biz ladies: bookkeeping 101


Today’s Biz Ladies post comes to us from Design*Sponge’s very own bookkeeper, Mandy Miller. With more than 10 years of financial experience, Mandy has assisted businesses in establishing budgets and maintaining financial accounts. Today, she offers some of her extensive knowledge on the subject with a comprehensive guide to managing your business finances. Thank you, Mandy, for this incredibly helpful guide! Stephanie

Read the full post after the jump . . .

Small business owners often come to me a few years into their business operations looking to get a handle on their finances. In some cases, they have been keeping receipts in drawers or boxes and handing them to their accountant at tax time. In other cases, they keep Excel spreadsheets of income and expenses. And while this kind of system may work for your accountant for now, it’s likely to become unmanageable as the business grows, plus it will be difficult to measure performance over time. After a few years, most business owners want to know how they’re doing — where they’re profiting and where are they’re losing money. In order to fully grasp a business’s performance, the best advice I can give when it comes to finances is to learn how bookkeeping works and invest in bookkeeping software.

Bookkeeping Software

By regularly entering your business income and expenses into accounting software, not only will your accountant love you at tax time, but you will be able to use the data to measure your business’s performance throughout the year and over time as you grow.

QuickBooks and its sister product, Quicken, are the most popular accounting software options. They’re pretty affordable and relatively easy to use. However, you should do research and find the best product for your business. Some industries have specialized accounting software products that could be a better fit than the out-of-the-box option.

The Income Statement

The backbone of bookkeeping is your income and expenses. By tracking these carefully, you can produce what’s called an Income Statement (also known as a Profit & Loss report or P&L). The Income Statement is your most important financial management tool. In any given period, it will show your total income and total expenses and calculate the difference. By deducting expenses from income, you calculate your business profit or loss — aka, the bottom line. While the Income Statement is handy at tax time to send off to your accountant, it is also a valuable tool to help manage your business. If you are regularly recording your income and expenses, you can measure your business performance throughout the year, which can also help you make important decisions. Can I afford a new sewing machine? Is it time to move out of my home studio and get a studio space? Am I ready to take on a full-time employee? Am I a good candidate for a bank loan or line of credit?

Income is the money you receive for goods or services, via cash, check, credit card, PayPal, etc. In many cases, income is just one category, either a product or a service.  For example, if you make and sell bags, you would categorize your income as Product Sales. If you offer interior decorating services, you would categorize your income as Services. You can even break out these categories further if you’d like. Say you make and sell bags, purses and wallets. Then you may want to track each type of product separately; in that case, you could add subcategories to the Product Sales account: Bag Sales, Purse Sales, Wallet Sales. I mention this because as you expand, you will probably want to get a sense of which products sell best and worst, or what products sell best at certain times during the year. This kind of tracking can help you with decision-making and planning. The total of all the money you receive for Sales and Services is your Gross Income.

Expenses are the costs of running your business. Expenses should be broken down into categories. For most of you, expenses will be divided into two types of categories: Cost of Goods Sold (COGS) and Operating Expenses. Below is an example of a very basic list of expenses. I’ve also provided a few examples of typical expenses that would be posted to each category.

Cost of Goods Sold (COGS)

COGS are items you purchase that are directly related to the products you sell. For example, sticking with our Bag Sales example, any material you buy that will go to make the product would be considered a COGS — textiles, thread, buttons, snaps, etc. The cost to have the materials shipped to you would also be a COGS. For example, if you buy Italian leather to make your bags, the freight to have it shipped to you would be a COGS. The cost to ship to your customers would also be considered a COGS. COGS differ from Operating Expenses in that by deducting your COGS from your Income, you can determine your Net Income — what’s left after you purchase your materials.

Note: COGS are not used for service-based businesses. Basically, if it walks out the door with your customer, it’s a COGS.

  • Product Materials

Example: textiles, thread, yarns, buttons, snaps, zippers, dyes

  • Freight and Shipping

Example: freight and shipping charges associated with Product Materials, freight and shipping charges associated with order fulfillment (shipping orders to customers)

Operating Expenses

Operating Expenses are all the other day-to-day expenses required to run your business, but they aren’t directly associated with your products. To get to your bottom line, you deduct the Operating Expenses from the Net Income. That’s how you get your Profit or Loss. Of course, we’re hoping for profit!

