Our Two Cents

The entrepreneurs I talk to are, without exception, smart, motivated, energetic people. They are full of ideas for life-changing products and services and plans for the future. But at some point, nearly all first-time business owners get stuck by a question: “What type of entity should my small business be?”

This may not be the most fun part of starting the business, but it shouldn’t be painful either. If terms like S corp, C corp, and sole proprietorship make your head spin, you’re definitely not alone.

This question is so common that I decided to put together an article to easily explain the different types of entities that work for most small businesses.

Math may or may not have been your favorite class in school, but when it comes to running a company, ignoring the numbers is one of the greatest fatal flaws a business can make (individuals too, for that matter). Your numbers are what make your company’s plans more than just pipe dreams. They alone have the ability to provide accurate and meaningful guidance based on the only stuff that can’t be made up.

This is what makes accounting an amazing gut-check for any business owner. It’s your chance to align your feelings of how your business is performing with solid data. And if your gut and the numbers don’t agree, you’ll quickly be able to uncover any hidden problems or opportunities that would have otherwise gone undetected.

Last year, my friend started the business of her dreams. She used her personal savings to fund early brainstorm sessions, computers, and the UX designer she needed to get started. She did a lot of things right to get her small business of the ground.

Something she did wrong? Her accounting. She kept track of all of these expenses by sticking the receipts into the bottom drawer of her desk every couple of days.

You can see where this is going.

 

If the phrase “Mind the GAAP” makes you think of the London Underground, you’re probably a business owner and not an accounting professional who enjoys a good pun. And if you’re reading this article, it’s highly likely you just got off a call with potential investors who dropped the phrase “GAAP accounting” about four or five times, and now you’re thinking, “Great, another accounting to-do on my plate...”

In a recent post I covered the reasons small business owners should consider choosing accrual/GAAP over cash accounting. In that post, I noted that there are times and places for cash accounting. And, because startups and smaller businesses (including many inDinero customers) can choose either method, I wanted to discuss the use-cases for cash a bit more.

There are two methods for keeping track of your income and expenses: cash and accrual accounting. Choosing your accounting method may seem complicated, and based on which one you choose, that’s exactly how your finances may end up.

1. Cash: This method requires cash to change hands, meaning that transactions are recorded only when payment is received or made.
2. Accrual: Based on matching, this method records revenue and expenses when they are earned in real-time even if payments haven’t hit or left your account yet.