A Step-by-Step Guide to Online Business Money Management

Want to know something funny?

More than one person has told me that the one thing holding them back from starting their business is not knowing how to handle taxes and bookkeeping.

Hold the phone for a sec.

You haven't even made your first sale yet – you haven't even created a product you can sell – and you're worried about taxes and bookkeeping?

I love the confidence that all of a sudden they'll just be makin' it rain sales and money, but let's get real. You don't need to pay taxes on $0. Plus, if you did just end up having a shit ton of sales the first day you open your site, you'd be able to hire the best accountant available and wash your hands of most of this nonsense.

If that's holding you back from starting your business, you can move past that now.

But for those of you who have made your first dollar(s), or just spend money on your business, or simply want to quell their money jitters, I wanted to talk a little bit about organizing your business finances, so you can start 2016 strong.

Small disclaimer: I am not an accountant or tax specialist. Please look into the information specific to your province, state, or territory if you're not already familiar. 

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How to Become a Ninja With Your Business Finances

I've not hidden my disdain for business financials. I hate it partially because of the time it takes and partially because it's an administrative task that I'm frankly no good at.

But that doesn't mean managing your income and expenses properly isn't necessary – for me, or for you.

Your first year should be relatively straight forward. At least, mine was. Then it turned into an absolute shit show as I began to earn more money, increase my revenue streams and pick up new projects. It went from a straightforward process to an administrative nightmare that would take two weeks of full time work come tax time.

That's why you've gotta track your money.

Here's a step-by-step process I recommend.

1. Separate your personal and business finances

When you're first starting out and your only expense is a hosting account and an email service provider, you probably don't need to open a whole new bank account just for your business.

But as you begin to see some income or even more expenses, it's a good idea to keep your personal and business finances separate.

You could ignore this advice, and melt them together like I did for the first few years. This made it insanely confusing come tax-time every year, with weeks of anguish and frustration.

Or, you could do it right the first time.

Open a bank account just for your business (this usually doesn't have to be a business bank account – just an account separate from your personal account) and use one credit card solely for business expenses.

I have a Tangerine Business Savings Account my business income. If you're in Canada and want to go the same route, use my Orange Key for a free $50 bonus – 35611511S1. 

I also have a Tangerine US Savings Account, since I mainly work in USD. This allows me far more freedom with how and when I convert my USD to CAD. Unfortunately, Tangerine doesn't allow acceptance of wire transfers, so I also have an RBC US Chequing Account.

I use a travel rewards card (RBC WestJet World Elite MasterCard) for all of my business expenses, because this allows me to rack up the points, which means free travel and lifelong happiness for all. Naturally.

You should be able to open your account and credit card online in under half an hour. Then…

2. Decide how you want to get paid

This one is simple. Most beginners get paid through PayPal exclusively. I'm not a beginner and I still get paid through PayPal for all of my coaching and freelance clients, and the products and services I offer.

When you release your first product, you may want to use Gumroad or Stripe, but usually you'll still need a PayPal account.

If you already have a personal PayPal account, I'd advise against using it for your business. That will just confuse things. Start a new one for your business income and expenses.

Once you've set up PayPal, connect your business bank account and credit card with it.

3. Connect your business accounts with an accounting software.

You don't have to be an accountant to use an accounting software. I use and recommend FreshBooks, because it's simple, cheap, and easy to use.

I tried Wave at the beginning of 2015, becuase it has a free version, but it has a lot of limitations and the lack of a mobile app alone ate up at least half an hour of my time each week to scan and upload receipts.  I then realized that it was a bit ridiculous that I was spending so much time trying to keep up Wave to save $10/month on FreshBooks when I value my time at $150+ per hour.

Click here to sign up for FreshBooks to get a free 30 day trial (this is an affiliate link – if you love FreshBooks and continue to use the service after your trial is over, I'll receive a commission at no extra cost to you. Thank you for your support if you choose to use it!).

Once you've chosen a cloud accounting software, you can connect your business accounts:

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In FreshBooks, you do that under Expenses > Bank Accounts > Add Account.

This will automatically pull your expenses into the software, so you can categorize, add receipts, and download pretty charts:

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4. Obsessively track your expenses and income

I don't have to say it, but I will because it's important:

The expenses you incur to start, maintain, and grow your business usually carry a tax benefit. It's not just lost money. You can usually use those expenses as either a tax credit, a tax deduction.

Quick FYI: A tax deduction reduces your yearly income. If you earned $50,000, and you spent $10,000 on deductible expenses, your income would be taxed at $40,000. A tax credit reduces the amount of taxes you pay (dollar for dollar). 

This only stands, however, if you track diligently. That means tracking receipts, expenses, income, and everything else you can possibly track financially in your business. Yes, track those expenses even if you don't expect to make a ton of money over the year. It's all important!

