One of the things that both exited me, and terrified me in starting my own business was getting to be involved in all aspects of the company. When you are first starting out you have to wear many different hats. Some seem to fit really well, while others never really fit right. When you are the only employee everything is your responsibility, and you end up being the CEO, producer, coordinator, production assistant, and in my case the nanny.
I’m coming up on 2 months since I left my day job, and I wanted to share with you some of the hats I have been trying to wear. In this post I’m going to focus on the accounting hat. I do want to say that I’m not a financial expert, and I’m simply talking about my experiences. Consult a financial professional about your own financial and business situation, since chances are 90% of what I write is probably wrong.
How many of you have ever used Quickbooks? My first experience with Quickbooks was in high school when I would help my dad keep track of his Golf Course sales company. I was one of those weird kids that actually loved financial stuff. My dad mainly used Quickbooks to write invoices, and keep track of inventory. Since I knew I would need a way to do bookkeeping for my company I decided to go with what I was familiar with, and bought a copy of Quickbooks.
I thought I had a pretty good idea about financing, but quickly realized how little I actually knew. I have slowly started to figure things out, but there is still a lot I’m trying to wrap my head around. How many of you have heard of Chart of Accounts? If you want something that will make your head explode look no further then Chart of Accounts. (click image to see an example chart of account for an animation company)
The definition of a chart of accounts is a list of account names and numbers used in accounting to organize financial records into different expenses, liabilities, assets and income. That sounds easy enough. Wrong! When you start trying to figure out what expenses go where, and how many different income accounts you should have it becomes very tricky. Should I have one income account for sales, or should I have separate income accounts for each type of income. For example, a separate income accounts for Production Services, Animation, VFX, Motion Graphics. There are benefits to keeping things simple, but there is also benefits to having more detail. Finding out what is best for me is something I’m still trying to figure out.
There are other things in Quickbooks that I have been working on learning. Things like doing estimates, linking items to the proper accounts, tracking mileage, and other expenses, and knowing how to bill back clients for those expenses. I really do enjoy all of this stuff, and love the challenge and pushing myself to learn new things. If you have any Quickbooks tips please leave a comment below.
Taxes… enough said? As a service company I don’t have to worry about sales tax, unless I sell something physical (At least from my understanding of it). For example if I make a video for a client those services are not taxed, but if I put the video on a hard drive to give to them I need to add sales tax for the hard drive. What I do have to worry about is income tax on the profit my company makes (Income-expenses). As a sole proprietorship I end up having to pay self-employment tax. This is basically your social security and medicare tax. When you are an employee at a company they often split this tax with you 50/50, and although this is standard there is no law that your employer needs to pay half.
When it comes to employees I will mostly be hiring freelancers to help with my projects, and they are independent contractors, and are responsible to pay their own taxes. If I do hire employees I will then have to worry about withholding a part of their wages for taxes, and contributing to their social security and medicare.
Another thing that I have been thinking a lot about is the legal structure of my company. Currently I have it setup as a sole proprietorship, which is the most common type of small business. The company is no different then the owner in the eyes of the IRS, and the income the company makes is the owners income, and is taxed that way. A disadvantage is it does not offer any legal protection for the owner, and does not survive after the owner leaves. When I start making more money it will eventually become more beneficial to structure my company as a S-Corp, or LLC. These provide limited liability for the owner/s, and can offer some tax benefits. The legal and financial advice that I have received so far seems to be in favor of a S-Corp, so I’m currently trying to learn as much as I can about this structure.
Luckily there are professionals that can help you with a lot of this, and trust me I’m constantly talking to my CPA. Even with their help I do feel it is important to have a general understanding of the finances of your business. Ultimately you are responsible for your company, and even professionals can make mistakes. By having a general understanding you can flag things that don’t seem right, and be able to make good decisions based on what the numbers say.
A good financial plan is a road map that shows us exactly how the choices we make today will affect our future. ~ Alexa Von Tobel
As you can see the accounting hat is a very important one. I don’t think everyone would enjoy wearing this hat, but it is one of my favorites.
If you have not already, I hope you will join me on my journey by subscribing to my blog. If you have any thoughts or advice I would love to hear what you have to say, so please feel free to leave me any comments below. Otherwise, be sure to stay connected with me on Twitter (@MillerAnimation). Only Time Will Tell.