  • Advertising and Promotion

Example: advertisements, flyers, email marketing

  • Computer and Internet Expenses

Example: internet access, computer equipment and accessories, software

  • Dues and Subscriptions

Example: professional dues, magazine subscriptions (business-related)

  • Insurance

Example: business or commercial policies

  • Finance Charges

Example: bank fees, interest expense

  • Meals and Entertainment

Example: business meals (meals with colleagues, vendors, customers), business entertainment (promotional events such as parties for your business)

  • Merchant Fees

Example: credit card processing fees, PayPal fees

  • Office Supplies

Example: paper, pens, paper clips, staples, filing supplies, etc.

  • Payroll and Wages

Example: wages paid to full- or part-time employees

  • Professional Fees

Example: legal, accountant, consultant

  • Rent
  • Repairs and Maintenance

Example: equipment repairs, office/space repairs

  • Telephone

Example: office phone, cell phone, fax line

  • Tools and Equipment

Example tools: sewing needles, knitting hooks, crochet needles, printing materials, jewelry tools, and so on

Example equipment: sewing machines, knitting machines, jewelry-making equipment, screen-printing equipment

  • Travel

Example: business-related travel

  • Utilities

Example: electricity and gas

The Balance Sheet

Okay, so now that we’ve covered the Income Statement, which is your tool for tracking business profits, I’d like to introduce you to the Balance Sheet. The Balance Sheet is a snapshot of your company’s financial standing. It tracks your assets, liabilities and equity.

I don’t want to get too heavy into the Balance Sheet, since most young companies will not need to use many Balance Sheet accounts in the early years, but I do want to provide a little understanding of the Balance Sheet because it really is an important part of your bookkeeping. The more you understand early on, the better!

Typical assets include:

  • cash in the bank
  • petty cash on hand
  • any money owed to you by your customers (Accounts Receivable)
  • inventory on hand
  • NOTE: In some cases, equipment is an asset. It will usually depend on the value of the equipment and its typical lifespan. You should check with an accountant to help make this determination, or you can go directly to the IRS (http://www.irs.gov/publications/p946/index.html).

Typical liabilities include:

  • money you owe your vendors (Accounts Payable)
  • outstanding credit card balances
  • loans from the bank or from individuals
  • tax liabilities such as sales tax or payroll tax

Equity, or Owner’s Equity, includes:

  • capital contributions made by you, such as investments made for start-up costs
  • capital contributions made by investors if you’ve accepted investments in exchange for equity shares
  • any draws or distributions you’ve taken from the company would also be posted to the equity accounts

For most small businesses, the Balance Sheet is pretty simple and straightforward. You haven’t taken out a bunch of loans, and you probably haven’t amassed a lot of expensive equipment. However, as you grow, the Balance Sheet will most likely grow with you. Let’s say you get to a point where you want to expand and open a storefront. You may need a business loan to get that going. Thus, you would add the loan as a liability, and what you spend on building out and furnishing the store would become an asset. Or maybe you are ready to open a small factory. The money you spend on building out the factory and for equipment like sewing or knitting machines or other industrial equipment would be assets. Or perhaps you are ready to take on a partner. The partner would make a capital contribution to your company in exchange for equity.

One Balance Sheet account that you are likely to already use is the credit card liability. If you use a credit card to fund some of your expenditures, you will carry the outstanding balance as a liability. QuickBooks makes it pretty easy to set up a credit card account; you can post the charges to the account, and then any payments you make are deducted, thus tracking what you owe.

The Rules

When I work with new business owners, one of the concerns I hear most is that they are unsure about what they can expense through the company. This makes them nervous to take on the bookkeeping function, worrying that they will make a fatal mistake. Once you start to do bookkeeping, you should track all business-related expenses. When it’s time to do your taxes, you will provide your accountant with your Income Statement and your Balance Sheet, and your accountant will sort out which expenses are 100% deductible and which are deductible at a lower percentage or not at all. For example, most meals are only 50% deductible for tax purposes, but your company lays out the entire cost of the meal. Don’t only record the tax-deductible portion. Record the full amount of what you spent, and let your accountant sort out what’s deductible. Your job is to track your spending, and to calculate your bottom line, you need to record everything you spend for your business.

The Professionals

As I mention above, it’s important to work with an accountant to help you with your taxes (unless of course you are a tax whiz or an accountant in your other life). There are many rules and regulations to follow that can be confusing, and you should always seek expert advice when in doubt. A good accountant can also provide guidance on bookkeeping. When you are stuck on what seems like a monumental obstruction, it could just require a quick 5-minute explanation from your accountant, a quick phone call that will keep you moving forward. Many accountants will even provide some basic training.

