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When you jump into the world of entrepreneurship, it’s easy to get overwhelmed. From learning to marketing and sales to books and payroll, it’s a giant learning curve. Everyone comes from different backgrounds and experiences that they bring on their journey. For those with no financial experience, it can be overwhelming to do the administrative side without proper resources.
Although it is always smart to hire an accountant or accountant To help you with the financial side of your business, understanding the nuances of finances and taxes is also very beneficial in ensuring things are done right. Here are three terms that all entrepreneurs should know to make sure their books and finances are in order.
1. What is your cost basis?
Your cost base is an important part of starting your business. In other words, it is the amount of Capital city that you deployed to start your business. This number counts as you begin to increase your income and create profits.
When start your business, it often takes decent capital to buy equipment, rent office space, pay employees and more. These expenses can seem daunting and even more overwhelming if you had to pay taxes on the net income generated in the First year or the first two years of activity.
The great part of understanding the cost base is that tracking this number helps you during the tax period to understand what you owe. Since you have already earned the money and paid it off, it is no longer taxed. So if you spend $100,000 to start your business and earn $300,000, you can pay yourself $100,000 back without paying taxes on it.
Your cost base is an important number to track to understand the financial health of your business and to ensure that you do not pay more taxes than necessary. Be sure to keep track of this and these transactions.
2. What is the mixture?
To mix together is something we often see when an entrepreneur makes rapid progress in building their business and often with side hustle. Mixing occurs when you use the same bank account or credit card for personal and business purposes. Not only can this make things difficult to track in terms of spending, but it can also be a signal for an audit.
In the traditional sense, blending is the act of combining funds. In investing, this can be beneficial, but in a business, it can lead to all sorts of problems. One such issue is that when applying for a business loan, it can be difficult to clearly define business income versus other funds and to understand your cash flow. It will be much easier for you or your accountant to keep these funds separate to establish your cash flow and help you understand how much loan you may qualify for.
Ultimately, it’s extremely important for a business owner to understand what mixing is and avoid it at all costs. Do it by starting a business bank account and use a separate credit card for business transactions, even if it’s a personal card that you only use for business purposes, while generating enough income to apply for a business card.
3. What is amortization?
Amortization, or a depreciation expense in business, is the ability to depreciate a physical asset or fixed expense, such as a car, as it depreciates over time, minus the salvage value. Essentially, you can deduct a capital asset as an expense if it is used for business purposes. It is considered an operating expense. Understanding this will also help you tax timeso you don’t pay more than what is actually due.
For example, if you buy a computer for $3,000 and plan to use it for four years and sell it for $400 at the end of those four years, your annual depreciation expense would be $650.
There are several ways to calculate depreciation expense, the one described above is called the straight-line method. Other methods accelerate asset depreciation and allow you to write off more expenses earlier in your life. Speak to a tax advisor to better understand these accelerated methods and why you would use them.
Understanding these three terms as a beginning entrepreneur will help set you up for success and avoid headaches in the future. Most importantly, consult the appropriate experts for your accounting, bookkeeping and tax planning needs.