Updated: Nov 16
One of the first questions start-ups frequently ask is whether they truly need bookkeeping software. Of course, the goal of any business should be to graduate to a point where you will need bookkeeping software to help manage business affairs. But, when is the correct time to sign-up?
This answer inevitably depends on three factors: (1) How well is your new business capitalized? (2) How much income do you project to make in the first year? And (3) How complicated will the business be in your first year?
If you are jumping into a straight-forward business, without a lot of capital, and you are unsure about how successful you will be, it is likely best to focus your time and capital on product and marketing in the very beginning. When you are in this boat, I have a few recommendations:
(1) Always start by getting a separate bank account (and, if applicable, credit card) for the business. Never commingle personal and business transactions. If you are at Target and purchasing personal and business items, run the business items through and pay using the business card. Then, run the personal items through and use the personal card.
If you do this, the business bank account and credit card will contain a history of all the economic transactions of the business. I think of these economic transactions as the DNA of a business, i.e., the building blocks. You should later be able to download these transactions onto a spreadsheet when it comes time to work on your books, or you can hire an accountant to do so.
Learning QuickBooks is a major time commitment. It's complicated software. If you are, in addition, trying to learn the basics of accounting, this will subtract a lot of time and money from what you should be focusing on the most, your product and marketing.
(2) Delay registering as an S Corporation or C Corporation. Corporate tax accounting is more nuanced. When you are ready to operate as a corporation, you should be in a position to procure bookkeeping software.
(3) On your tax return, elect to be a cash-basis business and make the de minimis election. When you file your first tax return, you want to elect to be a cash-basis business with the de minimis election. This will simplify bookkeeping requirements.
The cash-basis election allows you to use cleared banking and credit transactions (the transactions on your downloaded spreadsheet) when finalizing your taxable income for the year. On the other hand, the accrual election, for example, would require you to count outstanding invoices as sales even before payment is received.
Generally, the de minimis election permits you to expense certain tangible items with a cost up to $2,500. In other words, you are not required to depreciate the new business computer or cell phone you purchase. This is another way to simplify recordkeeping in the earlier years.
Several of our clients manage their books on a spreadsheet and work with us during tax season to prepare tax returns. In fact, this is often a recommended "lean" strategy for newcomers trying to figure out their business model. By following these steps, you can adopt this technique to help you save time and money, while you work to develop your business concept.