No matter if you are a small business owner or a work from home entrepreneur, it is easy to get trapped in the different aspects of setting up a business like choosing a name, developing products or services, designing labels, creating a brand, developing a website and getting the other essential things done. While each of these aspects is important, as a work from home entrepreneur, you must invest some time to know the less glamorous yet crucial aspects of a business, such as accounting.
Here are all the essential accounting basics that you, as an entrepreneur, should know to make 'work from home' work for you.
1. Open a Business Bank Account
Once you have chosen your company's name and have it legally registered, it is time to get a separate business bank account to record all the income and expenses. Having a separate bank account will help you organise funds and plan for taxes. To get a business bank account, all you need to have is a legally registered business name and a few essential documents like ID proof, address proof, etc.
Before you choose a bank to get a business account, make sure it satisfies certain requirements.
- Compare the banking and related services offered by different banks
- Make sure the bank has its ATMs near your home for convenience
- Check out the transaction limits of different banks and make sure it works for your home business
2. Get a Merchant Account
Even if you are a work from home entrepreneur, you will still need a merchant account. Having a merchant account allows you to accept credit card payments. If you run an e-commerce store, you can set up a direct payment method with a merchant account. And if you offer any services like digital marketing, public relation consulting, etc., many of your clients would like to pay via credit cards. So, it is a wise idea to have a merchant account in place before your clients or customers ask for it. Alternatively, you can also use a third-party payment processor like PayPal. However, the fee of a third-party payment processor is around 2.9% + $0.30 per transaction.
3. Track your Expenses
The secret to effectively manage your business accounting lies in tracking your expenses carefully. It will help you monitor your business growth, craft financial statements, plan for tax returns, keep a record of deductible expenses and save big.
To track your expenses effectively, you need to build a system for organising receipts and other essentials data/records. While running your business from home is a wise way to keep overheads low, true efficiency will lie in managing both your personal and professional expenses separately and smartly. For instance, if you are using a single phone, internet connection, transportation means, etc., deduct the percentage of business use for both home and business purposes. Just be sure to track all the records and maintain a log of your personal and professional use of resources separately.
Some of the necessary paperwork you must track are:
- Bank and credit card statements
- Financial statements
- Receipts of parking, travel, business meals, supplies, equipment, etc.
- Receipts of utilities, internet, phone, etc.
- Tax returns
4. Set up a Payroll System
As a work from home entrepreneur, you will most likely be a one-person show. Even if you hire a freelancer or a part-time employee to help you, you are still accountable to ensure smooth business operations. If you hire employees, you need to set up a payroll system and make sure you are withholding the correct taxes. And if you appoint freelancers, you need to maintain a log of how much you are paying to each person every month. Setting up a payroll system for your freelancers, part-time and full-time employees is essential to file income tax returns at the end of the year.
5. Calculate Gross Margins
Calculating and improving your business's gross margin is the first step towards earning big and saving more. To calculate your gross margin accurately, you should first know the costs of goods sold. Let's understand what are 'cost of goods sold' and 'gross margin'.
- Cost of Goods Sold (COGS): COGS refers to the costs of establishing the products sold by a company and direct labour costs.
- Gross margin (GM): Gross margin is the total sales revenue a businessperson gains after incurring all the costs of products and direct labour.
The difference between your COGS and GM is the factor that truly determines your skill to run a business successfully. Keep in mind that your gross margin should always be high enough to attract investors and succeed over time.
6. Manage Cash Flow
'Cash is king': this time-tested adage holds true particularly for startups, small business owners and work from home entrepreneurs. For businesses with limited credit lines, cash is one of the most crucial assets. Without cash in hand, it can't pay the direct labour cost, reach customers, establishes an inventory and grows. Therefore, you must understand the smart management of cash flow. Comprehending and projecting cash flow prudently will help you to ensure there is enough money in the bank to run and grow the business. Keeping track of cash inflows and outflows will help you use excess cash productively, avoid any unnecessary expense and cash shortage and plan for future growth.
7. Know your Tax Obligations
As a work from home entrepreneur, filing your taxes can be extremely intimidating, especially if you have not done it before. Your tax obligation varies depending on how you have got your business registered because the needs of a sole proprietorship are quite different from those of a corporation or LLC.
The following points cover some of the common tax obligations:
- Sales tax: You will need to collect your clients' sales tax and submit it to the government. Do your research to know how much sales tax you should charge and when to submit it.
- Income tax: Depending on the type of business set-up, you need to file income tax. For instance, if you run a sole proprietorship, your income tax will be part of your income. And if you run a corporation, you should file distinct tax returns for your business.
Types of Taxes:
Before you file your tax, you must know there are two types of taxes: direct tax and indirect tax. The differences between direct tax and indirect tax is determined by the way, you pay these taxes.
- Direct Taxes: The taxes you directly pay to the government are known as direct taxes such as wealth tax, corporate tax, dreaded income tax, etc.
- Indirect Taxes: excluding direct taxes, all the other kinds of taxes are known as indirect, such as service tax, sales tax, VAT (value added tax), etc.
As per the provisions of law, tax evasion is an offence, and if you don't pay your direct and indirect taxes on time, you are liable to be punished. However, since the government introduced the GST in 2017, it has replaced several other kinds of indirect taxes.
8. Maintain a Balance Sheet
Maintaining a balance sheet is essential as it captures a clear picture of your business' financial health. It will help you quickly figure out both assets and liabilities. Also, it will help you find out what resources are available and what you owe others. As a work from home entrepreneur, you can keep your business in check using a balance sheet. The balance sheet will give you a good understanding of where your company currently stands and its feasibility for its future growth. Therefore, maintaining a balance sheet is imperative to ensure the long-term success of your business.
As a work from home entrepreneur, you can grow your business and ensure its success by mastering the accounting basics. Having a sound knowledge of the what, how, and when regarding accounting can help you strengthen your company's financial health, ease the burden of the tax season, save big and plan for future growth. Whether you are planning to become your own boss or have already taken the leap, comprehending accounting basics will always help you reach your entrepreneurial goals.
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