While finance might not be your strong suit, it’s important as a business owner that you grasp the basics of small business accounting. That way, you’ll get a good understanding of how your company is performing. Whether you’ve just launched a new company or you’ve been in business a while, we’ve put together a complete guide to help you master your finances. 

The complete guide to managing your small business finances

Get a grasp on your finances so you can manage your cash flow, grow your business and simplify your books for tax season. Here are the steps you should follow to take control of your business finances:

1. Register your business

The first step in managing your company’s finances is registering your business. To do that, you’ll need to choose what type of business works best for you. These are the most common types of small businesses:

  • Sole proprietorship: A sole proprietorship is an unincorporated company with just one owner. While setting up a sole proprietorship is easy and affordable, it’s important to understand that it offers no legal separation between you and your business, so you can be held personally liable for debts or lawsuits.
  • Limited liability company: An LLC incorporates aspects of a sole proprietorship and a corporation. It offers personal protection in the case of lawsuits or business debts, and it allows you to file taxes either as a sole proprietor or a corporation.
  • Corporation: A corporation is a business or a group of people that is legally allowed to operate as a single entity. A corporation is considered to be a separate taxpayer, so your business finances are completely separate from your personal finances. Corporations enjoy lower tax rates, but they can be expensive and complicated to set up. 

2. Separate your finances

It’s a smart idea to keep your personal and business finances completely separate. If you register your business as an LLC or a corporation, you’re legally obligated to have a dedicated business bank account. While you don’t need to open one for a sole proprietorship, it’s a good practice to adopt. 

What does it mean to separate your finances? Here are the basics:

  1. Don’t pay for business expenses using personal bank accounts or credit cards, and vice versa. 
  2. Don’t transfer money from your business bank account to your personal accounts. 

Here are the business bank accounts you should consider opening:

  • Business Chequing Account: For receiving payments from your customers and paying your company bills, like your rent and utilities.
  • Business Savings Account: For putting aside money to cover your tax payments and to create an emergency fund in case your company is hit with unexpected expenses. 

You may also want to get a business credit card to build up your credit and earn cash back or other rewards. 

3. Pick an accounting method

There are two basic accounting methods you can use to keep track of your finances. You’ll want to choose the method that works best for you, and stick with it:

  • Cash accounting: You record revenue when you receive payment and you recognize expenses when a bill is paid. This is the more simple of the two methods.
  • Accrual accounting: You recognize revenue when it’s earned and expenses when they’re incurred, rather than when the money actually enters or leaves your bank account. It’s a trickier method, but it gives a more accurate picture of your financial status. 

4. Choose a bookkeeping solution

Bookkeeping might sound intimidating, but it really just involves keeping a record of all your earnings and expenses. It’s a good idea to develop a consistent bookkeeping method that works for you. You can either use the single-entry or double-entry bookkeeping method to track your finances. 

Here are some options for how to manage your bookkeeping:

  • Do it yourself: You can handle your own bookkeeping and either track everything manually in Excel, or pay for bookkeeping software to make things easier for you.
  • Outsource your bookkeeping: You can choose to outsource your bookkeeping by hiring a part-time or freelance bookkeeper.
  • Hire full-time help: If you run a large, complex business and your bookkeeping is considerable, your best approach may be to hire a bookkeeper to work in house.  

5. Track your expenses

Make a habit of tracking all your business-related expenses. That way, you can claim those expenses when you file your taxes. Some of the most common business expenses you may incur include: 

  • Meals
  • Entertainment
  • Advertising
  • Vehicle repairs
  • Gas
  • Office supplies
  • Salaries, wages and benefits
  • Business insurance
  • Rent
  • Utilities

For a complete breakdown of the business expenses you can claim, check out the Canada Revenue Agency’s list of allowable business expenses

6. Choose your payment methods

You want to get paid for your work, so you need to decide which payment methods you’ll accept from your customers. You’ll want to strike a balance between accommodating the different needs of your customers and keeping payments affordable and manageable. Here are some common payment methods for small businesses:

  • Cheque
  • Cash
  • E-transfer
  • Credit card
  • Online payments
  • Mobile payments 

7. Set up payroll

If your business has employees or contract workers, you’ll need to set up a payroll system to pay their salaries or wages. The first step to setting up payroll is classifying your workers. The type of worker you employ will affect your tax obligations, so this is a critical step. Here are the key differences between an employee or a contractor:

  • Employees are workers that your company has some control over in terms of the activities they perform. That means your company sets their work hours, determines their wages or salary, offers them training and has the power to hire or fire them.
  • Contractors are workers who have the freedom to control how, when and where they work. They typically charge by the hour or by the job and can choose their own work hours. 

8. Determine your tax obligations

The taxes you pay will depend on what type of business you run and where you’re based. You’ll need to do some research to determine all your company’s tax requirements, but these are some of the common tax obligations for small businesses:  

  • Business or professional income tax
  • Corporate income tax
  • GST / HST
  • Payroll deductions

The CRA has more details about business tax obligations

9. Create financial statements

Financial statements are reports that help you understand how your business is performing financially. They can help you predict how your revenue or expenses will change in the future, and can help you decide when it’s time to grow your business. Here are the different financial statements you can create:

Balance sheet: Your balance sheet shows a complete snapshot of your finances at a specific moment in time. It gives your assets, liabilities and equity using the formula:

Assets = Liabilities + Equity

Income statement: Your income statement takes a deeper dive into your business income, broken down into revenue, expenses, gains and losses. It’s used to determine your net income, to show how efficiently your business is performing. It uses the following formula to calculate net income:

Net income = (Total Revenue + Gains) – (Total Expenses + Losses) 

Cash flow statement: The cash flow statement shows how much money is flowing into and out of your business. It’s broken down into the three types of activities that affect how businesses earn or use cash: operating activities, investing activities and financing activities. 

10. Consult a professional

If you’re unsure of how to manage any aspects of your business finances, or if you’re just launching a new business and want to start out on the right financial foot, it’s a good idea to consult an accountant. A CPA can help you with all these financial challenges:

  • Choosing the legal structure of your business
  • Determining what kind of business insurance you need
  • Creating a financial strategy for your business
  • Making sure you’re meeting your tax obligations
  • Filing your tax returns
  • Producing financial reports

Getting a handle on your business finances can give you a clear picture of your company’s financial health and help inform important business decisions, like hiring employees or investing in equipment. Once you’ve mastered the basics of small business accounting, you’ll be better positioned to prepare your business for future growth. 

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