Tag Archives: small business

Bookkeeping, Business Structure

Do You Need a Business Bank Account?

Posted on by Kaitlin Kirk
13
Jan

You’ve probably heard it before – “you need a separate bank account and credit card for your business.”

It’s true, you do.

But why? It makes everything harder! Money goes into the business account, but all your bills come out of your personal account. How are you supposed to pay for things like groceries if all of your money is in the business account?

I get it, I’m a small business owner too – my business income has to pay my personal expenses.

Whether you’re incorporated or a sole proprietor, you need a separate account.

As a sole proprietor, things are a bit simpler because everything you make goes on your personal taxes, so you can transfer money to your personal account without too much planning (besides some cash flow management, but that’s beyond the scope of what we’re talking about here).

Why does it need to be separate?

Having a clear line between your personal and business expenses, ensures you’re only claiming the business ones against the business income.

The Canada Revenue Agency isn’t going to let you deduct cat food if you’re a coach. Sorry about that.

On the other hand, you definitely want to deduct everything related to the business – if you don’t, you’re paying more in taxes than you need to. Nobody likes that.

Taxes are a huge reason to keep everything separate. Not only for the sake of compliance but also to save time. When the inevitable tax season comes around, you don’t want to be going through every bank statement for every bank account and credit card you have trying to pick out the expenses you think might be business related.

It’s time consuming, tedious, and honestly, it’s pretty unlikely you’ll make it through the whole exercise without making a mistake somewhere.

Trying to remember what you bought at Canadian Tire eight months ago is going to be a tough one, and if you can’t prove it was business related, you can’t deduct it for tax purposes.

Maybe you keep all your receipts and write on them to say what you bought and why. That’s great! That will definitely help to keep things separate. You’ll still have to go through and add up all of those receipts at the end of the year.

Pro tip: you can take a picture of receipts with your phone and toss out the paper. The CRA will accept digital copies as proof of purchase. Yay!

What if the business is incorporated?

Corporations are technically separate legal entities from their owners (a.k.a. shareholders), which means they for sure need their own bank account and credit card.

The corporation will need to pay tax on its income, and you’ll need to pay tax on what you receive from the business. When you have only one bank account, that makes things tricky. Where’s the line between business and personal?

Having a separate credit card makes life SO much easier. The fee on your bank account will be way less if you only have a few transactions every month, and you can use the credit card to pay for everything. I know it’s hard to get credit for the business, especially if you’re just starting out, but it can be as simple as just getting another card issued on your personal account. The important thing is to have another physical card that you only use for business. It will show up on your statement separately from the other card.

Are taxes the only reason?

Nope, it’s just the one with the biggest potential consequences.

Reporting will be difficult too if you only have one account. How much did the business make in net income? Will you have cash in the bank to pay your suppliers on time? If everything is in one account it will be tricky to know the answers to these questions, which makes it tricky to run the business efficiently.

If the business is a side-hustle and you still have a day job, you’ll have no idea if the business is making money if it’s not separate. You might be bankrolling the business and not even know it.

At that point it’s more of a hobby than a business, which is ok, but keeping your finances separate will give you all the facts.

What’s the take-away?

At the very least, the business should have its own bank account, and ideally a credit card too. It will be so much less stressful and time consuming when taxes inevitably roll around. Plus, if/when you start working with a bookkeeper or an accountant, you’ll save money because they’ll spend less time on your taxes. Win!

Kaitlin

Pricing

Pricing Your Services: Facts vs Feelings

Posted on by Kaitlin Kirk
06
Jan

As an accountant I get asked “can you tell me the price I should be charging for my services?” and my short answer is no.

I can calculate the direct costs required to offer the service. I can tell you how much you’re spending on overhead, and I can even give you multiple ways to assign those overhead costs to your services. None of which is overly helpful in determining a price for you’re services.

Don’t get me wrong, those are all good things to know so you can be sure you’re covering your costs with the prices you do set. But I don’t recommend using them as the first things you consider.

