Set up the finances stage by stage

1. The finance column, stage by stage

Stage	What holds the money side back	What gets you past it
SOP 145 — Run the business at level zero — improvise	Your personal money is your business money	Open a business bank account and fund it, pay business costs from it, and write off startup expenses
SOP 146 — Make the first money — monetize	You have no way to collect money	At least two ways to get paid, then a test payment that lands in the business account
SOP 147 — Make new customers consistent — advertise; the last stage with no employees	You do not keep track of your money, and you have no way to pay taxes	QuickBooks or an equivalent, saving for taxes, and a daily look at the bank account
SOP 148 — Stabilize the business at one to four people: the human resources side	You are not withholding employee taxes or fees	A payroll provider that handles every tax and fee by state, with the team onboarded to it
SOP 148, the finance side	People are paid informally, bills are forgotten, and customers are not billed properly	Payroll processing, basic bookkeeping, and managing what comes in and what goes out, potentially with a collections process
SOP 149 — Prioritize and niche down at five to nine people	Random one-time costs make cash flow lumpy	Set up a P&L and a cash-flow statement, and get basic business insurance

2. Level zero: give the business its own money

At this level you might not even know there is a difference between your money and the business's. Later there will be. To graduate:

• Go to a bank and open a business account. It could be a local bank or a commercial one, whichever you are more comfortable with.
• Put money in it: whatever it takes to open it, or whatever amount you can.
• Pay business expenses from that account.
• Write off startup expenses, to save on taxes.

The tax side, as stated. Taxes may be new to you: in the past you may have got money back, as an employee or because you made nothing. Now that you make money, you pay the IRS every year for having made it.

Expense the overlap. If you are starting out, this is called one of the smartest financial reasons, arguably the strongest, to start a business and incorporate: once you make an attempt at a business, the costs of doing business can be expensed.

• Phone. You probably have one. If it is used for work and for your personal life, but for work the majority of the time (you are trusted on this), you could put it through your LLC. What you now pay from personal income after tax becomes a write-off: the money comes off before tax is worked out on what is left.
• Computer. The same applies to maybe your computer, the hardware from the IT function (SOP 145 section 7).
• Internet. The internet provider too, maybe after an upgrade you needed to do higher-level work.
• A room at home. If you use a room in your home because you work from home, you can write off a portion of your rent, as long as you clearly mark that room as the office you work from exclusively. Again, you are trusted to do so.

The general point: you pay 100 percent of these personally and probably have spare capacity. You do not use all of your phone, your internet or your computer for your personal life, and the remainder could be written off against your income. So, it is said, starting a business can make you wealthier on its own, before your first dollar comes in, because less of your money goes to the government.

Do it now. Personal spending that is not a write-off, paid from a business account, is much harder to undo later. The trip to the bank sounds like a pain; do it before you make a lot of money.

Two cards. You need only two: a business card and a personal card. Before each purchase, ask whether it is for you or for the business, and use that card.

Bank sign-up bonuses. Many banks want your business and will pay you to bring your cash. The offers named:

Account	Offer as stated
Chase Total Checking	A $300 bonus to open an account, with a direct deposit in the first 90 days
PNC Virtual Wallet	Up to a $400 bonus
US Bank Smartly Checking	Up to a $400 bonus

Offers like these change, so check what a bank offers today. A bonus of $300 or $400 could go toward getting customers, who at this stage pay you nothing.

A first credit card. The same banks offer a card; the limit usually starts at $500. That gets you going and starts building credit. This is assuming you start at true zero: if you already have a card, or an income, you probably have a higher limit.

What it costs to start. A statistic heard secondhand, from someone else: today the average small business takes only $3,500 to start, all in. For someone starting with nothing, that means internet, a laptop, a phone and maybe one or two basic software tools at a few hundred dollars a month. That is what it costs on average now. If you do not have $3,500, the moves above help: taxes save some of it, and there are the bonuses, and a card that builds credit on what you already buy, with one or two percent off. If you cannot control what you spend, you have deeper problems than getting customers. If you can do the basics, you set yourself up quickly.

Tax law is not covered on this page; the write-off statements above are carried as they were made.

3. Monetize: set up ways to get paid

The constraint is that you have no way to collect money. You did not need one before: you served people for free, and they paid you in reviews and feedback.

• Set up at least two ways to get paid. This is given as a recommendation. One of them is always cash. The second is a way to take credit cards, since that is probably the most common way people pay today.
• Set up a credit card processor, an online checkout, or both. Examples named: your bank, Stripe, Shopify and Amazon. All were called checkout pages with a processor built in, then at least the later ones, Shopify and Amazon among them; your bank and Stripe take an extra step.
• Test it. Run a payment, then check for the deposit in your business bank account. When it arrives, you have run a dollar through the pipeline and it works. That is how you graduate, and at this level it is easy.

4. Advertise: track the money, save for taxes, look at the bank daily

The constraint is that you do not keep track of your money and have no way to pay taxes. To graduate, set up QuickBooks or an equivalent, save for taxes, and check your bank account every day.

Pay tax quarterly. New business owners often forget that they will owe taxes, and a huge bill takes them by surprise. You are meant to save for them quarterly. The best move, especially if you are someone who spends what is in the account, is to start paying tax quarterly; it also teaches financial discipline. A new owner without the best financial discipline, and without a CFO, a controller or even an accountant, is better off paying quarterly, so the money owed to the IRS is not spent first.

