Session notes: setting up business finances

These are the notes from the session on Thursday, August 20 at 6:00 p.m., part of the programme.

The August masterclass was taught by two practising accountants from a two-office Edmonton firm that acts for about forty product businesses. Eighteen came, a waitlist of six did not get in, and by the end of the following week eleven members had registered for GST. These are the notes. They are not tax advice; they are what was said in the room, written up so nobody has to have been there.

Separate the money on day one

The first forty minutes were about a thing that sounds too simple to need a masterclass and that half the room had not done: a separate bank account, a separate card, and a rule that nothing for the business is ever paid for personally. The accountants’ point was not tidiness. It was that every personal transaction mixed into the business creates a question at year-end that costs more to answer than the transaction was worth, and that a lender or a buyer who sees mixed accounts stops reading.

Practical: one operating account, one savings account that GST collected goes into the day it is collected so it is never accidentally spent, one card. A sole proprietor can do this today. A corporation must.

The chart of accounts for a business that holds stock

A consultancy’s books are simple: revenue in, expenses out. A product business has an asset that changes value every time a shipment lands, and the books have to know about it. The chart of accounts the accountants handed out has four lines most templates do not: inventory (an asset, not an expense, until it is sold), cost of goods sold, freight-in (part of the cost of the inventory, not an operating expense), and inventory write-downs for the units that arrived broken or will never sell.

The mistake everybody makes: expensing the whole purchase order the month it is paid for. It makes a good month look terrible and the following months look better than they were, and it makes your margin unknowable. Inventory goes on the balance sheet when it lands; it moves to cost of goods sold when it ships to a customer.

GST, and the border

This was the segment that paid for the evening. If you sell more than thirty thousand dollars in four consecutive quarters you must register for GST. Below that you may. The accountants’ advice for anyone importing: register now, voluntarily, because you are paying GST at the border on every shipment and only a registrant can claim it back as an input tax credit.

One member had registered two years earlier because a retailer wanted a GST number on the invoice, had filed every return since, and had never once put the GST she paid at the border on the input-tax-credit line. Registrants have four years to claim. The adjusted returns, when she filed them, covered her desk for the year. She has told everyone. That is the review.

• Register voluntarily if you import anything, regardless of revenue.
• Put collected GST in the savings account the day you collect it.
• Keep the broker’s Commercial Accounting Declaration (the CAD; older shipments will be a B3) for every shipment; it is the document that supports the credit. And register in the CARM Client Portal before the first pallet ships, not when the broker calls.
• File quarterly, not annually, if you are importing; the cash comes back faster.

Paying yourself

For a sole proprietor there is no “paying yourself”; the profit is your income. For a corporation the choice is salary or dividends, and the accountants would not give a general answer because the right one depends on your other income, whether you want RRSP room and CPP contributions, and whether the corporation needs to keep cash. What they would say: decide it once a year with someone who knows your numbers, not in December in a panic.

The fifteen-minute monthly close

The session ended with a routine, and the routine is the reason it was the most useful hour of the season for several people.

1. Reconcile the bank account against the books. Every line matches or gets a note.
2. Count the inventory, or at least the three products that matter. Adjust the books to what is on the shelf.
3. Move the GST collected into the savings account if you have not already.
4. Look at one number: gross margin this month. If it moved more than five points, find out why before you do anything else.
5. Write down the one thing you did not understand. Bring it to the next Pastries & products.

A business that closes its books in fifteen minutes a month has a cheap year-end. A business that does not has an expensive one, and does not know it yet.

The chart of accounts and the monthly-close checklist are on the whiteboard in the team room and available at the front desk. The next finance session is in season three; bring your statements.