Buying Pain Relief

Costs are only 10% of the information you need to price your services. The other 90% is the impact, or perceived value, for your customers.

If you only use your costs to come up with a price, you haven’t accounted for the impact your services have on your customer. A cost-based pricing strategy will always produce a lower price than a value-based strategy, which means you’ve left money on the table. Your customer would’ve happily paid you more than you charged them.

People will make a purchase to avoid pain more often than to gain something.

Think about the last time you bought something. Why did you buy it? Chances are it was to relieve or avoid some kind of pain. Maybe it was gas for your car to avoid the pain of walking for an hour to get work, or maybe it was an email marketing app to relieve the pain of spending hours trying to manually send emails.

When you decide to purchase a specific product or service, you do it because you believe the value (pain relief) you’ll receive is more than the money it will cost you.

That’s why it’s not an accounting question. It’s a psychology question. What is the perceived value of the service?

Buying is Emotional

This is not an easy question to answer because it’s all relative and the person setting the price feels differently about the service than the person buying it. Their perceived value is different than that of the customer’s.

On top of that, every customer will have a different perceived value, so setting one price for every customer won’t work. You’ll either be too high or too low for almost everyone.

If each customer will have different specific needs and a different maximum price they’re willing to pay, how do we get the best price for our services?

By conveying the value to your customer. The difference between the pain they feel now and how much better they’re going to feel after our work together.

All of this is to say, buying is an emotional decision and we need to account for the psychological factors at play. Big business spends millions every year to understand the best way to exploit those factors because we, as consumers, are mostly unaware of the way our brains process price.

I’m not saying you should be trying to trick your customers, I’m saying to convey the value per dollar you provide, you need to understand how our brains comprehend price.

Buying into Sales

As humans, our brains have a hard time understanding price as an absolute. It’s like if we had two kittens, and I asked you to tell me which one was heavier. You could lift them both and give me the answer without too much difficulty. You wouldn’t, however, be able to tell me that one of the kittens was exactly 900g because our brains can’t measure absolute values. (Want to see an version with octopuses? Watch this: https://www.youtube.com/watch?v=4sr3Rqs42XE)

What they do measure is relativity, this year is better or worse than last year; today is hotter or cooler than the yesterday; this price is higher or lower than that one.

Big sales like Boxing Day and Black Friday are great days to look at examples of how businesses will use this to their advantage.

They use what’s called anchoring. They give us a higher price, the “original” price, put a slash through it with a lower price underneath, and post a big % off sign. That higher price is now anchored in our minds and the lower price seems like we’re getting more value for our dollar.

Canadian Tire does this to the extreme. There are items that say 95% off on the tag. Did they ever really sell that can opener for $75? Probably not. In fact, the “manufacturer’s suggested retail price” is almost always fictional.

Aeropostale for example, always has a sale on – they don’t ever actually sell their clothing for the non-sale price.

Anchoring is so effective our brains don’t even care if the higher priced item is related to what we’re buying. There’s a restaurant in the UK that has a scooter on their menu for $15,000. That scooter has nothing to do with the food they serve, but the $15,000 price tag makes everything on the menu seem relatively cheaper.

Buying a Feeling

I’m not suggesting you offer a scooter for sale on your website, I’m not suggesting you inflate your prices so you can use fake discounts. I’m not even suggesting you use discounts. What I’m saying is our brains don’t measure price logically, so we need to account for that in the way we price and the way we convey value.

The take away here is to understand the problem you solve for your customers. Speaking their language to express how much better they’ll feel after working with you, will communicate the value of your service. When your customer understands your value, you can charge higher prices.

Ultimately the answer to “what should I be charging for my services” is how much value will your customer receive and how much is it worth to them to be rid of the pain they’re experiencing.

