When you are starting up, you simply don’t know what you don’t know. Not to fear, Tom is here! Tomasz Popiel, CPA, CA is Startup Canada’s fearless Finance Director and is a Financial Analyst, Chartered Professional Accountant and entrepreneurial enthusiast based in Ottawa, Ontario. As part of a new monthly finance series with Intuit QuickBooks, Tom will answer your startup finance questions. Got questions? Ask Tom. Submit your questions for next month to firstname.lastname@example.org.
The information in this article is for educational and information purposes only and should not be relied upon for decision making. Always seek the expertise of a professional advisor or accountant prior to making any decisions.
Q1 – I am an entrepreneur thinking about starting up. What are the first 3 things I need to do to set up myself up for financial success?
Starting up can be tough and it often feels like you need to do a million things at once. (And that doesn’t include all the things you don’t know that you should be doing.) Here are three key things you should prioritize to ensure financial success:
- A means to track, monitor and report on your financial performance and situation. You can do this on paper, using a spreadsheet, or using software such as QuickBooks, depending on how sophisticated you would like to be. The important part is that you choose something you know you are going to use, something reliable and something you can understand. Here are the pros and cons of each method:
- While using pen and paper is the easiest and quickest means to start, it is error prone and cumbersome when it comes to monitoring and reporting. Cost: $0.
- Using a spreadsheet is an easy and versatile way to get started if you’ve got spreadsheet basics under your belt. It too can be error prone, however, and can be time consuming to continually have to create reports that are timely and useful. Cost: $0 for solutions such as Google Docs or the price of Excel.
- Using an accounting package such as QuickBooks often takes the longest to set up and can have a learning curve, but it’s rarely as hard as you think. The benefit is that you’ve got one integrated package and reporting is a breeze once you learn to use it.
- Understand your business model. How does your business make money? This is the first step to understanding what financial information needs you have. For example:
- If your business produces a product, you should know the production cost per product unit to ensure you are pricing it correctly for sale.
- If you are offering a service, you should know how long the service(s) take to perform so that you price it correctly or don’t overcommit yourself.
- Know how many fixed costs and variable costs you have. Fixed costs are the expenses that have to be paid regardless of how much activity your business does (i.e. your office/building rent). Variable costs are the costs that vary with the level of activity or output (i.e. the cost of cloth if you produce clothes for sale).
- Understand basic accounting and your financial statements. The two big financial statements most people focus on are the Statement of Operations (or Profit & Loss Statement) and the Statement of Financial Position (or the Balance Sheet).
- The Statement of Operations will tell you how your business has performed over a period of time.
- The Statement of Financial Position will tell you what you own, what you owe and what’s invested in the business.
Probably the most important number to know early on is the amount of cash you have available and how it’s changing. If you’re allergic to accounting then this might be a great place to invest in a meeting with a pro to set you up properly and then you can take over. Depending on your business, this could be one of those places where you might need to be doing something you’re not aware of. Going through how your business works with a pro will ensure the most important considerations are discussed.
Q2 – I am a sole proprietor. Should I open a new business account with my bank or can I continue to operate with my personal account?
While technically as a sole proprietor you don’t need to have a separate bank account, if you’re ever anticipating more than a small volume of transactions I would recommended that you have a separate bank account for your business. It will be easier for you to keep track of your business income and expenses and you’ll always be able to reconcile to a separate bank statement and reduce the risk of missing something. If you put everything together into a personal account, you run the risk of accidentally not reporting income or missing an expense when you file your tax return.
Q3 – Having just opened a new business, what tax considerations and key dates do I need to know to ensure we are meeting our taxation requirements?
When it comes to ensuring you meet all your tax and other filing requirements, I strongly suggest seeing a professional on the matter. Depending on the type of business, there are sometimes special filing requirements besides the ones for all businesses and there could be special permits, licenses or other requirements you need to fulfill in order to operate.
You should also be aware of the different levels of government and their filing needs. The Canada Revenue Agency (CRA) comes to mind when we think taxes but there are also provincial ministries and Quebec residents file with Revenue Quebec.
