There’s no doubt about it, the first year in business is tough. In order to successfully nurture their startups through the growing pains, entrepreneurs should keep the following six points in mind to help them sail past the milestone of ‘one year in business’ and achieve long-term success.
1. Expect tax season to get complicated
Once you step out and become your own boss, tax season is no longer the time of year when the refund windfall arrives; Instead it becomes a period of detailed reporting in which startup businesses balance the books for the year and start to see if your business is truly viable.
Anything you were hoping to claim back as a business expense during this time needs to be entered meticulously and honestly, and you need to have kept your receipts in place. In their first year of operation, businesses often carry potential deductibles as financial burden throughout the year longing for the day that they finally get to write them off. It is imperative that businesses verify what constitutes a legitimate expense in accordance with the CRA, as making an assumption about this, or going with word of mouth could be costly. See the full CRA list of eligible expenses here.
2. Remember that GST is your responsibility
Very few business owners dream of becoming tax collectors when they started out, with more than a few forgetting that it is their responsibility to collect GST/ or PST on top of the price of their goods and services. For any business exceeding revenue of more than $30,000 for four consecutive quarters, it’s likely that you are obligated to charge and collect GST. If you believe your business falls into the ‘small supplier’ bracket then you may be exempt from collecting this tax. See the CRA’s small supplier verification checklist to learn more.
If your startup is a digital-first business, you will also have to consider GST implications. As of July 1, 2021, digital economy businesses selling in Canada, whether they be based in Canada or overseas, now have new GST obligations under three proposed measures:
- cross-border digital products and services
- goods supplied through Canadian fulfilment warehouses
- short-term accommodation through digital platforms.
If you’re worried about what to do with GST, PST or QST we’ve put together a helpful guide to Canadian tax to make things as smooth as possible for you.
3. Don’t expand too soon
When your business starts to gain momentum and see some early success, it’s very tempting to try and strengthen your legitimacy through increased headcount, new office space or even equipment. While it’s good to be proactive, young companies will not yet understand their rate of churn. Early growth might be temporary, therefore the decision to hire someone during a short-term upward trend could leave you with a host of new hires without enough work to do.
4. Know your metrics
If you have ambitions of one day having your business funded by a VC firm, then you’ll need to know a few more metrics other than profit and loss. If you are intending to start a SaaS business, these five metrics will be your vital statistics:
Cashflow. Even if your fledgling business is fortunate enough to be well funded, it’s critical to know your cash levels at all times. You’ll need money for day-to-day operating expenses as well as to invest in your ambitious growth strategies.
Gross margin. Perhaps the simplest metric for all businesses to remember is gross margin. Gross margin is a company’s net sales revenue minus its cost of goods sold (COGS). A higher margin means a higher profit and the ability to grow this number year over a year is very appealing to potential investors.
Churn rate. Also known as the rate of attrition, the churn rate is how quickly a customer stops doing business with you.
CAC and CAC payback. What does it cost you to get a customer? What does it cost you to keep a customer? When do you see a return on this investment? These are three questions that can provide proof of a viable and sustainable business model.
Changes in CMMR. CMMR refers to Committed Monthly Recurring Revenue. For term-based subscription businesses, this is the portion of subscription revenue that is recorded each month by the business.
You can read more about key business metrics here.
5. Prepare to make a loss
It might sound defeatist to hear these words before you’ve even got off the ground, but there’s a simple reason why startup businesses fundraise or sole entrepreneurs invest their own startup capital into the organization — it’s because instant profit is not guaranteed. Most businesses will predict a loss in their first year of operation in their business plan. This means that you will need to have already secured the necessary funds to:
- Allow the business to operate day-to-day
- Pay your staff
- Pay yourself.
- Pay vendors
Even if you’re not taking a wage during the startup phase, you still need to have the funds on hand to eat and live.
6. Bookkeeping is a blessing, not a burden
For many entrepreneurs that don’t come from an accounting and finance background, it might feel daunting that bookkeeping is something that is going to play an important part in the survival of your new venture.
By getting to grips with bookkeeping and accounting software now, you will not only ensure your business is compliant in terms of tax and other regulatory issues, but you’ll also be prepared for short- and long-term business challenges such as maintaining cashflow and meeting payroll. Put simply, accurate bookkeeping helps to keep a pulse on your business’s financial health.
About the Author
Digital and Social Content Manager for Sage Canada
Owen is the Digital and Social Content Manager for Sage Canada. For more than 10 years, Owen has worked as a writer and editor for a number of national and international publications, frequently breaking stories in the fields of finance and technology. He’s committed to providing helpful and problem-solving content to both local and global audiences.
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