And don’t be discouraged if finance, bookkeeping and accounting don’t come naturally to you! If bookkeeping feels way out of your comfort zone, you may want to consider hiring a bookkeeper to come in once a month or a few times a year, depending on your volume. It’s probably worth the cost for you to stay focused on what you do best and not get overly distracted or bogged down with the bookkeeping. But I do strongly recommend that you stay involved. Ask your bookkeeper to generate the Income Statement and Balance Sheet each time they visit. Make sure you carefully review it with them and ask questions. Every once in a while, I come across a client who doesn’t want to know anything about their bookkeeping, and I promise you, it’s never a good situation. It usually means that the business owner is not making informed decisions, and as such, the finances can easily fall to the wayside. So having a bookkeeper alone is not the solution; make sure you have a bookkeeper that you work closely with.

Get Training

There are many bookkeeping resources on the web, everything from free articles to online classes. You can even get QuickBooks training online. So if you feel overwhelmed as you begin this process, be sure to do research and find the right answers. A few websites I love and use a lot myself are:

www.sba.gov — The US Small Business Administration website has so many resources, you could spend days there. They offer everything from articles to free online courses. Be sure to check out the Finance section!

www.businesstown.com — This site provides in-depth yet user-friendly accounting information, especially help with accounting terms and concepts.

www.netmba.com — This site covers a variety of business topics, including comprehensive articles on finance and accounting.

In Summary

In order to fully understand the finances of your business, it’s important to get yourself familiar with bookkeeping and invest in accounting software. The earlier in your business life that you do this, the better grasp you’ll have on your growth and performance. By developing a bookkeeping system, you can arm yourself with the tools you need to measure performance and thereby begin to make important decisions about the direction you can take your company in. Business owners, regardless of financial acumen, should educate themselves on accounting basics. As you grow, finance will only become an increasingly important part of your responsibilities, so be sure to get a handle on it early on!

Rebecca

Thanks for breaking this down so any layperson can understand it. I’m in the process of starting a small business on the side selling my bags and other creations and have been working out all the details like costs, advertising and bookkeeping. I’ve been second guessing myself and this gives me the confidence that I can handle the undertaking.

Andrea

Thank you so much for this post! I am a bookkeeper and have tried several times to help friends get their accounting in order and get Quickbooks set up for them as a favor. Sometimes successfully, but many times people have not really been ready to sit down with someone. I see people really bewildered by the task and with receipts very disorganized. Please do your bookkeeper (or your friend) a favor and get your receipts in order before sitting down with them or handing them over. Organize them by category, or date, or both. Make notes as to what they are for so that your bookkeeper has a better idea of what to do with them, if you’re not sitting down with them to go over them. And try not to be grumpy about it. It’s not fun for you, but it needs to be done and acting like it’s pulling teeth won’t make your bookkeeper feel very good. I had a friend once repeatedly tell me how lame and boring and terrible it all was. Well, that’s what I do for a living, and that’s pretty rude, even if you don’t mean it that way. Once you get a grasp on your financials and get caught up, it’s really pretty cool to be able to see where you’re at financially.

Mallory

I would like to switch to Quickbooks ( right now I work from an Excel template my accountant gave me) but I have a Mac and I’ve read nothing but terrible reviews for the Mac version of Quickbooks, and have been hesitant to invest in the software because of that. do you know anything about it? Thanks!

Holli @ Thrive Consulting

Great post! I specialize in doing virtual bookkeeping, accounting, and tax services for small business owners and entrepreneurs. I totally agree that having a business owner who takes the time to get actively involved and understand their financials makes all the difference. Even if you’re not an accounting-minded person, knowing what is profitable and what is not is key to maintaining a successful business over the long term.

Anna

Great post! Thank you very much! My husband is starting to make the transition to full-time self-employment as a general contractor, and, of course, I’m in charge of paperwork. I’m pretty on top of it, and educating myself as we go, but this post just gave me the information and confidence to know what I can handle and learn about, and what I need to outsource.

Also, if anyone has tips or resources for home accounting software specific to general contracting and/or the Mac, I would really appreciate it.

Thanks!

Blake

Such great information, not overwhelming at all… super useful prod in the right direction! Thanks.

Michelle

I really look forward to the biz ladies posts. This one was just what I needed. Every time I sit down to do my books, I dread it,. This write-up actually made it seem less overwhelming. Thanks!

Shannon

Thank you for a great post! I’m considering using Outright and wonder if anyone has any experience using it? Pros, cons, etc.?

