INTRODUCTION
One of the realities of working as an independent is preparing for the inevitable ebbs and flows in client volume. While we’d all like to think we’ll be busy five days a week, 52 weeks a year, the reality is that independent life can be unpredictable. You can be overwhelmingly busy one month, and find business slow the next. Sound financial planning will help you accommodate these peaks and valleys.
- Find an accountant that you’re comfortable working with
- Open a business account at your local bank
- Set aside money for income tax and HST
- Develop a system for tracking your finances
FIND AN ACCOUNTANT YOU’RE COMFORTABLE WITH
If you don’t already have an accountant, now is the time to find one. An accountant can help you better understand the tax advantages available to you as an independent consultant and help you keep track of your money by setting up a financial tracking system for you. It’s important as you do business, to keep these in mind, so that you don’t overlook opportunities to maximize your income.
Ask for recommendations from family, friends and business associates. Lawyers and bankers may also be able to help out in this regard. The Chartered Accountants of Ontario (http://www.icao.on.ca) also provides a directory of Chartered Accountants in Ontario, and allows you to conduct a search by region so that you can contact CAs in your area.
Before selecting an accountant, you should conduct an interview with at least three to see which one best meets your needs. The Financial Planners Standards Council at http://www.fpsc.ca/10-questions-ask-your-planner lists 10 questions you should ask a financial planner and these questions can easily be adapted to meet your interview needs for finding a good accountant.
OPEN A BUSINESS ACCOUNT
Whether you are a sole proprietor, have a partnership, or are incorporated, you’ll need to open a business account at your local bank.
- How much revenue am I anticipating earning in the first year? How much revenue am I targeting on a monthly basis?
- Will I need business cheques on my business account?
- Will I need a debit card on my business account?
- Do I want the flexibility of being able to do online banking on my business account?
- Do I want the ability to transfer money from my business account to a personal account?
- Do I want a business credit card?
It’s a good idea to sit down with a representative from your bank to discuss the business account options that are available to you. Remember to bring a copy of your business registration information with you.
Bank of Montreal - http://www.bmo.com - Under ‘Business Banking’, you will find a section on ‘Business Accounts & Plans’. It identifies the type of information you will need to provide depending upon whether you are a sole proprietorship, partnership or corporation.
Canadian Imperial Bank of Commerce (CIBC) - http://www.cibc.com - Under ‘Business Services’, CIBC offers a listing of its various business account options, and includes an online small business cashflow tool.
HSBC - http://www.hsbc.ca - Check out HSBC’s business account options in the ‘Business’ section under ‘Accounts & Services.’
Royal Bank of Canada - http://www.royalbank.com - Select the ‘Business’ section, then go to ‘Starting A Business’ in the Solution Centre. Here you will find a Business Account Selector under ‘Financing Options’ that will help you determine which account best fits your business banking needs.
Scotiabank - http://www.scotiabank.com - Under ‘Small Business’ select ‘Day-to-Day Banking’. Here you will find the various business account options available as well as information on cash flow management.
TD Canada Trust - http://www.tdcanadatrust.com - Under ‘Small Business’, you can select ‘Accounts’ to see what business account options are available to you.
SET ASIDE MONEY FOR INCOME TAX AND HST/GST
Moving from full or part-time employment to independent practice means that you no longer have a financial department automatically deducting your income tax from your salary. This is an important consideration to keep in mind as you deposit payments for work you’ve completed. Be sure to set aside money for income tax and HST/GST.
In your first two years as an independent, the government does not require you to pay quarterly installments on your income tax. Rather, you can pay any income tax owing when you file your taxes. All the more reason, then, to ensure you’ve maintained the appropriate percentage of your income for paying taxes and HST/GST.
Talk to your accountant about how you can best handle your finances to ensure you’re not short of money when it comes to paying your taxes.
Revenue Canada replaced its HST/GST processing system in April 2007, providing more online services for HST/GST registrants including:
- searching for the status of a payment;
- reviewing interest charged or paid;
- transferring a credit to other accounts;
- providing additional remittance vouchers for your payments;
- providing account statements, such as a statement of arrears and/or a statement of interim payments;
- providing copies of previously issued notices or statements; and
- changing some of the communication instructions on your account, such as stopping us from sending certain statements or the return envelope with your remittance voucher(s).
The website breaks down information on HST/GST by the type of business you have (i.e. sole proprietorship, partnership, corporation). It also includes information on filing your HST returns and provides access to the forms online. To find out more about HST/GST registration and filing, please visit the Revenue Canada website at http://www.cra-arc.gc.ca.
OTHER WEBSITE RESOURCES
The Government of Ontario website offers an online publication ‘Your Guide to Small Business’ that features a section on income tax, HST, GST, business insurance and business records.
DEVELOP A SYSTEM FOR TRACKING YOUR FINANCES
You’ve just completed your first assignment for a client. How are you going to invoice that client? How are you going to track that invoice and payment when it comes in? How are you going to track your expenses as a business against the revenue you are generating? If you’re not familiar with keeping financial records, talk to your accountant about a simple, straightforward method for tracking your business finances.
The Invoice
Some things to keep in mind when you’re preparing your client’s invoice:
- Does the invoice have my company name, address, phone and fax numbers on it?
- Does the invoice have a place to add HST/GST? Is my HST/GST number clearly identified on the invoice?
- Does the invoice clearly state what services the fee covers? Have any additional expenses been added to the invoice (i.e. parking, photocopying, etc.) and do I have the receipts for these expenses? (Remember: if the HST is already included in the price of the expense (i.e. parking), that expense should not be included when you are calculating your HST amount).
- Have I stated a timeframe within when I expect the invoice to be paid (i.e. payment due upon receipt; 2% interest per month will be charged on accounts not paid within 30 days)
- Does the invoice clearly state the name of the client and the client’s address? Is the date the invoice was issued clearly stated?
- For financial tracking purposes, have I assigned a number to the invoice? (this is particularly useful if you are following up with an organization’s Accounts Payable department regarding an overdue payment)
- Is who the client should make the cheque out to clearly stated on the invoice?
- How often will I invoice a client if I’m completing a long-term assignment (i.e. bi-weekly, monthly, upon completion of assignment, half up front/half when completed)?
Tracking Payments
How will you know when an invoice has been paid? Everyone has a different system for tracking their invoices and incoming payments. The important thing is to have a system. Maintain a record of how much you’ve invoiced each month, and track incoming payments against your invoices to identify what’s been paid and what hasn’t. If you have a business stamp, you can mark the date a payment has been received on a copy of the invoice, and staple the payment slip attached to the cheque to the back of the invoice. This makes it easy to quickly identify which invoices haven’t yet been paid. If you are maintaining a financial ledger, then this information should be transferred to the ledger.
Keeping Receipts
Discuss with your accountant what you need to track in terms of expenses. Any receipts you use in the course of conducting your business (i.e. gas, postage, parking, meals, office supplies, office equipment) should be kept in a safe place. Most stationery stores carry special envelopes marked by month in which you can keep your receipts over the course of the year. If you have incurred expenses in the course of conducting business with a client, and have agreed in advance that these expenses will be billed as part of your invoice, remember to attach the receipts to the invoice before forwarding to your client. Check with your accountant regarding start-up expenses for your business including office equipment (desk, bookshelves, filing cabinet, computer, printer, scanner, BlackBerry, etc.), office supplies (paper, printer cartridges, letterhead, business cards, envelopes, pens, notepads, presentation folders, in/out baskets, DVDs/CD-ROMs, etc.), phone connections, internet connections, etc.
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