Today I’m excited to share this guest post from Holly of Accounting Spot. Holly provides accounting and bookkeeping services for small and micro businesses, and she’s graciously agreed to share her tips for keeping track of profit in your business. Thanks Holly!
Hello! I was so excited when Megan asked me to guest post here on CraftMBA. She has been talking a lot about creating a culture of profit and that topic is something I am so passionate about! Before I get in to the number crunching, let me start by telling you a little about myself…My name is Holly. I am a financial accountant, focusing on supporting micro and small businesses. I am a numbers girl. I am passionate about accounting, small business and entrepreneurship and love to support others in their quest for business ownership. I hope I can help get you on your way to financial organization! 🙂
{Image courtesy of f2images.etsy.com}
Megan has done an excellent job of sorting through the psychology of owning a profitable business, what I want to do is talk about the science of tracking your business profit. I want to help you create a process for tracking your business finances. I will put together a skeleton plan here today, then you can use that to make it your own and work for your own situation. (I should note, this discussion is based on the assumption that you run your business as a cash-basis, sole proprietor. If that isn’t the case, please adjust accordingly.)
So, let’s get down to the basics…
I have broken the process out into 4 steps:
1) Gather
2) Sort
3) Reconcile
4) Report
{Gather}
This is the easy part. You need to get your business bank statement and business PayPal* reports. You’ll also need any other reports or receipts for business transactions conducted outside of these business accounts. This could include receipts for purchases made with personal funds or sales received into your personal account. Simply put, you need to collect a receipt or record for every incoming or outgoing business transaction.
*(PayPal reports: history>reports>Monthly financial summary & View Details of same page)
{listing from OrangeBeautiful.etsy.com}
{Sort}
Here is where we group income with income and expenses with expenses. You may want to group income in to sub groups by type. Etsy sales, Local sales, Wholesale sales and so on.
Categorizing expenses will take a little more time. There is no set list of categories to use. I think it is a good idea to start with the expenses found on the schedule c tax form. It is not the end-all, be-all of expense categories, but it is a great starting point. Use these categories and then add in your own subcategories as necessary for your business. You can find those HERE.
So, the big question is HOW to best track this information. My three favorite methods are spreadsheets, Outright or QuickBooks. I suggest getting familiar with your options to see what best suites you and your business. I have free Income & Expense tracking spreadsheets available for download on my BLOG. These are simple and to the point. Great for micro business. Outright is a free online program that will automatically link to your PayPal account, and it’s a simple program to use. And I’m sure you’ve all heard of QuickBooks. I love the program. It is full cycle accounting software. Great for micro business and beyond. I could go on for hours about these programs. But, to spare you the excitement (ok, maybe only I find it exciting), you can jump over to my Accounting SPOT blog to read up about these and to find a few tutorials to help you get started with each.
{listing from Charms4You.etsy.com}
{Reconcile}
This is just a good old fashioned bank reconciliation. For accounting purposes, I consider PayPal a bank account. So for your business bank account, PayPal account and any other bank type account, you need to complete a reconciliation. This is where you match transactions on the statement to the transactions posted in your accounting program. This verifies that your information is complete and accurate. QuickBooks has a module just for this. If you are using spreadsheet or Outright, you will need to do it manually. I know, manually…yuck! But, so worth it for the reliability it provides.
{Report}
This is where all your hard accounting work pays off! You get to see your bottom line. Whether it be a profit or a loss, knowing just where you stand allows you to make solid business decisions moving forward.
Whichever accounting program you choose to use, the reporting is pretty much done for you. Once you do your input and coding, the reports fall in to place (unless you are using pencil & paper, you’ll have to do some work to get your report). An Income Statement (aka Income & Expense Report) is a necessary management tool. You need know where your business stands financially in order to make good decisions.
There you have it, the accounting basics you need to get started! Keep in mind, you don’t need an expensive and/or super sophisticated accounting system. What you need is a process that works for you and is something you will stick with on a regular basis. Accurate, reliable, doable.
If you have any questions or comments, please feel free to comment on this post. I will be checking in often. Thanks so much for having me! 🙂
You can also find Holly over at the Accounting Spot blog and on Twitter.
(Links to Outright and Quickbooks are affiliate links.)
This is so helpful! I’m definitely going to check those links out – thank you SO much for sharing! 🙂
Ooh, I have a question!!
I’m pretty good with the basic accounting stuff – I have an undergraduate degree in business administration, so I’ve taken a few accounting courses (enough to have a basic grasp, but by no means do I claim to be an expert!) and am a total spreadsheet nerd. So I’m pretty good as far as tracking regular income and expenses, the things where I’m taking cash in or paying cash out to a specific entity.
But what about deductions I’d take at tax time, like mileage and use of a home office? While I meticulously track the number of miles I travel for business and the *total* utilities, mortgage, insurance, etc. on my home (I have a fairly elaborate personal finance spreadsheet as well), I don’t pay myself $0.50 for each business mile traveled, nor do I break out my home office expenses on a monthly basis and pay myself for my business’s overhead costs, since at tax time they’d be recorded as deductions rather than expenses. *Should* I be recording these as business expenses on my spreadsheet and paying myself for them out of my business’s funds? Or is it appropriate to treat them as I would mileage/home office deductions related to an employer other than myself (say, if I had a home office and mileage for my day job – my employer wouldn’t record these as THEIR expenses, it would be up to me to report them as deductions), and just keep them records of them as business-related expenses that come out of my own personal (non-business) funds.
