From online sellers to consultants to mompreneurs starting up a business in the home, more and more people are becoming self-employed and using their homes as their base of business operations. Doing so has some major financial advantages like saving money on a lease, daycare and gas or transportation expenses.
There are also other advantages to being a work from home professional like finally saying goodbye to long, frustrating commutes, the freedom to set your own work schedule and being truly comfortable while you work (hello sweatpants!). Of course, there are some disadvantages to being a home-based business. Distractions abound, the fridge is too easily accessible and working where you live can make it somewhat challenging to separate work and play. But on the whole, being a self-employed, home-based business can be the right solution for established professionals or startups with dreams of world domination.
Chances are if you are a home-based business owner, you will have to take care of at least some of your own accounting. Far from being a complete guide for managing your small business finances, below you’ll find five tips to keep in mind as you manage the financial side of your business.
#1: Choose the Right Business Structure
The Government of Canada’s “Setting up your Business” page is probably the best place to start as it has the information you need on deciding which business structure makes the most sense for your business. Your business structure plays a significant role in the way you report your income and has other tax and legal implications as well.
Here are the basics of the most common business structures:
- Sole proprietorship – is the easiest and most basic business structures and is usually best for self-employed individuals but it provides no legal separation between you and your business, leaving you personally liable for debts and lawsuits incurred by the business
- Partnership – as the name suggests, this is a business shared by two or more people and is as easy to set up as a sole proprietorship but also doesn’t provide much personal protection
- Corporation – this structure offers the most protection but is more complicated to set up
When choosing a business structure, it’s important to choose one that makes sense for your present situation while taking into account your future business goals.
#2: Keep Track of Everything
Whether you’re comfortable with Excel, Google Sheets or dedicated accounting software, keeping a “financial diary” of every penny spent and earned for your business will not only help keep you out of trouble with the CRA, but it will give you a clearer picture of how your business is performing.
#3: Separate Your Finances
Another way to avoid CRA troubles and to better know where your business stands is to have a separate bank account for your home-based business. This also means not paying for business expenses with your personal money and or use money from your business to pay for personal expenses. You’ll also need to put aside a portion of your business income for tax purposes and be disciplined enough not to spend it on either personal or business expenses.
#4: Know What Deductions You Can Make
Did you know that you can claim the expenses related to the portion of your home that you use for your home-based business? That includes heating costs, insurance costs, electricity expenses and more for your home business’s workspace. The full list of eligible deductions can be found on this CRA webpage.
#5: Consult Your Financial Statements
This is an extension of tip #2. Creating financial statements regularly such as balance sheets, income statements and cash flow statements can tell you how your business is performing as well as give you insights on strategies moving forward like whether to raise prices, if you need to reduce expenses and which expenses can be reduced and whether you need to shorten the payment terms on your receivables.