Grace

Thank you so much for this post! I just started a small business, and trying to understand Quickbooks has been a challenge from a designer’s point of view. Thank you for making the mountain more of a molehill.

Sarah Holbrook

Shannon I used Outright when I started my business. If you use cash accounting and and your business doesn’t require inventory tracking for COGS (manufacturing and retail, among others, always do) it may fit your needs. When I transitioned to a fully-fledged package (Saasu) it was very time consuming to re-enter everything using proper accounts, inventory tracking etc. It really depends what kind of business your running and what type of information/reports will help you (and your accountant) understand the financials. The value of the data coming out will only be as good as the data going in :).

Caroline

Someone else recommend Outright to me too. Curious about if it’s the right way to go. Really helpful post. Thanks!

diana

great piece! I always struggle to get going every quarter, but once I’m into things I actually like it!

Rami

Great article, thank you!
I also would love software recommendations for Mac users — and Canadians!

Kate

This post couldn’t have come at a better time. I am behind two years and I know That I owe taxes and although I have the money in the bank I feel so overwhelmed even to start. I bought Quickbooks, and as Mallory said about the Mac version, it hasnt been an easy program to learn. My accountant wanted me to enter where I was at the end of 2008 with all the data that he had from my last statements and that’s where I came to a screaming hault and have quite literally panicked. The software is like nothing I have ever come across. Im glad to hear that there is some tutorials on line. I must go find those. On a different note – thank you, thank you for posting this piece it helped me get my butt in gear!

Robin

Great information! I ended up taking a class at a local adult education school to learn how to use Quickbooks and it helped get me up and going pretty quickly.

Sisi

GREAT INFORMATION! And it’s very in detail. Quick book is good, in a bookeeper’s point of view. I’ve tried to used Quickbook, but really ended up costing quite a lot of my time, now we are with Zero, everything is online, and very easy. Just another suggestion!

Kyle Q.

Thank you for continuing to provide easy-to-understand tutorials on running a business. This article could not have come at a better time for our new jewelry business. THANK YOU! THANK YOU!

Jennifer

Does anyone have any think-outside-of-the-shoebox ideas for organizing receipts into categories? Perhaps something that is visually pleasing, that would actually motivate you to do the sorting as you go? I’d love some ideas!

Mosaic

Great & timely post. I was working PT for an interior designer using only Excel. I finally convinced her to use QuickBooks. Her accountant & bookkeeper came & loaded it. Her bookkeeper sat down with me to set it up & begin entering checks, expenses, etc. There were questions regarding entries I wasn’t sure about. Iwantedto discuss them with the bookkeeper before entering them. The owner said I asked too many questions & she dud not want me calling the bookkeeper. Wow- not too many red flags there. I quit that week!

Lauren

Mallory, QuickBooks for Mac does have many limitations. I would recommend running Parallels on your Mac ($70-ish I believe) which will enable you to use the more-bells-and-whistles QuickBooks for PC version. I have been doing this for years and it works beautifully.

Danielle

Your Biz Ladies series has helped me out SO much. It’s clarified a lot of things. I’ve bookmarked most of the posts for reference, but this one is by far one of the most important. For sure. Thank you for the information! I appreciate it.

Shannon

SARAH: Thank you so much for your comments on Outright. I appreciate it!

K of Little Alexander

I left Outright when I decided to shift to double entry bookkeeping. I’ve been using Wave Accounting (another free online system) and it’s been great. I recommend it for anyone struggling with Mac software or looking for a robust, but free, software to try out.

Karina

Thank you for the great advise, I am trying to start my own small design business while trying to keep the whole finance side as simple as possible. I was looking into getting freshbooks, but I will also look into quickbooks!

Susan Osborne

Great post! It’s so important for business owner’s to see their financial picture on a regular basis so they can make savvy business decisions. Waiting until tax time doesn’t do it! A simple system to stay on top of it is so vital to your success!

I know it’s sounds simple, but I like to buy really pretty office supplies, like folders and decorative expanding folders, etc to keep papers and statements organized. Makes it’s more fun to organize :).

Elizabeth Kurtz

Wow, this is a great post! Even as a bookkeeper myself, it’s great to hear what others are doing. I like all the ideas posted, especially integrating creativity into bookkeeping! There is always a way to make these tasks more fun, even when it comes to bookkeeping!

Susanne Bruen

Having the correct financial procedures and cash flow management methods in place based on analytic reports and regular business health checks (all formatted in easy to understand terms) is just part of having a proven book keeping system. It is not the software but the professional knowledge and the experience in the person knowing how to use the systems and methods correctly

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