Adapted from Microsoft Small Business Kit by Joanna L. Krotz, John Pierce, and Ben Ryan

Many of your clients likely started their own small businesses because they prefer the more freewheeling and flexible small biz style to the slower-paced, meeting-heavy, and bureaucratic style of larger corporations. But the joys of a small business can quickly become a fading dream if the business owner does not establish a comprehensive financial management process and method to keep critical financial records in order.

It's in your best interest to help your small business clients as they set up their company finances. Your valuable input at the beginning will help ensure that, in the future, you won't find problems with your clients' books. Follow these guidelines to help your clients establish a sound financial management process.

Setting up finances for a business

Your client will need to accomplish numerous tasks in order to set up the finances for a new business. The following table contains some required tasks, along with suggestions on how you can help your client complete each task.

Separate business and business accounts

Your client needs to separate business and personal finances. For example, a business checking account should not be used to pay for a home mortgage. Likewise, a personal credit card should not be used to pay for business expenses. Explain to your client the importance of setting up business bank accounts and credit accounts that are kept strictly independent of all personal accounts.

The Internal Revenue Service (IRS) is alerted to any income that is deposited directly into a business owner's personal checking account, as well as any personal expenses that were deducted as business expenses because the funds were drawn from the owner's business account.

Track company finances

Keeping up-to-date receipts and statements can help your client make smart decisions, build the client's business, secure funding, and avoid potential disparities with the IRS. Explain to your client the importance of regularly performing these bookkeeper-friendly and accountant-friendly tasks:

• Retain receipts.
• File receipts in a way that's more organized than, say, putting them in a shoe box.
• Document expenses.
• Retain organized copies of all customer transactions and services.

In addition, help your client by providing a basic list of the records that should be tracked at least monthly. Owners of brand-new businesses may want to track these records daily. Important records to track include:

• Bank statements and check registers   Reconcile statements as soon as they are received in order to lessen the chance of overlooking any expenses or transactions.
• Income and sales receipts   Keep a monthly account (weekly would be ideal) of income and revenue sources. Remind your client that recording sales without taking the steps to collect the money might significantly skew the appearance of the company's financial status.
• Expenses and outgoing payments   Keep at least a monthly summary of all outgoing expenses, payments, and transactions, paying close attention to inventory and supply purchases. Your client won't be able to accurately price goods and services without understanding the bigger financial picture.
• Big-ticket purchases   Keep receipts of purchases of major items (such as computers and vehicles) and receipts of one-time payments. These types of purchases and payments require different information on financial statements and income tax returns.
• Employee payroll and other records   If your client's small business has employees, it's critical to keep tabs on employee income, Social Security tax withholding and payment, and other employee records.

Meet tax requirements

If your client feels confident that he understands taxes because he has regularly filed his own federal and state income tax returns, explain to him that his tax obligations as a small business owner might have increased. Depending on the form of business entity that your client established, he might now be required to file federal, state, and city income tax returns.

In addition, income tax is no longer your client's only tax responsibility. Broaden your client's perspective by explaining that the company might have to collect and pay:

• Sales tax
• Excise tax
• Payroll taxes
• Other state and local taxes

Taxes and all the attendant paperwork, transactions, receipts, and filings are usually the biggest record-keeping demand for a small business.

Determine compensation

Help your small business owner decide how to accept a salary, including the amount and frequency of salary payments and the method of payment.

Compensation for the owner of a company may include the following:

• Straightforward salary
• Lump-sum bonus
• Dividend distribution
• Hiring family members
• Perks and benefits
• Delayed compensation
• Employee benefits
• Loans

Encourage your client to establish a payment agreement with his or her company. Your client will undoubtedly want to balance the needs of the growing business with his or her lifestyle and family demands. For example, if your client is planning to launch an e-commerce channel on a redesigned Web site, a pay cut might be the solution. But if your client's eight-year-old son requires braces, a raise might be necessary. Make sure, however, that your client consults with you before treating himself or herself to any large financial reward, regardless of how he or she classifies it.

Hire professional financial help

An owner of a new business may not appreciate the time and effort required to attend to finances and record-keeping regulations. If your client formerly worked at a large corporation, a support staff may have performed these tasks.

Some small business owners decide early on to hand over bookkeeping duties, or at least payroll functions, to a professional. If your client hasn't yet decided who will handle the bookkeeping responsibilities, steer your client toward hiring a professional for the following reasons:

• Keeping an accurate set of accounts takes time. Your client's time would be better spent marketing the business or selling goods and services to customers.
• An experienced bookkeeper is less likely to make a potentially costly mistake, such as forgetting to make a tax payment or calculating payroll taxes incorrectly.
• Company books attended to by a professional bookkeeper will be complete and accurate when it's time to hand them off to the accountant during tax time, making tax-time easier and reduce the amount of accountant bills.

Follow these guidelines so that you can help your client develop a financial management solution that will empower your client's business. But make sure that any financial management solutions that you chose for the owner of new company do not completely distance its owner from the financial details of the business. Help your clients make smart decisions by having small business owners keep a close-up view of where their company's money is going and where it's coming from.

About the authors   Adapted from Microsoft Small Business Kit by Joanna L. Krotz, John Pierce, and Ben Ryan. Visit Microsoft Learning to learn more about this book and its authors.