Accounting 101 - Taking it Back to the Basics
I’ve been hearing a lot lately that accounting is an overwhelming topic and you just don't know where to begin. Maybe you're a new business, maybe you're a business who's been in it for a little while, but you haven't been doing your books properly. Now you've been seeing some of my tips and strategies and you're thinking “Oh crap, I need to get started. I need to get these things done (and done accurately), but where do I start?” I’m here to break it down for you in three points.
1 - Why Do Numbers Even Matter?
Okay, so you're in business for yourself. Maybe you had quit your 9-5 and now you're doing it on your own and you wonder “Well, what's the point in doing this?” The first one, kind of the obvious one, is taxes.
It's important when it comes to filing your income taxes that you have all of your income and all of your expenses noted in the correct categories. Then when you file your tax return it is easier for your preparer (or yourself), but you need to have all of your income and expenses categorized in order to do that. So, taxes will be the number one reason why you need to know your numbers!
The second reason is you need to know where your money is going, and that includes your income as well as your expenses. Where is it coming from? Where is it going? I look at this as the financial health of your business. Just like you go to a doctor for annual checkups, you need to do a checkup on some of your business finances as well. Don't wait and do those once a year, in reality, those need to be done monthly or at least quarterly. Also, in order to know where your money is going, you need to know things like:
Are my sales up?
Are they down?
How are they compared to maybe last month or maybe last year?
Those are ways that you would actually be able to make calculated decisions within your business. You also need to know where your expenses are in relation to your industry percentage standards? Okay, so let's think about that for a minute. Most industries, spend money on the same things, right? Their percentages of expenses are typically a percentage of income.
Let's just say you're a consulting business. In a consulting business, you may have an outside consulting base, such as a coach. You also have utility expenses, maybe you have supply expenses, things of that nature. Well, one important thing with keeping up with your numbers is to figure out if those numbers are in line with the industry standard for that percentage. Are you spending too much money in certain categories? There’s no way you will know that unless you keep up with your expenses on a regular basis.
For my business owners, sometimes you need to borrow money from the bank, right? That might not be just for your business, maybe you want to refinance your home or you want to buy a home for the first time, buy a vehicle. When you are self-employed, it’s important that you keep up with your finances so that you have those records and they're readily available for anyone who needs to take those to the bank.
Another reason why it’s important to know your numbers is to catch errors quickly. Wow, this is a biggie for me. You would be surprised at errors that I have found from banks and yes, they happen. Maybe someone else's check went through your account instead of theirs. Maybe they picked up a number incorrectly. Remember, banking is automated now - it's all about the robots, right? I promise you it happens. Maybe the bank charged your account with overdraft fees and they shouldn't have. Maybe you have a free banking account and you shouldn't be charged a monthly service fee, but the bank is charging for that. Those are things you're not going to catch unless you're doing your books on a regular basis.
If you’re doing your books on a regular basis, you can catch those subscriptions -maybe you tried to do a free trial, right? We all do them and I'm the world's worst at those. it looks really cool, let me sign up for a free subscription. If I don't like it in 30 days, all I have to do is go in and cancel, right? Never. You forget about it, life happens and we forget to go back and cancel those free memberships!
So if we're not looking at our bank statements regularly, we're not checking and actually reconciling our bank statements, posting those transactions, then those amounts of subscriptions that we don't even use add up. $9.99 here and $15.99 there add up, so please take the time. Another example of this, I had a client this week come to me and he has rental properties. He just sold a piece of rental property and we were able to catch where his house payments were set up on auto-draft. Two months after closing the bank still took those payments out of his account. If we weren’t on top of it, then it wouldn't have gotten caught.
Alright, so there's another reason and this one is a current reason. Many of you may have heard “You have to run your business like a business or we're not giving you the PPP (Paycheck Protection Plan set in place during the pandemic). We have gone over the hurdles with this but those were hurdles in place because people are not running their business as a business and I'm going to tell you, it's not going to sit well. If you are serious about your business, you are serious about your finances - they go hand in hand. If you're not serious about your finances, your business will not work.
2 - Basics
Alright, so I'm going to go to the basics of bookkeeping, and I'm going to break it down into three easy steps. Alright, we're ready. Let's go. Alright, my favorite one and I say this all the time. My number one recommendation in the basics of bookkeeping is to keep your personal and your business bank accounts separate. This is important no matter whether you are a corporation or you're just a sole proprietorship, but more so if you are an LLC or a corporation. If you do not keep sufficient distance between your business and your personal, then you've wasted the time creating the entity to begin with. You created that entity for liability purposes and if you're not keeping your personal and your business, income, expenses, assets, all the above separated, you don't have the liability protection anymore.
Okay, so keep them separate. I'm also mixing personal and business expenses and income together just to make it harder for you. When it comes to reconciling these things, getting things written for your taxes, figuring out what needs to go on that financial statement for the bank, it just makes it messy. When things are messy, you're less likely to do anything with them, because it's a hassle and nobody has time for it. So keep it simple!
The second thing in bookkeeping is to choose a system. There are actually two systems that I'm asking you to pick here. One is going to be your accounting software or some type of template. There are several different paid options for you guys out there such as:
QuickBooks Online (my personal favorite)
QuickBooks Desktop
Zero
WAV
Calculated Tax Planner.
I want to remind you of a couple of things if you are totally green to accounting. When I say income and expenses and deductions and categorizing into different groups of paid software is not what you need. I'm telling you that because it makes it look so easy, but if you mess one thing up, everything's a mess and your books are a complete disaster. So if you're not familiar and if you're not going to go through the effort of doing the homework to learn how to properly use the software, it's a really it's a waste of time, and it's a waste of money.