I think part of the reason I’m confused is that, while my business is technically has its own set of finances that are totally separate from my personal finances, it’s a sole proprietorship, so all of my profits would be reported as personal income, whether I take it as a salary or not. That’s what’s blurring the lines for me a bit here, and I have a strong suspicion that I’m probably overthinking it. 😛
The timing of this post could not have been better – I’m 3 months behind on my paperwork, through no fault but my own, and am quite worried that whenu do go to do it, I’ll be so confused I’ll just give up. These tips will definitely help me to get organized…thank you for sharing 🙂
GREAT POST, Holly!
I have to say my favorite part though is where you said that you consider a PayPal account a bank account for accounting purposes. THANK GOODNESS! That’s how I’ve been using mine for the better part of a year and I often question myself about whether I need to put some useless & potentially expensive extra step in, transferring everything to a bank account.
I do keep really good track of my PayPal income & expenses through Outright – seems like such a perfect “banking” solution for a business that operates almost exclusively online like mine does.
Thank u so much for this! I find bookkeeping very intimidateing to the point of wanting to hire a bookkeeper. But I keep telling myself that I can do it and handle my handful of transactions.
If i hate bookkeeping so much is it worth hiring someone? What should someone expect to pay?
I can’t wait to cruise your blog in the am to find great helpers.
I’m so glad you have found the article helpful!! 🙂
Steph: I am going to give you a general answer, that I hope will provide some clarification.
As a sole proprietor it is important to track business expenses paid through your personal account. Whether it be office supplies, fuel, utilities or what-not. If money has moved, it should be counted within your accounting system. There is always an exception to the rule (although I can’t think of one right now), but in general if money has changed hands account for it (for example fuel costs). If money hasn’t changed hands (for example depreciation) it is a tax only transaction.
Janelle: You’re so welcome! I’d say try to see if you can find a program/plan that works for you to do it yourself. I don’t know how many transactions your business has, but hopefully you can wrangle it with out too much trouble. That said, if it is something that totally stresses you out and you would rather just not deal with at all…then it might be time to outsource. Bookkeepers charge between $20 – $50 per hour. CPA’s (which you only need at tax time) charge well beyond that. Of course your monthly bill would greatly depend on how many transactions you have and what your needs are. If you have any questions, just let me know!
Thanks!
Holly
Holly,
I recently launched my Etsy site and we’re selling 100 orders a month, and entering memorized invoices in QB and subtracting the fees. Is there an easier way to do this. I have
an outright account but I don’t know how to use it to it’s full capacity. The data entry is a nightmare.
Do you know of anyone or can I hire a consultant to teach me how to do make my bookkeeping less time consuming. It’s getting really expensive paying someone to add everything.
my email is karenart@loosepetals.com
I’m located in Chicago
Thanks!
Tara: Even as a seasoned accountant, it took me quite some time to consider PayPal a bank account. Once I did that, it was so much easier to track! I don’t know why I didn’t think of it that way earlier, it really is a bank account! Plus, they have great reports available that make reconciling a cinch!
Yay Holly, I was so excited to see you featured here. It was such a nice surprise to open up Craft MBA on Reader and see one of our local friends front and center! 🙂 So, I need to work on the whole reconciliation part, I’ve been very neglectful in that department! I am happy to say that as of today, I’ve finally done some clean up work in my PayPal account to update my account from my maiden name and get things within my PayPal more ship shape. I think it’s good for people to take a look at what their customers’ receipts are saying in terms of information that is auto-populated from your PayPal account. I had no idea how outdated some of my info was in PayPal and it really didn’t reflect the branding that I’m aiming for with my new blog/store on Meylah. Now I’m heading over to Outright to see if my sales so far have been reflected accurately on my account. It’s nice to finally see some credits rather than debits. Woohoo! (& sorry for the monster comment!)
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HI Holly… I was hoping to see what your response to Karen was? Thanks! Melinda
karen April 11, 2013 at 2:16 am | Permalink | Reply
Holly,
I recently launched my Etsy site and we’re selling 100 orders a month, and entering memorized invoices in QB and subtracting the fees. Is there an easier way to do this. I have
an outright account but I don’t know how to use it to it’s full capacity. The data entry is a nightmare.
Do you know of anyone or can I hire a consultant to teach me how to do make my bookkeeping less time consuming. It’s getting really expensive paying someone to add everything.
my email is karenart@loosepetals.com
I’m located in Chicago
Thanks!
I just found your blog and am so glad! I am looking forward to reading all your articles and asking you lots and lots of questions.
I have always dreamed of having my own business and have made lots of excuses about why I can not start. I have now decided that I want to pursue a very small business so that I can supplement my income. This is a starting point but I would like to aim higher eventually. I have read some business books and been to a few classes but am a newbie.
I would like to start selling on Amazon and wondered if you could give me some tips. I also want to keep the money for the business separate from my personal account. Will I be able to get paid to Pay pal via Amazon? I have not noticed this feature before and wondered if you knew how I could do this. Also, I am going to take funds from my personal account to start off with. When and how do I pay myself back once sales get going. I want to learn the basics, I know but… we all have to start somewhere I guess.