Attaching a number to an emotional problem is not easy because it requires the logical side of our brains to be in tune with the more fluid side. There are quite a few ways to make the process easier, but in the end it’s about testing and re-working your numbers until they feel right.

If you need help with pricing, I’m here for you. Fill out the contact form to book a free, no-obligation call to get all your questions answered. www.kirkcpa.ca/contact

Kaitlin

Bookkeeping

Comparing Wave vs QuickBooks Online for Small Business Owners

Posted on by Kaitlin Kirk
07
Nov

How to make the best choice for your business

Are you trying to decide on the right accounting software for your business? Not sure where to start? Let me guide you through the decision-making process. This isn’t a typical comparison blog post. There aren’t any grids with features or check marks. Just a thoughtful way to figure out what will work for you and your business.

The first thing people usually ask about an accounting app is “how much does it cost?” Many people are attracted to Wave because it’s free (QuickBooks is $5 – $40/month depending on the features you need). But just because you don’t pay any money for it doesn’t mean it’s actually free. Your time and sanity are worth something.

Rather than the cost, the first question you should be asking is “what do you need it to do?” Maybe you’re just starting out and all you really need is to track the cash going in and out of a one bank account. Maybe you have a more complex company and you need it to run payroll or track inventory. Whatever the case, it’s important to know what your goals for the system are before you start looking. As you get into the bells and whistles of what an accounting app can do, it can be easy to miss the important stuff.

Don’t Get Distracted

Here’s how to know what you need:

How many transactions go through your bank and credit card accounts every month?

By transaction I mean any time money goes in to or comes out of your bank account or credit card. Both Wave and QuickBooks allow you to connect your bank and credit card account to their apps (they call it a “bank feed”). Doing this will automatically pull your transactions into the system. The interface looks like a big list.

Now you become like an octopus in a mailroom – a sorting machine putting everything in the right boxes. In other words, telling the app why you spent or received the money in the list.

QuickBooks will recognize transactions that happen often and suggest the account you normally use. It also allows you to setup an “auto-add” function. So, for example, if you have a telephone bill that you pay to the same company every month, you can setup a rule to “auto-add” that transaction to the Telephone Expenses account whenever it’s paid – eliminating the need for you to sort it every month.

You become an octopus in a mailroom. Not like a health and-safety violation… but a metaphor for efficiency.

Wave doesn’t have this functionality. You’ll have to sort each transaction manually. If you have less than 25 transactions per month, and between one and three accounts (credit cards count as accounts), doing this sorting manually might be ok. If you have more transactions and/or more bank and credit card accounts, it’ll become tedious and time consuming to have to manually go through each one.

What information do you need from your accounting data?

Once your information is entered into the system, it’s important to be able to get it out again in a useful way. For example, if you owned a bakery, you’d want to know how much you were making from selling peanut butter cookies, and how much you’re spending on ingredients. You’d probably also want to know how much money you owe to suppliers and how much cash you have in the bank. These are fairly simple requests from your data. Both Wave and QuickBooks handles them very well.

If you need something more complicated, like maybe you need to track inventory, or you’d like to see how much cash you’re spending versus how much you’re bringing in, then you’ll need a more robust system like QuickBooks.

How comfortable are you with bookkeeping?

Does the idea of bookkeeping make you want to hide under your blankets? If the thought of managing your books already has you rolling your eyes, it’s even more important you find an accounting app that will relieve stress, not add to it.

Does the idea of bookkeeping make you want to hide under your blankets? If the thought of managing your books already has you rolling your eyes, it’s even more important you find an accounting app that will relieve stress, not add to it.

It’s important that you are comfortable knowing how to navigate the app and having support on-call for when things inevitably go sideways. For the most part, both QuickBooks and Wave have an intuitive interface that will guide you down the path of financial clarity.

A notable difference is in the list of transactions that comes from your bank account – the bank feed we talked about earlier – and the support.

Bank Feeds

It’s not uncommon for a business to have more than one account. For example, your bank account where money is deposited, and a credit card used for business expenses.

