How to collect your business income
When sales start rolling in, you’ll need a way to accept the payments. Depending on the type of business you have and if you operate a customer retail store front will determine the types of payments you will consider accepting for payment from your customers.
If you operate a retail store front than you will most likely want to accept most or all forms of payment:
Major credit cards (Visa, MasterCard, American Express, and Discover)
Virtual Payments: Apple Pay / Google Wallet / Paypal
Rewards / Coupons
House Credit Accounts
Money Orders / Cashiers Checks
Accepting Cash is usually preferred especially if you operate a retail store front. First of all, its immediate and a guaranteed form of currency that is accepted everywhere including your bank account. A down side to this form of payment is if you deposit more than $5,000 in cash at your bank they may charge you a cash processing fee. Check with your bank for such a fee.
Major Credit Cards
Many consumers these days have and use their credit / debits cards often and compels a business to accept this form of payment. A business would need to open up a merchant account to accept this form of payment. A merchant account is a type of bank account that allows your business to accept credit card payments from customers. If you use a third party payment processor, the fees are generally around 2.9% + $0.30 per transaction. You can consult this list to help you find a payment gateway that will work for your location. The cons to this option are the business must pay the processing fees, and must wait about 2-5 business days to become available in your bank account depending on the merchant account you use. The major benefit is that you are able to attract a higher number of customers which means bigger profits.
You can easily integrate your POS (Point of Sale) system with your merchant account so that customers can pay with their credit / debit card through a payment terminal placed near the cash register. There are many options where you can purchase all the equipment or rent from the processing company.
If you’re a North American store owner on Shopify, you can use Shopify Payments to accept credit card payments (Visa, American Express, and Mastercard). This saves you the hassle of setting up a merchant account or third party payment gateway.
Now these days, technology is exploding with so many creative ways for consumers and businesses to engage and transact purchases such as Apple Pay/Google Wallet/Paypal where they are the same in much the same way as credit / debit cards because they are usually funded with a credit / debit card. The difference would be a consumer would be using a mobile app for example to pay for their purchase.
You could develop an app for your business to sell your products/services and allow the customer to pay directly through your business’s app. Developing your own app can be very expensive, especially if you have no experience in software/app development.
Everyday we see new apps come on the market that offers businesses the ability to engage with their customers to sell their products/services and more. Depending on what you are looking for an app to do for your business, you may be lucky enough to find a suitable app where you might subscribe to use or simply download for a one-time fee.
Rewards / Coupons
Rewards and coupons especially in electronic form (i.e mobile apps) are becoming very popular with both businesses and consumers. Consumers benefit because they can shop more than once at a particular business and the business rewards the customer for being loyal. The business wins too because they establish a recurring customer base to depend on for future business. In business, the way you entice a customer to spend more at your business is to offer deals the more they shop. In turn, you can earn more per customer by offering repeat business deals than just a one time purchase.
House Credit Accounts
Establishing a house credit account for customers depends on your business’s finances. Most small businesses can’t afford to finance a customer’s purchase. In special cases where you have a customer that brings you sizeable business, you may consider allowing them to invoice you once a week, or once a month – depending on what you can arrange with the customer. If you’re a gas station and you have a car dealership that fills up often – it can be a good idea to establish some sort of house account for them. You can take a credit card as the form of payment to charge once their invoice is due and could be beneficial for both you and the customer.
Money Orders / Cashiers Checks
Accepting money orders or cashiers checks are usually safer than accepting checks, but still take caution since there are some really good con artists that can make a money order or cashiers check look better than a real one. If you know the customer and have done business with this customer there’s a much higher chance the payment is good.
Accepting checks should be taken with much caution unless you the customer. If you have a business where the product or service taking payment for is spread over time like a cable company offering long term services, accepting checks will usually fine because you have the leverage to cut the customer off if the payment bounces.
Now that we got the basic forms of payment, there are additional steps to take to take in your income and properly account for the money for tax and accounting purposes.
