4 Non-Negotiables for every business owner
Running a business successfully requires more than passion and good ideas - it demands smart financial decisions that set the foundation for long-term growth. There's a lot of information out there for business owners; however, these are the four pieces of information I continuously share with the different business owners I speak with. By implementing the following four things in your business, you'll have a solid financial foundation to build your business.
Have Separate Bank Accounts
It's time to open a separate business account and credit card for your business! There are many reasons to open individual accounts; below are three main reasons I believe you should open them today;
Having separate accounts allows you to be in the mindset of making decisions with every purchase. With separate cards, you are more likely to ask yourself, "Is this business or personal?".
When you know it's business, it signals you to keep your receipts for tax purposes. If it's a meal, write down who you were with and for what reason. Being mindful of personal vs. business expenses shows tax authorities that you take business seriously.
If you lose track of your bookkeeping - you know that all of the transactions in those accounts are business-related. This also avoids the need to remember every purchase you've made. Having a clear split between business and personal expenses lessens the headache come tax time, and you're covered if an auditor decides to go poking around in your books.
With a good foundation, you can help more clients, avoid financial headaches, and help keep the CRA off your back. Opening these kinds of accounts has become easier and more accessible. With some institutions, you can open a business account on the app if you're already a client. Consider looking around at different banks depending on your needs because some have better incentives on business accounts and credit cards than others.
2. Track Every Expense
Expense tracking can be done easily with any cloud-based accounting software such as Xero or QuickBooks. With the click of a few buttons, you can connect your business account and credit card to the system. The system pulls transactions automatically - the only thing you have to worry about is attaching the receipts and classifying the expense categories. Attaching and classifying receipts can be done with a software called HubDoc.
If you need help deciding which items to expense and "write off," check out this blog post that walks you through it. Don't be like David in the classic scene in Schitt's Creek and "just write it off."
Tracking your expenses helps you stay compliant with the tax man. It also enables you to examine your financial situation at any given moment to see where you're spending the most and where you might need to cut back.
Knowing where you stand financially can help you plan for the future of your business.
So you know if and when you can hire help.
So you can decide whether or not you can purchase new equipment.
So you can have the information to pitch or get funding if that's something your business needs.
Similarly to your personal finances, tracking expenses helps you make informed decisions for the betterment of your future.
3. Without a Contract, there is No Work
Too often, two parties decide to work together and start a business relationship… yet nothing is in writing. However, as business owners, we must remember this key phrase when working with anyone else in business: "If it's not in writing, it didn't happen".
An invoice alone is not enough to require someone to pay you - you have to have a separate contract with their explicit agreement to the amount of your goods/services. In some circumstances, emails can count but aren't as ironclad if challenged legally.
When creating a contract for a client, there are three key pieces of information to include:
Clearly define the services or deliverables you'll be providing; this is called the Scope of Work. This ensures both parties have a mutual understanding of expectations and prevents scope creep, which is where clients ask for additional work beyond the agreement. They hired you for a service you have knowledge of, and allowing additional tasks can lead to misunderstandings and issues for you completing the job.
Outline the payment structure, including the total cost, payment due dates, and acceptable payment methods; this is called your Payment Terms. This helps protect your cash flow and establishes clear guidelines for when and how you'll be paid.
Specify the terms under which either party can terminate the contract; this is called the Termination Clause. This includes any required notice period and potential penalties for early termination, giving both sides a clear way out if needed.
These elements help ensure that you and your clients are protected and on the same page throughout the project.
This is not an exhaustive list, and your contract should include other industry-specific clauses. You can have a lawyer draft a contract for you, (many lawyers have templates available online for sale) or, you can draft one yourself and have a lawyer look it over to ensure you are covering all of your bases.
Once you have your contract ready to send to the client, you need to have it signed by both parties. An e-signature platform is probably the easiest way for you and your client - PandaDoc is a great option.
It is important to have clear terms between you and your clients or anyone you choose to do business with, to ensure everyone's expectations are met. When communication is clear, there is less worry or headache if something goes wrong.
4. Some Debt is Good Debt
We are afraid of debt as individuals, and for good reason - it can be hard to get out from under and must be used with caution. However, the interest you pay on debt is tax-deductible for a business. Most large corporations have debt and use it as a tool in their business.
Many businesses have busy and slow seasons. A revolving line of credit or an operating loan should be explored to make seasons where cash flow is tight - less stressful. You usually won't be approved until the business is more established, but it should be on your radar as a goal for your business. You should work with your financial institution to ensure your business is on track to obtain the debt it may need in the future to fund expansion plans and new initiatives.
Not all debt is bad, particularly for a business, but like your business account and credit card, you need to keep it separate from your personal loans or lines of credit.
Conclusion
Creating a solid financial foundation for your business is crucial. When you separate your personal and business finances, start tracking your business expenses, have contracts with your clients and recognize the potential benefits of responsible debt, you'll set your business up for success. These strategies keep you compliant with tax authorities, safeguard your operations, and give you the tools to make smarter financial decisions.
With the right systems in place, you can confidently navigate the ups and downs of running a business and focus on growing it for the future. Deciding to go into business for yourself can sometimes be risky; you don't need to take that same risk with your finances.
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I LOVE banishing the “finance scaries” by teaching entrepreneurs in an easy-to-understand way. If you’re reading this, you might benefit from my FREE Financial Health Check, which will assess how you’re doing with the financial management of your business, and provide you with customized resources that will hopefully resonate with you.