31 Tips from Small Business Month
October was Small Business Month in Canada. And to celebrate, I offered one tip per day on Facebook and LinkedIn. Here they are, grouped by category:
Income Statement 101. The basic income statement equation is revenue minus expenses equals profit or loss. Income statements start fresh each period with all amounts resetting to zero and the profit/loss shifting to the balance sheet as retained earnings.
Be sure to ask for both copies of the receipt for any meals/food expenses for your business. The cash register receipt and the debit/credit receipt are both needed
for different reasons.
Check your dates! The date on an invoice is the date it should be recorded
as either revenue or an expense, not the date of the payment.
A Square or PayPal fee reduces the amount that is received from a sale using their service. But what does it do to the revenue? Nothing. The fee should be treated as an expense. Revenue is based on the amount charged to the customer, and isn't determined by the method of payment.
Make sure you have a system for capturing the information on thermal receipts before they fade with time. Get in the habit of copying them if you are keeping paper copies, or scan them if you prefer electronic copies. Thermal receipts will be useless as backup once they have faded to blank, and the CRA won't be sympathetic if you plead ignorance.
Don't limit your chart of accounts to just the categories in the T2125 (for sole proprietors). Subdivide your accounts into the categories that make the most sense for you, and then combine them at tax time to suit the limitations of the T2125.
Balance Sheet 101. The basic balance sheet equation is assets equal liabilities plus equity. Balance sheets are perpetual. They might have a specific end date, but the amounts will be cumulative since the start of the company.
Not all debt is created equal, and different sources of funds need to be treated differently. Loan interest is a business expense, and sometimes paying no interest needs to be booked as well.
Don't neglect the less exciting accounts on your balance sheet. Prepaid expenses, prepaid income, accounts payable and accounts receivable should be checked on a regular basis to make sure that something doesn't get stuck in limbo. Like a deposit for a future contract that was then cancelled. It can't stay in prepaid income forever!
Watch your receivables! How long will you let a customer not pay their bill before you write them off as a bad debt? Send reminders and be cautious if you continue to sell to someone who hasn't paid their last bill.
When at all possible, go cashless. All purchases and payments that are made through a business bank account or credit card can be validated by the respective statement. Cash is much harder to track. If it must be used, it must be managed.
Consider your payment terms. Do you invoice once per month and then allow your customers to pay in another 30 days? Can you survive without that cash for that long? Don't get squeezed between paying bills early and having your customers pay you late.
Watch your tax! Once you are registered for HST, be consistent by charging tax on all eligible sales to customers in Canada.
Be careful of default remittance schedules. For small companies registering for HST, the default frequency is annual, but quarterly is available by request. And you aren't limited to calendar quarters if a non-calendar quarter matches your fiscal year end.
When charging HST on sales and services, the rate needs to match the location of your customer. Make sure you charge and collect the right amount for each province/territory. While sales outside of Canada aren't charged HST, duty
could be charged on products at the border.
Consider using a second bank account to keep remittance amounts separate. HST that is collected on behalf of the CRA is not your money, and keeping it separate helps make sure you have it when it is time to remit.
If you have employees paid on payroll, be sure you don't include any expense reimbursements as gross pay. Reimbursements should not be taxed or have other deductions. Either reimburse the expenses separately, or add the full amount to their take home pay.
Be careful of default remittance schedules. For small companies registering for payroll, the default frequency is monthly, but quarterly is available by request. But you are limited to calendar quarters as the year must match the T4 year.
When setting up payroll for the first time, consider your choice in pay frequency. In Nova Scotia the least frequent option for new companies is semi-monthly or twice per month. Biweekly may be more common, but semi-monthly has its advantages.
Owners can be paid using payroll from a corporation, but if they own 40% or more of their company they are EI exempt. Corporation owners receiving dividends and sole proprietors receiving drawings are also not EI eligible.
The expenses booked for payroll are gross pay, company CPP, and company EI. Employee deductions come out of their gross pay, and while they do need to be remitted they aren't expenses for the company.
The minimum vacation pay that employees earn is 4% or two weeks per year for a full-time employee. Hourly employees earn 4% vacation pay on each hour they work, whether it is banked for paid time off, paid as it is earned, or paid upon request.
Employers need to provide an ROE when an employee leaves. ROEs are also required for a change in pay frequency or a change in payroll provider. So if you switch from doing your own payroll to using a company like Ceridian, you need to prepare ROEs so that the new provider has a clean slate for the ROEs they will prepare in the future.
Free trials are great, but watch for a catch. QuickBooks Online offers a free month trial, but the email used for the trial is then not able to redeem one of their many new client discounts. So consider using an alternate email for the free trial and your real email for the account.
Ask your contacts about referral options before signing up for a new software account or a new service. QuickBooks Online and Ceridian are two of the companies that I am happy to refer clients to, but I let my clients know if I will receive a reward for the referral. Ceridian allows for the reward to be reduced fees for the client. Win-win!
When double checking transactions in software like QuickBooks Online, consider exporting your report to an Excel file first. This will allow you to sort your list by multiple columns, highlight rows that need further investigation, subtotal groups of rows, etc.
Are bills and expenses the same in accounting software like QuickBooks Online? No. Bills have an invoice date and a due date. The expense is recorded as the month of the invoice, even though the payment can be one or more months later. Expenses are paid on the spot, and only have one date field.
Don't confuse bookkeepers and accountants. Bookkeepers still need accountants, even if accountants don't need bookkeepers. Lots of people can do accounting work, but only accountants can call themselves accountants.
Keep your business and personal finances separate. Make notes on your receipts if that helps, as waiting to try and sort them at the end of the month could lead to confusion and a greater chance of making mistakes.
Don't miss CRA deadlines. Keep track of your remittance and filing deadlines, and give yourself enough time to do your books before you file. Late filing can lead to higher scrutiny and an increased chance of an audit.
Avoid thinking of your bookkeeping as something that needs to be done to satisfy the CRA. They aren't the CRA's numbers, they are your numbers. And you can learn from your numbers every month, not just once a year.
I hope you had a successful Small Business Month, and that these tips help you to have an even more successful November and beyond.
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This blog is intended for information purposes only, and is not meant to replace the services of a bookkeeper or an accountant.