Cost Saving Ideas for New Businesses
Presented by Katie Organ at SCORE’s meeting at Oak Hill Country Club on September 8, 2006.
About the author: Katie Organ is an accountant with Thomas H. Green, CPA, P.C., 1175 Pittsford-Victor Road, Building 2, Suite 110, Pittsford, New York 14534. (585) 586-0650. She has over ten years experience preparing taxes for individuals and businesses in the Rochester area.
In working with new business owners, I have seen first hand, clients that have wasted money:
Mixing their personal and business transactions in the same accounts;
Using the wrong bookkeeping system; and
Not charging the correct sales tax.
New business owners can avoid these and other pitfalls if they meet with an accountant as they are setting up their business. There are so many ways that consulting with a CPA can save small businesses a lot of money, particularly in:
Selecting the right type of business entity;
Choosing the right accounting method for their business;
Selecting the best depreciation method; and
Developing a solid business plan.
There are also other ways for small businesses to save money through improved money management practices and reducing consulting costs. If you are starting a new business or looking to improve your current business, it’s important to take control of your business costs. There are many ideas I can share with you from the lessons learned by my clients. Here are a few cost saving ideas that could save your business a lot of money.
Bank and Credit Card Accounts
First, do not mix personal and business transactions in a bank or a credit card account. This muddies the water and can be time consuming to sort out.
Many new business owners will come in to have their first tax return prepared with their personal credit card statements that include both personal and business expenses. They may be carrying a balance on the card and assume that I can figure out by the vendor name if the transactions are personal or business. That is a very time consuming task! Also, it’s extremely difficult to calculate the business portion of the finance charge.
A better solution is to open a business checking account and get a new credit card to use exclusively for the business.
My experience with most new business owners is that they are creative but have little interest in bookkeeping. They want to be out making money and don’t want to spend time working on the books. Business owners can choose a bookkeeping system that is either a manual system or an automated system. The bookkeeping system that is best for you will depend on several factors.
A simple manual system, such as a spreadsheet or columnar sheet can work if the business owner only needs to track income and expenses to have a tax return prepared. The key to this form of bookkeeping is to make sure that the numbers reconcile. By this I mean that the beginning checking account balance plus the income minus the expenses equals the ending checking account balance. To keep tax preparation costs down, calculate a total for each income and expense category before you meet with a tax preparer.
If the new business has loans, a line of credit or uses credit cards, I would recommend an automated bookkeeping program. If the owner has a limited amount of time available to dedicate to bookkeeping and has a business that is profitable, I would recommend having someone who is proficient with a bookkeeping program do their bookkeeping for them. However, if the owner has available time, they can teach themselves a program. If they decide to do their own bookkeeping, I do recommend that they meet with someone who is proficient with the program that can determine if they are getting accurate reports with the processes that they are using.
My experience is with the QuickBooks program. The program is very user friendly however it will allow the user to make mistakes if they don’t know what they are doing. A common mistake that people make in the QuickBooks program is in regards to paying bills. If you enter a bill in the program you must pay the bill. Many times when people are new to the program they will write a check to pay the bill. By doing this they have double booked the expense. Needless to say, if they do this for several months they have a mess on their hands and will probably be paying someone to fix it.
The next cost saving idea for new businesses is the Empire Zone. If a new business will be renting or owning space and they project that they will be adding more employees as the business grows, it may be valuable to look at Empire Zones. There are many Empire Zone credits available to qualified businesses.
When it comes to how a small business charges for sales tax, I have one bit of advice: Know your requirements. Many new businesses overlook their responsibility of collecting and paying sales tax. The sales tax requirement for some business types is very clear cut while others are pretty vague. If someone starts a business servicing computers, service to the software is not taxable while service to the hardware is taxable. Knowing your sales tax requirements is important. You don’t want to find out the requirements three years down the road when you are selected for an audit. It’s best to find out these requirements upfront to avoid interest and penalty charges.
