Let’s just get this straight. This is not a boring article. Running your own business is sexy. Accounting is sexy.
As a business owner, you’ll have a more challenging life. And, you’ll contribute more to the wider economy, as you will buy other goods and services for your company and you may even start to employ people – thus increasing demand and employment.
You can do it
Don’t believe me? OK, I’ll reveal how ridiculously stupid I used to be: I was bought up in the UK in the 1980s where most people, including Margaret Thatcher, assumed that in order for businesspeople to make money; other people needed to suffer. Yes, when I was young I really believed that! There’s actually a feeling in England, especially amongst the educated elite, that businesspeople, salespeople and entrepreneurs are somehow brash, pushy and dishonest.
Other than to piss off the English upper classes (and what could be better than that?), there are some solid financial reasons why you should start your own business. I’m reading Rich Dad Poor Dad at the moment and (although that’s an affiliate link, sorry!) I’m not finding it hugely useful. But here are two of the main arguments Robert T. Kiyosaki puts forward:
- You should always be improving your “financial intelligence” of which accounting is “financial literacy”. You should also keep trying to improve you knowledge of investments, markets and the law (government regulations and the like).
- The other thing that Kiyosaki explains is the basic tax difference between people and companies. Employees earn money, get taxed and then spend, whereas companies make money, spend everything they can and then pay tax on anything that’s left. So, working for yourself: good; working for someone else: bad. (Tell us something we don’t know, Robert!)
If you haven’t set up your own company yet I can hopefully further persuade you by saying that you can do this anytime – even if you are in full-time employment.
Naysayer interjects: It’s difficult to set up a company and even harder to organise! You end up with receipts everywhere and have a nightmare every year working on accounts!
I live in the UK and follow the local tax laws. Things may be different for you but I’ve got some really general accounting advice following that should be useful no matter where in the world you reside.
Setting up a company in the UK is fairly quick, fairly harmless and fairly cheap. After that all you have to do is to supply accounts every year.
I have an accountant. He may charge me over $1000 a year (that’s an expense, see below) but, as they say, he’s worth it.
I spend about 3-4 hours doing the accounts for my business every year. Here’s how I collate all the information I give to the accountant and keep everything super simple:
- Have internet banking – I guess that’s a given these days?
- Make sure you make all the business expenses go out of this business account.
- Set up a business PayPal account that withdraws from this business account.
- If you can, get a credit card for the company.
You can simply copy and paste from online banking into an Excel file and give it to your accountant. Bank accounts online are better itemised to it is easy to note to your accountant whether a withdrawal was for marketing, hosting, outsourcing, etc., and whether a deposit was for client work or passive income.
If you buy something for $100 then that’s $100 less profit that you’ll have to pay tax on. So I try to claim as much as I can. Here are the expenses I claim for.
- Tools of the trade: computers, laptops, tablets, smartphones, etc.
- Website expenses: hosting, domain name registration, stock images, email management, etc.
- General expenses: travel (to see clients), a proportion of telephone charges, use of house as office, broadband and anything that I use for my company (stationery, courses, books, etc.)
I keep account of the invoiced client work with the use of a spreadsheet on Google Drive throughout the year. It has the following columns:
- Invoice number. There’s a cool little Excel/spreadsheet trick of creating consecutive numbers without having to type them out.
- Date invoiced.
- Date paid? Don’t get me started on late payers!
- Extra column for notes. This is useful for a description of the job and other issues like foreign currency conversions, etc.
Other financial considerations
Of course, it’s not so simple and it does involve hard work. Here are some other things to keep in mind while starting or running your own business:
- You could consider purchasing some insurance to cover you against injury or something like that.
- You should also start a personal pension
- If you’re from the US, you’ll need private medical insurance.
More importantly, when you’re running your own business, you should keep large surpluses both in your personal bank account and your business bank account to tide you over during the lean months. Indeed, before you start a business you should also have a few thousand in reserve.
This depends entirely on your own financial position and your ability to find work. I was really lucky as parttime freelance work was coming my way really easily when I started my business and I had that to fall back on during the lean times. If you’re giving up a well-paid permanent job you’ll obviously need more cushioning!
What you can do
Do you dread the time of year when you do the company’s accounts? See if you can automate the process by using your online bank statements as a record of your expenses. Ask your accountant who’s happy dealing with this sort of information on a spreadsheet.
Maybe you have other tips for accounting you can give us in the comments?
Looking forward to your sexy accounting input!