Small Business Bookkeeping Basics
Guest Post by Heidi E. Johnson
It can be overwhelming. There’s much to learn with many nuanced pieces.
The truth of any business lies in the budget, monthly reports and on bank statements. You have the opportunity for empowerment when you understand how the money comes in and how it goes out. The information found in the money systems you use can craft your strategic priorities and growth plans for the month, quarter and year.
Let’s make this a little less complicated and start with examining Money Out and Money In.
Money OutWe’re going to start by talking budgets. Creating a budget provides you and your business with guardrails on where your money goes and how much ends up in that bucket. Expenses will be fixed (consistent month to month) or variable (different month to month).
Grab a pen and a notebook, carve out some space and think for a moment about how you need money to flow out of your business. Divide your paper in half and label one side Now and the other Ideal.
Under the Now heading, list out what it currently costs to run your business. If you’re in the startup stages of your business with limited money coming in, the Now Budget will reflect the bare minimum of expenses. At the top of the list is paying yourself, then include items such as web hosting, liability insurance, technology services, and if you have a physical space, rent and utilities. At this stage, we often have to bootstrap it and aren’t able to hire out tasks, attend conferences, or purchase big-ticket items. However, sometimes a Now Budget includes one of these items, which you’ve decided is a worthy investment in this early stage.
Under the Ideal heading, list all the expenses beyond your bare minimums. You can include an increase in how much you pay yourself as well as the cost of attending a workshop or conference, classes to build your knowledge, or hiring out tasks that free up time so you can create growth in new areas.
There is no right or wrong answer here, your budgets and what you want the business to provide for you need to come from personal experience, needs, wants and goals.
Now you have an idea of what to spend your money on, let’s look at the process that needs to be set up.
Take a moment to reflect on the following questions:
- How will you pay your bills - weekly with a check, monthly via credit card?
- Do you have credit terms with vendors to allow you Net 10, 20 or 30 days to pay the bill?
- How often will you pay yourself?
- Do you need to set aside money for taxes, either self-employment or sales tax?
- Will you need to pay monthly, quarterly or yearly taxes or insurance payments?
Rent ---------------- Due 1st of month ---------------- Check – epay
Next we turn to the system you’ll want to use to pay your bills. At the most basic level a spreadsheet and online banking will serve you just fine. Other systems include FreshBooks, Get Harvest and the gold standard, QuickBooks. I’m an advocate for QB because everything integrates: banking, credit card, accepting payments as well as having robust reporting I can work with on my own and with my accountant.
Whichever system you choose, I recommend setting aside time every week, month, quarter, and of course, year end to review your tasks, results and goals.
Let’s take a look at how you want money flowing in so you can attend to the money going out.
Money InRefer back to your budget and notice when expenses are due. Grab a pen and a notebook, carve out some space and think for a moment about how you need money to flow in.
- Are most of your expenses due monthly or weekly?
- How do you want to pay yourself: weekly, bi-monthly or monthly?
- Does your business support a large chunk of cash being deposited once or twice a month?
- Do you need a more continuous flow of money coming in daily or weekly?
- How will you bill clients? Monthly, recurring, or at the time of engagement? Are you billing prior to work completed or do you expect full payment before you provide service? Will you require a deposit or down payment?
- How will you accept payment: cash, credit card, ACH transfer?
The answers to these questions will help form the foundation for educating your clients on how you expect to be paid for products or services.
Once you have an idea of how your money will flow through the business, it’s time to look at how your information will be captured and how you can use it.
Chart of AccountsThe chart of accounts is simply a list of containers (accounts) that collect your income and expense amounts. The accounts flow through to your profit and loss and balance sheet.
When keeping track of money in and money out, it’s always a good idea to think from the perspective of reading your profit and loss report. If you get too specific you’ll create a multi-page report that is overwhelming to read and could cause you to completely avoid a vital piece of information for your business. On the flip side, if you aren’t specific enough, you won’t have the data to tell you if it’s truly profitable to offer Service A or Product Q.
Income (Money In): If you have multiple ways of making money you want to be able to track it. This will allow you to view your reports and compare the various ways money is made and if it’s profitable.
Take a moment to jot down your revenue streams. If they’re very different you might think about splitting them into separate accounts, as above, to give you more information. The important thing is to not make it too complicated or have too many containers.
Expenses (Money Out): These are the items you pay for to keep your business running smoothly. A few ideas to keep track of are:
- office supplies
- website hosting
- advertising + marketing
- professional fees
- banking and credit card processing fees
- memberships + dues
It can be tempting to create an account for every item and before you do, take a moment to think about the overall category the item falls into. When the expense side of a Chart of Accounts gets too long, duplicates start to appear because you can’t remember how you last categorized it. Keep it simple!
To help keep track of bookkeeping tasks, I’ve created a downloadable Bookkeeping Task sheet. It even has space to write in your specific tasks. If at any point you’re feeling overwhelmed, confused or just have a question, please email me, I’m happy to connect you to a resource.
About the Author
Heidi E. Johnson
bookkeeper + project manager
As a small business bookkeeper, Heidi works as the liaison between you and your accountant. Her job is to:
- Keep the records up to date
- Make sure taxes are filed
- Keep your financial goals in the forefront for business planning and growth.
Heidi believes strongly in intentional business building + setting up systems for sustainability, which ultimately creates a business you want to work in.