1. Open a Bank Account
After you’ve legally registered your business, you’ll need somewhere to stash your business income. Having a separate bank account keeps records distinct and will make life easier come tax time. Note that LLCs, partnerships, and corporations are legally required to have a separate bank account for business. Sole proprietors don’t legally need a separate account, but it’s definitely recommended.
Start by opening up a business checking account, and then any savings accounts that will help you organize funds and plan for taxes. For instance, set up a savings account and squirrel away a percentage of each payment as your self-employed tax withholding. Next you’ll want to consider a business credit card to start building business credit. Corporations and LLCs are required to use a separate credit card to avoid commingling personal and business assets.
Before you talk to a bank about opening an account, do your homework. Shop around for business accounts and compare fee structures. Most business checking accounts have fees that are higher than personal banking, so pay close attention to what you’ll owe.
In order to open a business bank account, you’re required to have a business name, and usually be registered with your state or province. Check with the individual bank for what documents to bring to the appointment.
2. Track Your Expenses
The foundation of solid business record keeping is learning to track your expenses effectively. It’s a crucial step that allows you to monitor the growth of your business, build financial statements, keep track of deductible expenses, prepare tax returns, and support what you report on your tax return.
Right from the beginning, you should establish a system for organizing receipts and other important records. This process can be simple and old school or you can use a service like ShoeBoxed. For American store owners, the IRS doesn’t require you to keep receipts for expenses under $75.00, but it’s a good habit nonetheless.
There are five types of receipts that you should pay extra attention to:
• Meals and Entertainment: Conducting a business meeting in a cafe or restaurant is a great option, just be sure to document it well. On the back of the receipt, record who attended and the purpose of the meal or outing.
• Out of Town Business Travel: The IRS and CRA are wary of people claiming personal activities as business expenses. Thankfully, your receipts also provide a paper trail of your business activities while away.
• Vehicle Related Expenses: Record where, when, and why you used the vehicle for business, and then apply the percentage of use to vehicle related expenses.
• Receipts for Gifts: For gifts like tickets to a concert, it matters whether the gift giver goes to the event with the recipient. If they do, then the expense would be categorized as entertainment, rather than a gift. Note these details on the receipt.
• Home Office Receipts: Similar to the vehicle expenses, you need to calculate what percentage of your home is used for business and then apply that percentage to home related expenses.
Starting your business at home is a great way to keep overhead low, plus you’ll qualify for some unique tax breaks. You’re able to deduct the portion of your home that’s used for business, as well as your internet connection, cell phone, and transportation to and from work sites and for business errands. Any expense that’s used partly for personal life and partly for business must reflect the mixed use. For instance, if you have one cell phone, you can deduct the percentage you use the device for business. Gas mileage costs are 100% deductible, just be sure to hold on to all records and keep a log of your business miles (where you’re going and the purpose of the trip).
3. Develop a Bookkeeping System
Before we jump into establishing a bookkeeping system, it’s helpful to understand exactly what bookkeeping is, and how it differs from accounting. Bookkeeping is the day-to-day process of recording transactions, categorizing them, and reconciling bank statements.
Accounting is a high level process that looks at business progress and makes sense of the data compiled by the bookkeeper by building financial statements.
As a new business owner, you’ll need to determine which bookkeeping method to use:
1. You can choose to go the DIY route and use software like Quickbooks or Wave. Alternatively, you could use a simple Excel spreadsheet.
2. You have the option of using an outsourced or part-time bookkeeper that’s either local or cloud-based like Bench Accounting.
3. When your business is big enough you can opt to hire an in-house bookkeeper and/or accountant.
With so many options out there, you’re sure to find a bookkeeping solution that will suit your needs.
Canadian and American business owners need to determine whether they’ll use the cash or accrual method of accounting. Let’s take a look at the difference between the two methods here:
• Cash Method: Revenues and expenses are recognized at the time they are actually received or paid.
• Accrual Method: Revenues and expenses are recognized when the transaction occurs (even if the cash isn’t in or out of the bank yet) and requires tracking receivables and payables.
