’s checking and savings accounts from your own checking and savings accounts ASAP. This crucial step enables you to keep your small business’s spending as straightforward as possible (especially useful come tax season).
It also makes it much easier for potential investors to understand your financials. Most angel investors, VCs, or lenders won’t bother untangling your personal and business expenses—they’ll move on to an entrepreneur who takes her finances a little more seriously.
3. Use the right card every time
Accidentally using your business debit card for groceries or some minor personal expense makes a ton of work for you.
If you have trouble remembering which card is which, mark the correct card or consider opening accounts at a different bank with a different design to help you keep them separate. Err on the side of caution if you’re not sure, or consult with a professional (more on that later).
4. The business card is not your paycheck
As a founder who may or may not be drawing a salary, it’s easy to start blurring the line between personal income and business income. Don’t be tempted by this slippery slope. When you need to take an “owner’s draw,” transfer the amount you need from your business account to your personal account.
Why? Imagine you have a check payable to your business, but you’re planning on making an owner’s draw transfer as well. If you deposit the business checks directly to your personal account, it saves a few minutes, right?
Wrong. This will come back to haunt you at tax time, when suddenly you’re unable to correctly itemize your business income and the business’s payments to you. It’s also a warning sign to any investors looking over your financials.
5. Ditch the paper receipts
Gone are the days of hoarding receipts in shoeboxes and writing down everything in your paper ledger. Running a paperless office is easier, more reliable, and more organized. inDinero can be a key component of this (and we have a great system for managing receipts).
6. Go digital with your payments and invoicing
A lot of founders don’t think about the details of invoicing when they start their company, and end up having to send clients old-school paper invoices. Online invoicing and payment is faster, easier to track, and gets you paid sooner. At inDinero, we’ve met entrepreneurs who’ve arranged their accounting, invoicing, and payments systems such so that they never have to write a paper check, and it makes their books that much simpler.
7. Surround yourself with experts
New entrepreneurs have a lot of questions about accounting, taxes, and getting their finances in order before a fundraise. That’s okay—this is hard stuff.
Don’t be afraid to ask for help. Having access to a team of financial experts makes a huge difference to your company. Don’t wait until taxes are due or you get tangled up in some legal problem to start connecting with accounting professionals. Build those relationships early, and you’ll enjoy expert advice and access to their networks.
This article originally appeared on inDinero’s blog.
Navigating each stage of your startup’s growth is easier with the right accounting and tax support in your corner. inDinero handles the most tedious and intimidating tasks of your business operations–your accounting and taxes. Our cloud-based software+service solution maintains your books, creates statements, automates invoicing and bill pay, and turns your finances into insights that power your business. As a Lighter Capital startup, you’ll receive 30% off.