The second piece or a second system that I need you to keep up with is receipt storage. It's very important that you're not just tracking your income and your expenses, but you're also keeping those receipts and you are digitizing them, so don't keep them in a shoebox anymore like your parents used to do. Scan those receipts - super simple. Most of us have smartphones now, right? And it's really easy to scan those receipts and save them here:
Google Drive, that's my favorite
Dropbox
Evernote
QuickBooks Online
In QB O you can attach those digitally scanned receipts straight to the correlating expense categories so it's just a matching system. Amazing, right?
Third thing is to categorize your income and your expenses. This is the fun part! There’s a common list of expenses:
Bank service charges
Supplies
Utility (i.e phone bill, light bill)
Insurance
Rent
Office supplies
Equipment purchases
Do you know how those relate to your taxes? If you don't know how they relate to your taxes, you don't know how they relate to your accounting program.
Let’s talk about a situation where you have two different types of income streams. You're a marketing manager and you have services such as a “done for you” product, right? Your client actually pays you to put together Canva graphics and do all their marketing - that's platform one. Platform two might be that you have a small ticket item that people come back for.
In accounting software, we can actually separate out those income sources for you. Me, loving numbers, I want to know where my revenues come from. Also, with your expenses, there are two rules when it comes to your IRS guidelines for expenses to be deductible. The first thing is they have to be ordinary to your industry. if I was a social media marketer, would it be ordinary for me to buy a smoothie machine? No, right. That wouldn't be ordinary, correct, because I don't need a smoothie machine in a marketing business. However, it might be ordinary for me to buy a MacBook or ordinary for me to buy a ring light because I do love videos, right? That's an ordinary expense. So it has to be ordinary to pass the test.
The second thing is that it has to be necessary. Okay, so ordinary and necessary. That would mean if I'm in the marketing business, an unnecessary expense would be a pen that costs $900 or one of those paper clips you see online that are $1,000. Is that necessary? It's not. It's ordinary because I need a pen or I need a paperclip for my business, but it's not necessary because of the exorbitant price. Remember, it has to be both of those things in order for them to be a write-off or an expense per IRS guidelines.
I often get questions asking things like what if I use my personal bank account? Or my personal credit card? What do I do with those? If you're using my Calculated Tax Planner I have a super simple solution for you. If you're using my planner or you want to, copy it two times. One copy is going to be for your business bank account, which I know you all have and the second one is going to be for any personal expenses that you have. Then at the end of the year, you have two spreadsheets. One for your business account that shows everything that went into your business and then you have another one that is an accumulation of all your personal expenses for maybe your debit card, different credit cards, and things of that nature.
If you're anything like my husband and I, sometimes I may forget my business debit card or my business credit card, and he has his wallet but I forgot mine. No, I shouldn't do it, but if I'm somewhere and I need something for my business, then I'm not going to go all the way home to get my wallet! I'm just going to let him swipe his card and in that case, I want you to make sure you're not just checking your own debit cards and personal credit cards. Check your partner’s accounts too!
If you're using QuickBooks or another accounting software, there are several different steps in order to make sure that it's right. Depending on if you're an LLC or if you're an S corp, it has to be coded in the books properly. My recommendation for you is to download the Calculated Tax Planner and keep up with your personal things in there. Then at the end of the year when you go to give your books to your accountant, then they can help you to make the correct journal entries based on my downloadable planner and your QuickBooks, so they should be able to give you the adjusting entries to fix the books for you. If you don't understand accounting, do not attempt that yourself.
3 - Create Habits
My final request is that I want you to make bookkeeping a habit. You have to get in the habit, it's not something that you can sit down and do here and there - it's got to be a routine. I know it's easy to keep putting this to the side because it doesn't make you a dime and it doesn't bring you any customers or clients. I'm sure you are spending your time trying to make money and trying to get more customers or clients and bookkeeping doesn't do either of those things, but then I want to ask you these questions:
What is it costing you by not knowing your numbers?
What is it costing you to not know how much revenue you're actually making or what your expenses are?
Where's your money going?
What are you spending it on?
How can you make changes to your business to make a larger profit if you have no clue about your numbers are to begin with?
Next, I'm going to ask you if you're making a profit. If I asked you today, “What was your profit for January or your loss for January?” Would you be able to tell me? If you answer no, that means your bookkeeping is not in order and you need to make some changes today to get that fixed.
Then I want to know why you’re putting it off to begin with. Do you fall into a couple of these buckets? Do you just not have enough time? Or maybe you're confused about the accounting rules and regulations and you're scared of the IRS? Or you don't enjoy numbers. You enjoy selling to your customers, talking to your customers and growing your business, but you hate the number side of things. You're typically going to fall in one of those three categories. So if you fall into those buckets, and you're not ready, then maybe it's time to outsource your bookkeeping.
I hear all the time “I just can't afford to outsource”. I'm here to tell you again, if you are serious about your business, you're serious about your finances. So you're going to do one of two things: you're going to find the time or you're going to outsource. It’s that simple.
Think about some things that you spent money on in the last month that maybe you could set aside. Would it be:
Starbucks
Unused gym memberships
Unused kitchen appliances
Overdraft fees
If you look at those things over a month's time, I bet that you can afford to outsource your bookkeeping.
If you decide to DIY, download my Calculated Tax Planner here and once you get started if you have any questions, just send me a message and I'll help you as best I can. If you decide to outsource or download QuickBooks Online, then we need to schedule a strategy call with you. Let's talk about your business, let's see where the problems are. Where can I help you? That's my job!
Whatever you choose, set a goal now that you're going to make your business finances a priority - you owe it to yourself and you owe it to your business. That's what you started for. Most businesses fail if they don't have control of their finances, so now's the time say “I'm going to invest in my business.”