Tips for tracking your expenses and income:

  • Use that accounting software for everything. Invoicing, creating estimates, tracking expenses – don't stray from the accounting software you chose! FreshBooks holds everything for me.
  • Take photos of your receipts as you incur expenses. If you aren't sent a digital receipt, take a picture of your receipt with your smart phone for any business expenses (or expenses that could potentially be categorized as business expenses – you don't have to figure this out, your accountant does). I throw out all my paper receipts once they've been uploaded into FreshBooks – check with your country's tax laws to see if electronic receipts are accepted.
  • Upload receipts as soon as the transaction is posted. If you wait until the end of the month, it will be an organization mess. Trust me. Every couple of days, I log in to FreshBooks on my iPhone and just upload receipts and categorize expenses. Sometimes it takes a couple of days for your credit card or bank account to post a transaction. I stay organized by deleting pictures of receipts from my phone that have already been uploaded, so I know that the ones on my phone need to be dealt with still. For digital receipts, I leave them in my inbox until they're posted and then I file them in a folder called “[Year] Invoices/Receipts: Already In FreshBooks”
  • Review at the end of the week. Set a day every week to review your accounting software accounts. Make sure every expense is categorized and receipts are attached. The end of the month is far too long (you'll forget about half of the expenses) so each week is a good bet.

5. Do month-end reviews

I had my first 5-figure month in November with Unsettle, and I wouldn't have known that – or how much I spent to get there – if it weren't for my month-end reviews.

I use the Profit and Loss reports in FreshBooks to make it super simple.

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You can get there by going to Reports > Profit and Loss.

I then tend to put both my income and expenses in a spreadsheet that tracks growth month after month. You can have it, if you want! Click this link and save a copy for yourself (no opt-in required!).

5. Plan Like You Mean It

I made the same mistake as you might be making for the first five years of online business…

I failed to plan. And most bloggers – even financially smart bloggers and online entrepreneurs – make this mistake religiously.

This is a shame, but I think it's largely a function of not taking your online business as seriously as you should. Think about the company you work for. They don't just wing it month to month, right? They have a projections, and monthly and yearly revenue goals.

You need to do the same. 

This means that you not only need goals for the revenue you'll be bringing in, but a detailed plan to achieve them. Do NOT overlook this. 

Create a plan for your goals. Want to earn $50,000 this year with your business? What exactly will that look like month over month? How will you earn that amount? What growth rate will you need (%) to grow from where you are now to where you want to be?

You can have access to this beautiful spreadsheet I created for Unsettle by clicking here and saving yourself a copy:

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Don't just project and forget. Track month after month what your progress is. This is something I learned from working with Noah Kagan and in the short while I've been doing it, it's paid off big time. 

Then…

6. Budget like a Badass

Most bloggers and online entrepreneurs overlook the value of having a budget for their business. You make a budget (hopefully) for your personal finances. Why wouldn't you budget for your business, too?

Based on the projections you created with the spreadsheet above, set a budget of how much you'll spend on tools, events, conferences, travel, and services.

Don't be afraid to spend money in your business.

This brings me to the next (inevitable) topic, which is…

Budgeting for taxes.

There are tax calculators all over the interwebz, and it's usually best to calculate income tax based on whatever country, province, or state you live in. Some people err on the side of extreme and crazy caution and put away 50% of all their income for taxes and other government costs.

Because I'm in a fairly high tax bracket, I aim for around 35%. If I owe more than that at the end of the year, it won't be a huge deal to just transfer more.

Every time you get paid for a product or service, transfer a portion of that money into a short term (but the highest interest possible) savings account for tax time.

Unless you have to, don't pay your income taxes quarterly or monthly. Know your tax laws, but if you can pay the lump sum at the end of the year, do it. Otherwise you're giving the government an interest free loan. That money could be earning you interest – or even dividends, if you're smart with it.

I invest my tax money in dividend paying Exchange Traded Funds (ETFs) within my tax free savings account with Questrade (Canadian). This earns me both dividends and – if the market is good – interest. Why let the government take more money than you have to let them?

A portion of your income after you pay taxes should be re-invested in your business, so start to budget that in. Set aside a portion of your profit for education, professional services, maybe some virtual help. This will help it grow – just like any investment.

Don't Let Your Business Finances Become the Wild Wild West

I made this mistake when I first started online, and I know I'm not alone.

In fact, I've heard it from countless entrepreneurs who are now more established – the desire to have been on top of their money game to begin with, so save themselves the headache later.

If your business is under a year old – or, if you haven't even started it yet – you have a unique opportunity to set up systems that will save you time, effort, and energy in the future.

Not to mention help your business grow far more quickly.

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4 Comments on “A Step-by-Step Guide to Online Business Money Management”

  1. Tangerine fan here as well! Interested in their upcoming credit card program. The wire transfer can’t be help, since they are primarily an online bank – for the better and the worse.

    Excellent excellent advice. Even the ETF part! Consider setting up a corporation for additional tax benefits (and thereby skipping the high income tax bracket by paying oneself dividend instead to ordinary income). Thanks for the heads-up!

  2. Financial discipline is required if one must achieve financial independence. There are details to achieve this and luckily this post has elaborated on the basics.

    At least, even those without accounting skills can apply the money management rules highlighted in this post.

    Setting goals and planning for income and expenditures will go a long way to achieving financial independence.

    I completely agree with you on this :”Separate your personal and business finances”. This will promote discipline and good management for the business!

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