Wave will dump all your accounts into a single list of transactions. Although it tells you which account each line belongs to, this combined list was not built for easy understanding.

Even more confusing with Wave is trying to reflect a transfer between your accounts (ie: paying off your credit card from your bank account). The app is counter-intuitive and, especially if your banking data is not able to automatically connect, this simple action can be a real headache. Even I was yelling at my screen the first time I encountered this.

QuickBooks handles your bank feeds by having separate lists for each account. Visually, it makes a lot more sense. It will also allow you to make transfers between all your accounts, and often is able to automatically find the corresponding transaction. From that perspective it’s an easier system to use.

Another important piece of recording your bank transactions is matching them up to your bank statement (called reconciling). If you’re not doing this monthly there’s a risk your books will be incorrect. Wave doesn’t have a built-in area to do this, but QuickBooks does and it’s very easy to use.

I Broke It, Now What?

Support and training on your accounting app are so important. If you don’t know how to use it properly and you’re on your own if something breaks, it’s going to be frustrating and you’ll (probably) stop doing it.

QuickBooks has an extensive help section (including how-to videos), live support, and a community of experts. It’s all included in the price of your subscription.

Wave has a support centre and a community section of their website as well, but Wave offers something QuickBooks doesn’t, paid access to accounting and bookkeeping professionals. You can pay a one-time fee to have an accountant to coach you one-on-one for two hours, and then you can email them for 30 days. Wave also offers a bookkeeping service for a monthly fee.

Getting Paid

When it comes to invoicing, Wave and QuickBooks are similar. They both allow you to create custom invoices, but to varying degrees, and both allow you to send invoices and receive payments through the app for a comparable fee.

Wave allows you to upload your logo and change some of the words on the invoice, but that’s about it.

QuickBooks has a fully customizable invoice builder right in the app.

Do you use other apps in your business?

Are you using a Customer Relationship Manager app to manage your customer contacts? Do you have employees you need to track time for? Are you a retail store with a cash register? Having these apps connect to your accounting software makes life a lot easier.

QuickBooks can connect to almost any app. There’s also a very long list of apps specifically designed for QuickBooks. You could connect an app to make sure you pay suppliers on time, collect and manage your receipts, manage your employees and the list goes on.

Wave has three apps that you can connect. And because of the way it was designed, it’s unlikely to have many more in the future. If you’re just starting out this may not be a big deal, but it’s something to keep in mind as your business grows.

Safety Equipment Required

If you don’t have much experience with bookkeeping, you can make a mess of your records. For example, if you found out there was an error in an invoice that had already been paid, Wave would allow you to delete it. That’s a problem because deleting that invoice will have a domino effect through your books creating errors as it goes. QuickBooks won’t allow you do something that will have pervasive effects like that.

Wave also doesn’t keep track of any changes. This is one of those things that you don’t know you need until it’s too late. If you don’t have this log of your bookkeeping, you’ll have a harder time proving it’s for real if you get audited by the government.

QuickBooks has an internal audit log. Every transaction and every edit of a transaction is logged, including the time, date, what was changed and who did it. If you have an issue later, it’s great to be able to dig in to this log and find out what happened.

Just tell me what to do…

If you have a small business with few transactions and simple bookkeeping requirements, Wave will be ok.

If you’re not sure whether your company is too big for Wave or not, it probably is or will be soon.

As your company grows and your requirements become more complicated, it’s worth it to switch to QuickBooks.

Getting your business in to QuickBooks sooner rather than later will ensure you’re prepared for the next growth spurt. Grandma was right when she said “you’ll grow into it!”

Wave is free, but it could end up being more expensive in the long run. How much is your time worth? If QuickBooks could save you an hour a month, would it be worth $40/month? What about two hours? The point is this, your time is worth something.

Smart money management is not about paying the least amount for everything. It’s about paying the right price for the right service at the right time.

Kaitlin