FINANCIAL LITERACY MONTH

Happy Spring, dear readers! And Happy Financial Literacy Month!  

We’re going to take this opportunity to dial back to the basics of accounting and finance so that all of our artists, creatives, and just general non-finance people out there can have a quick guide and resource to reference when needed!  

Accounting, finance, cashflow… it’s all a funny thing in my opinion. Like, if you’re not good at it, it doesn’t really excuse you from doing it (unless you outsource of course) but even then, your financial decisions are still on you. And in that manner, it’s somewhat unlike other skill sets. For example, if you’re not good in creative areas of life, you can hire that out. You just need to be able to communicate what you want but … you gotta pay them ➡️ see what I mean, you are still responsible for the financial decisions. So, short of being your bookkeeper, how can we help you better manage and understand your finances? This is a topic that was brought to us by someone on our admin team that has learned boat loads about said topic since joining us, but still feels a bit in the dark. So, this one’s for you! 😉 

Business 101 

Let’s start with the very basics. 

When is Tax Day? 

This is, actually, two days for businesses (depending on entity type) and one for individuals.

1. March 15th: This deadline is for businesses that have tax returns that need to be filed independently of their owners’ personal tax returns (i.e. partnerships, multi-member LLCs, & S-Corporations). The output of these returns still affects their owner’s returns, but they get this doc called a “K-1” (it’s kind of like a W-2 for the owner) which they will use to prep and file their own personal taxes. So, long story short, these entities have to get their ducks in a row first.  
2. April 15th: This deadline is for three groups (and this is speaking VERY generally) …

• Businesses whose returns don’t affect their owners’ personal taxes (i.e. c-corps).
• Businesses whose returns are required to be filed before the owner’s personal tax returns are due. (i.e. sole proprietorships and single member LLC)
• And last but not least, this is, of course, Tax Day for individuals.

Can I get an Extension on That? 

The IRS allows all filers, no matter their original tax due date, a 6-month extension opportunity, but you must request it! There is an extension form that is due by the original tax date if you want to take advantage of this option. But keep in mind that if you owe taxes beyond what you or your business has paid to date, that’s allllll still due by the original tax due date.  As far as dates are concerned, we’ll do the math for you:

• Original Due Date: March 15th | New Due Date: September 15th
• Original Due Date: April 15th | New Due Date: October 15th

Let’s Get Fiscal… 🤨 

A fiscal year is just a fancy way to define the 365-day period you use when filing taxes. For individuals, the fiscal year is always January 1st – December 31st. Most businesses also use this traditional calendar year. However, as a business you can elect a different fiscal year if it makes sense for your industry – a good example of this would be a store that does a lot of business over the winter holiday season, meaning they will probably have more time to get their year end books in order over the slow summer months, so they may elect to have a fiscal year that spans July 1st – June 30th.

The Profit & Loss Statement aka The P&L aka The Income Statement 

The P&L is a financial report that shows how much money you made during the year (your income), how much you spent (your expenses), and the difference between the two (your profit)…  

Income - Expenses = Profit.  

This does not include things like loan payments or credit card payments… these things go on your balance sheet.

The Balance Sheet aka The Statement of Financial Position 

The balance sheet is the tricky one. Think of your balance sheet as something that shows you your financial position… aka how much cash you have on hand, how many assets you own (like a vehicle or  property), and how much you owe to others (like your credit card balance or that loan you took out from your parents). Oh, and last but not least, how much money you have personally invested in a business and your total net gains or losses over the lifespan of your business – they call this “Equity”. 

Now that we have these thrilling basics out of the way… what else do you need to know if you’re a newbie to the class? Up next, we’ll go through the essentials of tech, budgets, savings, and who to ask for help when you know you need some but are just not sure what you’re looking for.

Accounting Software = Your New Best Friend 

If I lost you a bit when I started talking about the P&L and balance sheet… I totally get it. In my previous life as a small business owner in the fashion industry, understanding those things was not my forte either. But I did understand the money coming into the bank and the expenses it took to run my business. To help prep the financials and put the picture together, I turned to QuickBooks (or insert any other financial software here). The beauty of software like QuickBooks is it allows you to enter transactions – i.e. the invoice that you are sending to someone that owes you money for a product/service or that credit card expense that you put on your AMEX – and it automatically uses those transactions to create financial reports like a P&L and balance sheet. Pretty much any accounting software can do this for you, we just happen to be QuickBooks Pros, so that’s our go-to. But I will advise you on two things… 

1. Do not try to do this in Excel. There are affordable options out there, find them, use them, make your life easier, thank us later.
2. Opt for an option in “the cloud” when possible. QuickBooks Online (QBO) is a great option with various price points for businesses new & old. It has a ton of automation options and app add-ons. Plus, if you “click” nicely, we can get you a discount (click here).