Generally, you should be aware of filing dates for the following:
- Corporate and Individual (sole proprietorship) returns
- GST/HST/PST Returns
- Payroll remittances
Corporate and individual
As a sole proprietor, meaning a non-incorporated business, your business income and expenses are reported as part of your personal tax return using the calendar year. You have an extended due date until June 15th of each year but any taxes you owe must be paid by April 30th so I suggest you just get it done and over with by April 30th.
Corporations have a different due date because a corporation’s fiscal year-end may be different than the calendar year-end. In general, a corporation’s tax return must be filed six months after the end of their fiscal year.
It’s important to recognize that not everybody needs to register for GST/HST/PST right away. For the GST/HST, there is a small supplier threshold of $30,000, which allows some small suppliers to not collect and remit GST/HST right away. This also means you cannot claim input tax credits though, so be careful.
Some, but not all, provinces have similar thresholds. Once you determine whether you need to collect and remit GST/HST/PST, you should review the CRA and your provincial ministries requirements around dates since it often depends on the volume of sales in your business. Don’t forget, GST/HST/PST don’t work the same way as your tax return, you’ll have to make installment payments throughout the year. For more information the CRA offers guidance online.
Ready to start paying yourself or hiring employees? Make sure you register for a payroll program account and get your employees to fill out their TD1 (and provincial equivalents). As the employer, you are responsible for withholding the appropriate taxes from your employees and remitting them to the CRA (or provincial body). As with GST/HST/PST, the frequency of remittance can vary depending on the size of your payroll and the CRA offers guidance online about when you should be remitting.
As an employer, you should also be aware of what constitutes an employee and what constitutes a contractor. You cannot simply call everybody a contractor or consultants and avoid payroll remittances – if life were only that easy! Unfortunately there is no easy answer to this and there have been many court cases about this very topic in the past but the CRA does offer guidance on the topic so if you are unsure whether you’ve got an employee or a contractor on your hands it’s best to consult a professional.
Q4 – I have learned over the years that financial management is not my strong suit. What should I do?
It’s great of you to recognize your limits. Not everybody has an interest in financial management and in many cases, a founder should probably be more focused on running the business, not making sure their numbers balance.
That said, whether you like it or not, financial management and reporting is an important aspect of your business. So, while you don’t need to be the one inputting invoices, paying bills and balancing your statements, you do need to review them and understand how your business is performing and the state of the business’s finances.
Here are some suggestions for getting more comfortable with your business’s finances:
- You could use financial accounting packages such as QuickBooks to simplify things. Keep in mind, you would need to make an effort to learn and use the software. Cost: $100+
- You could consider outsourcing your financial accounting functions to a bookkeeping or accounting firm. Cost: Varies considerably based on the provider.
- You could hire a part-time (or full-time) bookkeeper. Managing the financial transactions of a business is a bookkeeper’s job and they’ll take care of all the data input, making sure you know what bills you have to pay, take care of payroll, and will be able to provide you with the reports that you need. Cost: This will vary considerably, but can be a lower cost option.
- While an exceptional bookkeeper may be able to provide you with even more service, an accountant will be required to complete your tax return and can offer a swath of additional value-add services to your business, such as helping you analyze costs, set up key performance indicators, explain the health of your business, deal with complex accounting issues, and help you to understand the impact of financial decisions. Cost: This will vary considerably, and will generally be a higher cost option.
If you are unsure of what you need, consider consulting with a professional to make that determination.
Q5 – What tools and apps do you recommend to make managing our startup’s books easier so that I can focus on running my business?
I recommend a financial accounting package such as QuickBooks to track your transactions, bills, what is owed to you, and to report on these things in an easy and efficient way. After this, a spreadsheet package such as Microsoft Excel or Google Spreadsheets will be very useful for putting together more customized information, such as costing sheets or financial projections. After this, the sky is the limit depending on how techy and expensive you want to go. There are receipt scanning tools such as Expensify that scan your receipts with a cell phone and automatically categorize them for you. QuickBooks and others can help with all your payroll calculations to ensure you meet the requirements. There is also software out there for precise time tracking on jobs, inventory management apps and software, as well as business planning software like StratPad. You can go as simple or sophisticated as you want.
Got questions? Ask Tom. Submit your questions for next month to email@example.com.