Consulting a CPA
Sometimes spending a little money can save a lot of money. Getting the advice of a CPA will cost money in the short term, but can save you a lot more in the long term.
Consulting a CPA is invaluable when it comes to the following items: Selecting the right type of business entity; choosing the right accounting method for your business; selecting the best depreciation method; and developing a solid business plan.
Selecting a Business Entity
Let’s first look at how a CPA can help a small business when it comes to selecting the right type of business entity. Choosing the right entity type is very important. If you want to secure your personal assets in the event of a lawsuit, incorporating or forming an LLC is the way to go. Sole proprietors that want that protection can form a limited liability corporation and still file a Schedule C on their personal tax return.
For very profitable sole proprietors, incorporating and electing to be an S-Corp can save the business owner money as well. A sole-proprietor is charged self employment taxes on the bottom line of their Schedule C. If that same business owner incorporates and elects to be treated as an S-Corporation, the Corporation can pay the shareholder a reasonable salary that may be less than the bottom line of the Schedule C. The employment taxes for the business would be based on the wages of the shareholder rather than on the bottom line of the Schedule C. If they choose this option the shareholder’s salary has to be reasonable.
Choosing an Accounting Method
When it comes to choosing an accounting method, many businesses have a choice to use the cash or accrual method of accounting. The method used can have a big impact on when income and expenses are recognized and thus the amount of tax due. A CPA will help them determine which the best accounting method for their small business.
Selecting a Depreciation Method
Decisions regarding depreciation of fixed assets can also have a significant impact on the amount and timing of taxes due. With proper planning, depreciation deductions can be taken to maximize the amount of tax savings. In this regard it is helpful to have a business plan and an idea of what net income is expected from the business over the first couple of years. The idea is to maximize the amount of depreciation taken in higher income years.
Developing a Business Plan
A business plan is also very important to make sure there is sufficient working capital to withstand losses in the start-up phase. A CPA is trained in writing business plans and can be a valuable resource to the new business owner.
I want to talk a little bit about money management. It’s important to gauge startup costs to the size of the new business. It’s sad to see someone that is starting a small part-time business - spend the money to meet with a CPA, buy a bookkeeping program, incorporate the business; to only operate the business for a couple of months. If they want to try out a business on a part time basis - start with a manual system of bookkeeping. If they like the new business and want to go full time, they can add the bookkeeping program later, meet with the CPA to form a business plan and incorporate if desirable.
Another aspect of money management is about knowing when to stop. It is heartbreaking to see people keep an unprofitable business going. I understand that it may be the only thing you know how to do but the reality is – if you’re spending all of your savings and building up a ton of debt, it is not a smart business practice.
Keeping Consulting Costs to a Minimum
The last cost saving idea I have for the small business is how to keep accounting consulting costs to a minimum. Most Certified Public Accountants invoice based on the amount of time they spend on the job. If a new business owner wants to save money, it’s important to bring all tax information to the accountant or tax preparer in an organized fashion. The more organized your information is, the less time the accountant spends preparing your tax return. For example, if you use a manual bookkeeping system, calculate the totals for each income and expense category and provide beginning and ending bank account balances. Provide copies of invoices for all new fixed asset purchases and all new loan documents. Keep the phone calls to a minimum because this time is billable too. I have had new business owners that will call me with questions on a daily basis. If you want to save money, make a list of questions and call occasionally.
There are many ways a small business can save money, starting with not mixing personal & business transactions in the same account. Other cost savings ideas include choosing a bookkeeping system that is right for you, and knowing your sales tax requirements. There are many ways that consulting with a CPA could save small businesses a lot of money, especially when it comes to selecting the right type of business entity, choosing the right accounting method, selecting the best depreciation method, and developing a solid business plan. Finally, whether the small business owner wants to do their own bookkeeping or consult with a CPA, it’s important to get organized and stay organized. It can save them a lot of money.