Accurately tracking financial data is not only critical for running the day-to-day operations of your small business, but it is also essential when seeking funding from lenders or investors to take your business to the next level. In addition, keeping tabs of your finances can help ensure your products and services are priced right, identify what your margins are, determine your cash flow and make filing taxes easier.
Here are three basic financial statements that are important for your small business:
Balance sheet. This statement provides an overall financial snapshot of your small business. As an equation, it looks like liabilities + owner’s equity = assets. The two sides of the equation must balance out.
There are two types of assets: current and fixed. Current assets include cash or other holdings that can quickly be converted to cash within a year. These may include inventory, prepaid expenses and accounts receivable. Machinery, equipment, land, buildings, furniture and other essentials that you are not planning to sell are considered fixed assets.
Liabilities can be broken down into current or short-term liabilities, such as accounts payable and taxes, and long-term debt such as bank loans or notes payable to stockholders. Owner’s equity includes any invested capital or retained earnings. If you captured all of your accounting information correctly, both sides of the balance sheet equation should be equal.
Profit and loss statement. A profit and loss statement, also referred to as an income statement, enables you to project sales and expenses and typically covers a period of a few months to a year.
To determine net profit, subtract total operating expenses from gross profit. (Gross profit – total operating expenses = net profit.) Remember that gross profit is calculated as total sales minus the cost of goods sold. Costs of goods sold include things like raw materials, inventory and payroll taxes. Make sure to also factor in overhead costs such repairs, utilities, insurance and legal fees into your operating expenses to ensure your net profit is accurate.
Cash flow statement. This statement highlights how much money is coming in to (cash inflows) and going out of (cash outflows) your business. Cash inflows include cash sales, accounts receivable collections, loans and other investments. Equipment purchased, expenses paid, inventory and other payments are considered cash outflows.
To calculate your ending cash balance, take the beginning cash balance, add cash inflows and then subtract cash outflows. (Beginning cash balance + cash inflows – cash outflows = ending cash balance.)
Deciding which version of QuickBooks is right for you can be confusing. If you’re a product based business with complicated inventory needs, you should go with QuickBooks Desktop. However, if you’re a service-based business or one that needs access from multiple computers, then QuickBooks Online is your best choice.
When to Consider QuickBooks Online
QuickBooks Online is your ideal solution if you are a service-based business that does not need inventory tracking options or does not have complicated invoicing requirements. QuickBooks Online is best for companies that want access from multiple devices, have more than one person who needs access, as well as those that desire automatic updates from the cloud.
You should ultimately consider QuickBooks Online if you want the following:
Ability to give your accountant or other users access from any location: QuickBooks Online allows you to set up a user id and password for each person who needs to access your data from wherever they are located.
Ability to enter transactions using a mobile device, PC or a Mac: QuickBooks Online does not require software installation. Therefore, you can just open up a web browser from your mobile device, PC or Mac and log right into your account to quickly access your data.
Automatic, real-time updates: As you make changes to your data, QuickBooks Online updates automatically. Whether there is one person in the QuickBooks file or multiple users, changes made are updated in real-time.
When to Consider QuickBooks Desktop
QuickBooks Desktop is generally the best solution if you are a product-based business that needs inventory tracking options and batch invoicing. There are also industry-specific desktop versions that are great for contractors, manufacturers, wholesalers, retailers, and more. However, the desktop version can only be accessed from one device.
You should ultimately consider QuickBooks Desktop if you want the following:
Multiple inventory tracking options: QuickBooks Desktop offers two options for tracking inventory – the average cost method or the FIFO method (FIFO method available when you purchase the Advanced Inventory add-on module.). QuickBooks Online only allows inventory tracking using the FIFO (First In First Out) method.
Batch invoicing: QuickBooks Desktop has batch invoicing capability. When the amount and type of service you are billing multiple clients are the same, this feature allows you to invoice them all at the same time.
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Most often, self-employed people, including some persons involved in the sharing economy, need to pay quarterly installments of estimated tax. Similarly, investors, retirees and others -- a substantial portion of whose income is not subject to withholding -- often need to make these payments as well. Besides self-employment income, other income generally not subject to withholding includes interest, dividends, capital gains, alimony and rental income.Because the U.S. tax system operates on a pay-as-you-go basis, taxpayers are required, by law, to pay most of their tax liability during the year. For 2018, this means that an estimated tax penalty will normally apply to anyone who pays too little tax, usually less than 90 percent, during the year through withholding, estimated tax payments or a combination of the two.
Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishermen, casualty and disaster victims, those who recently became disabled, recent retirees, and those who receive income unevenly during the year. In addition, there is an exception to the penalty for those who base their payments of estimated tax on last year’s tax. Generally, taxpayers will not have an estimated tax penalty if they make payments equal to the lesser of 90 percent of the tax to be shown on their 2018 return or 100 percent of the tax shown on their 2017 return (110 percent if their income was more than $150,000). See Form 2210 and its instructions for more information.
IR-2018-93, April 13, 2018
Those who are married and filing jointly will have an increased standard deduction of $24,000, up from the $13,000 it would have been under previous law.
Single taxpayers and those who are married and file separately now have a $12,000 standard deduction, up from the $6,500 it would have been for this year prior to the reform.
For heads of households, the deduction will be $18,000, up from $9,550.
Child tax credit
The child tax credit has been raised to $2,000 per qualifying child, those who are under 17, up from $1,000. A $500 credit is available for dependents who do not get the $2,000 credit.
The deduction for interest is capped at $750,000 for mortgage loan balances taken out after Dec. 15 of last year. The limit is still $1 million for mortgages that were established prior to Dec. 15, 2017.
Contribution limits for retirement savings
Employees who participate in certain retirement plans ‒ 401(k), 403(b) and most 457 plans, and the Thrift Savings Plan – can now contribute as much as $18,500 this year, a $500 increase from the $18,000 limit for 2017.
State and local taxes
The itemized deduction is limited to $10,000 for both income and property taxes paid during the year.
Contributions to Roth IRAs
For individuals who are single or the heads of their households, the income phaseout has been raised to $120,000 to $135,000. For married couples who file jointly, the range climbs to $189,000 to $199,000.
The phaseout was not adjusted for married individuals who file a separate return. That is $0 to $10,000.
Savings in IRAs
Savers who contribute to individual retirement accounts will have higher income ranges following cost-of-living adjustments. Note that the deduction phases out for individuals and their spouses who are covered by workplace retirement plans.
For single taxpayers, the limit will be $63,000 to $73,000.
For married couples, the phaseout range will vary depending on whether the IRA contributor is covered by a workplace retirement plan or not. When the spouse who is investing has access to an employer plan, the range is $101,000 to $121,000. For individuals who don't have a retirement plan but are married to someone who does, the phaseout has been raised to $189,000 to $199,000.
The phaseout was not adjusted for married individuals who file a separate return and who are covered by a workplace retirement plan. That range is $0 to $10,000.