Bookkeeping Foundations for New Business Owners: How to Start, Categorize Transactions, Manage GST/HST, and Project Cash Flow

Starting a new business is an exciting step toward independence and growth. However, building a strong financial foundation from the beginning is essential for long-term success.

At FalconSight Accounting Inc., we specialize in helping new entrepreneurs establish efficient bookkeeping systems, maintain compliance, and position themselves for sustainable growth. This guide outlines the key steps every new business owner should take to organize their finances effectively.

Step 1: Set Up Your Bookkeeping System

The first step is to create a structured approach for tracking income and expenses.

Key actions include:

• Opening a dedicated business bank account to keep personal and business finances separate

• Choosing a bookkeeping system, whether through a simple spreadsheet, accounting software such as QuickBooks, Xero, or Wave, or working with a professional bookkeeper

• Establishing a regular schedule for updating and reconciling financial records, with monthly reconciliation recommended at minimum

It is important to retain all receipts, invoices, and supporting documentation, as required by the Canada Revenue Agency (CRA), for at least six years.

Step 2: Categorize Revenue and Expenses Accurately

Accurate categorization ensures financial reports are meaningful and that you maximize all eligible deductions.

Revenue Categories

Common examples include:

• Product Sales

• Service Income

• Other Income such as grants, rebates, or interest income

For instance, if you invoice a client $2,000 for consulting services, this would be recorded under "Service Income."

Expense Categories

Here is a sample breakdown:

• Office Supplies (eg. Office materials, subscriptions)

• Rent (eg. Office or co-working space rent)

• Advertising and Marketing (eg. Website development, digital marketing, advertising)

• Professional Fees (eg. Accounting, legal, consulting services)

• Travel (eg. Transportation and accommodations for business purposes)

• Meals and Entertainment (eg. Client meals and entertainment - subject to a 50% deduction limit)

• Salaries and Subcontractors (eg. Employee wages and contractor payments)

• Utilities (eg. Business internet, phone, and electricity)

• Insurance (eg. Business liability and commercial property insurance)

Each transaction should be recorded with the correct date, vendor name, amount, and assigned category.

Step 3: Create a Basic Cash Flow Projection

Effective cash flow management is essential to ensure your business can meet financial obligations and support future growth.

To build a basic cash flow projection, follow these steps:

1. Estimate your monthly revenue:
   Identify the expected income for each month based on sales forecasts, signed contracts, or service agreements.

2. Forecast your monthly expenses:
   Break down expenses into fixed costs (such as rent, utilities, and insurance) and variable costs (such as marketing, travel, or supplies).

3. Calculate net cash flow for each month:
   Subtract your projected expenses from your projected revenue.

   • A positive result indicates a surplus.

   • A negative result indicates a potential cash shortfall.

4. Plan for shortfalls in advance:
   If any month projects a cash deficit, consider adjusting discretionary spending, accelerating receivables, or preparing short-term financing options.

5. Maintain a cash reserve:
   Aim to keep a cash reserve equal to two to three months of operating expenses to provide a buffer against unexpected revenue delays or expense increases.

Example:
If you anticipate $5,000 in revenue and $3,000 in expenses for May, your projected cash flow would be a surplus of $2,000.
If you anticipate $4,000 in revenue and $4,500 in expenses for June, your projected cash flow would be a deficit of $500, requiring advance planning.

By updating your cash flow forecast regularly, you gain better visibility into your financial position, allowing you to make informed, strategic business decisions.

Step 4: Manage GST/HST Collections and Remittances Effectively

If your business is registered for GST/HST, it is important to manage the tax you collect and pay systematically to ensure sufficient cash is available at the time of remittance.

Tip: When issuing invoices that include GST/HST, track the amount of GST/HST collected separately from business revenue. It is recommended to transfer the GST/HST collected into a dedicated savings account to reserve funds specifically for CRA remittances.

For example: Under regular method, if you issue an invoice for $1,000 plus $130 HST, you will receive a total payment of $1,130 from the client. Separately, if you receive a bill from a supplier for $100 plus $13 HST and make a payment of $113, the reconciliation for the period would show GST/HST collected of $130 and GST/HST paid on expenses of $13. The net amount of $117 ($130 - $13) should be transferred to the GST/HST savings account based on this reconciliation.

In addition to managing GST/HST collections, it is important to be aware that different methods are available for calculating GST/HST payable:

• Regular Method: The most common approach where businesses subtract ITCs from the total GST/HST collected during the reporting period.

• Quick Method: Available to businesses with annual taxable sales of $400,000 or less. Under this method, businesses remit a fixed percentage of their total sales rather than tracking actual GST/HST paid on purchases. This can simplify reporting and, in some cases, provide cash flow advantages.

• Simplified Method for ITCs: An alternative approach for businesses looking to streamline how they claim input tax credits, although it is less commonly used today.

Choosing the appropriate GST/HST calculation method depends on the nature and size of your business. Each method has different implications for cash flow and administrative workload. Consulting with an accounting professional is advisable to determine which method will be most beneficial for your situation.

Following a structured reconciliation and transfer schedule ensures that funds are always available when GST/HST filings and payments are due, reducing financial stress and maintaining compliance with CRA requirements.

Common Mistakes to Avoid

To maintain strong financial management, new business owners should avoid the following:

• Mixing personal and business finances, leading to complicated reconciliations

• Neglecting to track small expenses that may qualify for tax deductions

• Failing to set aside sufficient funds for income tax and GST/HST remittances

• Delaying bookkeeping updates until year-end, which increases the risk of errors, omissions, and penalties

Implementing disciplined financial practices from the outset prevents future challenges and supports business growth.

Professional Support for Growing Businesses

At FalconSight Accounting Inc., we provide comprehensive support for new and growing businesses, including:

• Customized bookkeeping system design and implementation

• Accurate transaction categorization and monthly reconciliations

• GST/HST tracking, reconciliation, and remittance support

• Practical cash flow forecasting

• CRA compliance assistance and advisory services

A well-organized financial system allows business owners to focus on strategic priorities with confidence.

To learn more about how we can support your business success, contact us today at help@falconsightaccountinginc.ca or visit falconsightaccountinginc.ca.