The one caveat: a CPA who is above board. Get a good CPA, and have that person tell you how much to set aside for the quarterly payments. The warning given: people arrive saying their CPA told them they could put a spouse's wardrobe through the business. If something sounds illegal and could be risky, do not do it; the peace of mind is worth more. If you are building something legitimate, act legitimately: do not pay for the dog's haircut from the business bank account, and do not expense a vacation because of one work call that lasted an hour. In one example, an owner has always insisted on staying by the book, for peace of mind.

Check the bank account every day. You have no profit-and-loss statement and nobody telling you what you have, but you do have a bank account. If you check it daily, you at least understand how money flows, and you feel every expense that hits, which makes you more disciplined. The comparison given is stepping on the scale every morning while trying to lose weight: it shows last night's frozen yogurt, and you probably should not eat so much today. The account works the same way: why buy a new monitor when the old one was fine? At this point, fast feedback loops are worth more than accurate, precise, organized ones. You just need a pulse on what is going on.

Tax law and accounting rules are not covered on this page.

5. One to four people: payroll, then bills in and bills out

Payroll, the human resources side. Human resources is how you protect yourself from employees and regulators. The constraint is that you are not withholding employee taxes or fees, which is where a lot of people are. To graduate, get a payroll provider so that every tax and fee is handled state by state, and onboard the team to it.

• Providers are fairly easy to find. The large ones named are ADP, Gusto and a third, whose name is not established on this page. Gusto is said to be for smaller businesses, so you might want to start there; ADP and the third are some of the big players. None of them is recommended or ruled out.
• You do not have to be technical. In one example, all of a company's payroll was once paid over the phone, until someone else took it over.
• The point is compliance. Do it the right way, so people cannot come back and sue you for paying the wrong taxes or the wrong fees, or for not paying the states where your employees work (the earlier warning about employees is on SOP 147 section 9). Focus on it sooner especially if you are remote. If you and everyone you employ are in one state, it is not as hard. If you employ people across many states, you owe fees to each of them, and a payroll provider pays those fees for you.

Bills in and bills out, the finance side. The constraint: people are paid informally, you forget to pay bills (this may sound familiar to some of you), and customers are not billed properly. "Where is that invoice? Did we get that one?" Volume goes up and things start breaking. To graduate:

• Payroll processing, covered above. Whether it counts as finance or human resources depends on how you want to split them.
• Basic bookkeeping.
• Invoices and payments: accounts receivable, which is when customers need to pay you, and accounts payable, what you pay vendors.

Payables matter because a vendor you paid late can refuse you the core thing you need to deliver your service. Interruptions like that happen at this stage because there is no formal finance process.

What it looks like, in the order given:

• Billing. Make sure every client contract is entered properly. Contracts not filled in properly are said to have cost one company a great deal of money.
• Collections. If they are entered properly and the customer still does not pay, you need to know how many declines and chargebacks you are getting, and you need someone managing that and pushing customers to pay on time. Customers love their money too, and without follow-up they would rather have the service free.
• Money for fixed and recurring bills, first. If you always have rent, and always have software that is core to the business, put that money aside first. If you are online, think of all the software you need as your rent.
• A place for incoming bills. Create a process; even an email address works. It could be one for accounts payable, accounts receivable or finance at your company. That way you at least have somewhere to send them: mid-meeting, you say "email that to here", and it is off your plate until you check it later.

A tip on collections. In one example, an owner tends to be late on collections. Few roles pay for themselves faster than someone who collects. Say $50,000 a month is not being collected: one person can go and collect it. Worth doing.

Payroll and tax law are not covered on this page.

6. Five to nine people: the statements and insurance

The constraint is that cash flow is lumpy because of random one-time expenses: you find out that businesses cost money to run. To graduate, set up a profit-and-loss statement (a P&L) and a cash-flow statement, and get basic business insurance, meaning general liability insurance.

Insurance. Ask what could kill the business, and prevent those things. A business kept from dying keeps going, by definition; this is protection against the downside. Protect against claims of bodily injury: someone slips on the premises, such as a customer who slips and falls in the store.

The P&L shows whether the business made or lost money over a certain period. The simplest way to think of it: add up what you earned selling lemonade and subtract what you spent on lemons and cups.

The cash-flow statement shows how much cash came in against how much went out over a month. Take the same lemonade stand. You make a profit for the month, but before the last day you pre-order two more months of lemons and cups. You might be cash-flow negative for the month even though the P&L shows a profit.

Keep both. The P&L shows how the business is doing; the cash-flow statement shows how you survive until tomorrow and make payroll. At this level, that is all there is to set up.

Why the costs come in lumps. In the beginning, and especially at this stage, there are bigger purchases: investments that are one-time but happen regularly. Start expecting them and planning for them. Saving for big costs with a budget comes at the next stage: SOP 151 — Budget and forecast.

Insurance law is not covered on this page.

7. What this page does not decide for you

• The third payroll provider's name. Not established on this page.
• How much to set aside for quarterly tax. This page gives no figure for the amount to set aside; a CPA is to tell you.
• Whether one payment processor or two is meant at monetize. A payment processor is named; whether two of them are meant, or a payment processor too, is open. This page does not settle which reading is right.
• Which address incoming bills belong at. Payable, receivable and finance are all offered as examples. Not established on this page.

8. What this page does not cover

Forming the business entity is on SOP 145 section 9. Accounting standards and insurance beyond general liability are not covered on this page.