The 4-1-1 on Budgeting

Budgeting is essentially giving your money a structured plan instead of looking at your bank saying, “Hey! I have $10k, let’s buy some inventory!” and then the next week receiving a bill for that inventory you bought last month for $15k that you haven’t paid for yet. There are a lot of budgeting apps out there, including ones that are integrated into and included in your accounting software (cough, cough, QBO), doing the heavy lifting for you. The goal when budgeting is thinking through both the income and the expenses of your business, taking into account seasonal or industry spikes, new hires, increase in employee compensation, estimated tax payments… all the things. A good place to start is to look at your prior year history and build from there using your crystal ball to try to predict the future.

Emergency Funds: Your “Ugh-Oh” Stash 

Saving for a rainy day (or dry spell) is always a good idea, both in business and in your personal life. Our goal is to have 6 months worth of expenses in cash stashed away in a bank account. But if you're starting from ground zero, start small and grow; the general rule of thumb is to have about 3-6 months of operating cash on hand. There are some great resources and best practice guidelines out there on this; our favorite resource isProfit First and when used in conjunction with Relay Bank, the official “Profit First” bank - it's pretty magical.

When to Call in The Task Force!  

Ask yourself, why did you start your business? I bet your answer was not to handle your finances. Accounting knowledge, unlike the title of “Wearer of 27 Hats,”, is not automatically bestowed to you just because you started a small business (it’s actually a skill people go to a lot of school for… imagine that)! So, don’t be hesitant or embarrassed to seek outside help – you wouldn’t try to fix your car without a mechanic, right? So why try to fix your finances? 

But who do you ask? That was my biggest “?” when I found myself in this position, I didn’t know who or what I needed. I knew I needed a CPA to file taxes… (that’s right, right?) but what else. Well friends, let me break it down for you.  

1. Bookkeeper: a bookkeeper focuses on keeping your books accurate and up to date. They record daily transactions, ensure everything is properly reconciled, and can prepare financial reports.
2. Accountant: an accountant takes a broader view of your business’s finances, helping with tax planning, financial forecasting, and strategic advice to grow your business.  
3. CPA (certified public accountant): a CPA is a tax professional that is certified to prepare audited financial statements and can represent you before the IRS. They are required to meet and maintain strict education, experience, and licensing requirements annually.
4. EA (enrolled agent): an EA is also accredited by the U.S. government to prepare and file taxes (aka represent taxpayers) with the IRS and state tax agencies, however with much less stringent qualifications. An EA is typically more cost effective than utilizing a CPA but may not be equipped to handle a business that needs complex financial planning and management.  

Now keep in mind that there can be overlap of these groups. For example, your CPA may offer bookkeeping and accounting services. Or your bookkeeper may also be an EA. So, know what you’re looking for and make sure to ask the right questions.  

So, you may be wondering, where does Accounting Therapy fall in this list? While we do have some EA’s on our team, we exclusively offer bookkeeping and accounting services. While bookkeeping is without a doubt our bread and butter service, we do provide accounting services to certain clients who have the need! But when it comes to tax time and tax advice, we’ll work closely with your tax preparer (an EA or CPA) to ensure they have the info they need to advise you!   

Tips to Tackle Your Financial Foes

• Keep it Simple: start by tracking your income and expenses. Understanding where your money comes from and where it goes is the foundation of financial literacy.
• Educate Yourself: take advantage of online resources, workshops, and courses on financial management geared toward small business owners.
• Embrace Technology: leverage the resources at your finger tips to automate and simplify your financial management.
• Save for Taxes: Don’t forget those due dates! Set aside a portion of your income for taxes so you’re not blindsided by what you may owe in March or April. Best case scenario: work with a professional to help you get some estimates.Worst case scenario: use the Googler to find an estimated percentage of profit by entity that you may be required to pay to Uncle Sam.
• Review Regularly: schedule time to review your financial statements monthly (and if you’re the one keeping them updated, schedule time to get that done as well). This habit will help you make informed decisions and stay in touch with your bottom line.

To Wrap It All Up… With a Bow🎀 

Understanding the basics of your business’s finances doesn’t have to feel like a Monday morning without coffee. There are simple resources or teams of people out there that can help you navigate the unknowns. Plus, understanding the basics will help you make informed decisions that drive your business forward and your bottom line up.  

If you’re at a place where you do think you need a team to help, we’re always here for you. We love helping small businesses take the insanity out of small business accounting. Plus, our strength is that we have a team of real people who speak “entrepreneur” so that you can understand what the heck is going on.  

So! Happy Financial Literacy Month! Here’s to making informed financial decisions and to the continued success of your business! Our challenge to you… pick one thing you can do for your business’ finances this month that will make a difference moving forward. Let us know what it is in the comments!  

Until next time… 🍻