Many people dream of turning a hobby into a small business. Perhaps you’re a chef and would like to open a restaurant. Or maybe you’d like to turn your photography passion into profit. You might not face significant accounting challenges if your new business is profitable over time, but what if the new business’ expenses exceed income? In this month’s blog, we’ll show you key considerations to keep in mind to ensure your transition is smooth and financially sound.
Keep Personal and Business Finances Separate
One of the first steps is to open a separate business bank account. This distinction between personal and business finances is not just a best practice; it’s essential. Mixing the two can lead to confusion, making it challenging to track your business expenses and income accurately. Moreover, it can create issues when it’s time to manage your financial records.
Understand Your Costs
Accurately tracking and understanding your costs is critical. This includes both fixed costs (rent, utilities, and insurance) and variable costs (materials, shipping, labor, etc.). Knowing your break-even point—the point at which your revenue equals your costs—will help you price your products correctly and ensure your business is profitable.
Understand the Accounting Principles Behind Revenue Recognition
While not all businesses are required to comply with the revenue recognition principle of accounting, it’s important to take the time to understand it. In the US, according to the revenue recognition principle of ASC 606, revenue should be recognized when the delivery of promised goods or services matches the amount expected by the company in exchange for the goods or services.
This will help ensure your financial statements accurately reflect your business’s financial health, and how your business is doing financially.
Related: Learn more about why your business isn’t making money and how to fix it here.
Consider Hiring a Professional
While DIY accounting is possible, hiring a professional accountant can save you time and help you avoid costly mistakes. An accountant can offer valuable insights, ensure compliance with financial regulations, and provide advice tailored to your specific business needs. Additionally, ensure your accountant adheres to accounting ethics to maintain the highest standards in your business operations.
Hire MARIELA RUIZ, CPA, PLLC
At MARIELA RUIZ, CPA, PLLC, we are dedicated to helping you navigate these complexities and set your business up for success. We’ve helped many small businesses like you lay a strong foundation for your business’s financial health. Visit our website at mruiz-cpa.com or call us at (956) 997-0067 to learn more about how we can assist you in making your business financially sound and profitable.
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