Technically, Canadians are required to use the accrual method; but to simplify things, you can use the cash method throughout the year and then make a single adjusting entry at year end to account for outstanding receivables and payables for tax purposes.
American business owners can use cash based accounting if revenues are under USD $5M, otherwise they must use the accrual method.
4. Set up a Payroll System
As a new online store owner, you’ll likely be a one-person show. However, maybe you’ll hire a part-time employee to help you out, or a freelancer to design your logo. Right away, you need to establish whether that individual is an employee or an independent contractor. For employees, you’ll need to decide on a payroll schedule and ensure that you’re withholding the correct taxes; there are lots of services that can help with this. For independent contractors, be sure to track how much you’re paying each person. American business owners may be required to file 1099s for each contractor at year end (you’ll also need to keep their name and address on file for this!).
5. Investigate Import Tax
Depending on your business model, you may be planning to purchase and import goods from other countries to sell in your store. When importing products, you’ll likely be subject to taxes and duties. These are fees that your country imposes on incoming goods. Take the time to learn about importing goods into the US and Canada, and the associated taxes, so that you know the rules from the get-go. Also, if you are importing goods, the Duty Calculator can help you estimate the fees in your own business and plan for costs. Check out these additional articles on importing into Canada and the US if you have any more questions.
6. Establish Sales Tax Procedures
The world of eCommerce has shaken up sales tax regulations and they are admittedly a bit confusing due to location issues. When a customer walks into a brick and mortar retail shop, they pay the sales tax of whatever state or province they make the purchase in, no matter if they live in that city, or they’re visiting from across the world. However, when you sell online, you’re often selling to customers who live in different states/provinces, and even countries.
As a Canadian store owner, you only need to start collecting GST/HST when you have revenues of $30,000 or more in a year (submit the GST/HST you collect in installments). If you want, you can collect GST/HST even if you don’t earn this much in revenue, as you can put it towards Input Tax Credits.
Selling to international customers can be easier than domestic sales because you often don’t need to charge sales tax when selling to out-of-country customers. Canadian store owners don’t need to charge GST/HST to customers who are outside of Canada. For American store owners, international purchases are tax exempt as well. However, this can get a bit complicated depending on the state you live in, so check in with your accountant for detailed information about your specific state’s regulations regarding international sales tax.
7. Determine Your Tax Obligations
Tax obligations vary depending on the legal structure of the business. If you’re self-employed (sole proprietorship, LLC, partnership), you’ll claim business income on your personal tax return. Corporations, on the other hand, are separate tax entities and are taxed independently from owners. Your income from the corporation is taxed as an employee.
Self-employed people need to withhold taxes from their income, and remit these to the government in lieu of the withholding that an employer would normally conduct. For American store owners, you’ll need to pay estimated quarterly taxes if you’ll owe more than $1,000 in taxes this year. Canadians have it a little easier; if your net tax owing is more than $3,000 you’ll be required to pay your income tax in installments.
8. Calculate Gross Margins
Improving your store’s gross margin is the first step towards earning more income overall. In order to calculate gross margin, you need to know the costs incurred to produce your product. To understand this better, let’s quickly define both Cost of Goods Sold (COGS) and gross margin.
Cost of Goods Sold (COGS): These are the direct costs incurred in producing products sold by a company. This includes both materials and direct labor costs.
Gross Margin: This number represents the total sales revenue that’s kept after the business incurs all direct costs to produce the product or service.
Here’s how you can go about calculating gross margin:
Gross Margin (%) = (Revenue - COGS) / Revenue
The difference between how much you sell a product for, and how much the business actually takes home at the end of the day is what truly determines your ability to keep the doors open.
9. Constantly Re-evaluate Your Methods
When you first start out you may opt to use a simple spreadsheet to manage your books but as you grow you’ll want to consider more advanced methods like Quickbooks or Bench. As you keep growing, it’s good to continually reassess the amount of time you’re spending on your books, and how much that time is costing your business. The right bookkeeping solution means you can invest more time in the business with bookkeeping no longer on your plate, and potentially save the business money.