bethanyroseman

Self-Employment Basics

There is a ton of information out there for self-employed business owners. With enough time and dedication, you could learn absolutely everything you need to know about running a business. But you’re self-employed. You do not have time to sift through everything there is to know. After working with business owners as a bookkeeper, accountant, and tax preparer in California for twenty years, I think I can save you some time. Here are the basic things you need to do if you are self-employed. (None of these recommendations or links are currently sponsored. Please see our legal disclaimer.)

1. Track your tasks

First, you’ll need to establish a system to keep track of what you need to do. This can be through pen and paper or with an app, but decide early how you will keep track of what you need to do. Develop a habit of tracking everything that comes up so the tasks can be scheduled and prioritized. Here are a few recommendations:

The Bullet Journal method is fantastic for tracking long-term goals and big-picture vision. For day-to-day, I highly recommend using a digital task-tracking method, especially if you have recurring tasks. These should include your specific process for completing the tasks described next.

2. Separate your business and personal finances

As a sole-proprietor you as an individual and you as a business are indistinguishable, one and the same. However, keeping your business finances separate from your personal finances (money you take out of your business to pay for your rent/mortgage, groceries, gas, clothes, etc.) will go a long way in protecting your non-taxable business deductions. Also, if/when you ever apply for a business loan and the creditor requests your bank statements, you can maintain your personal privacy by having your personal transactions in a separate account.

Only run business transactions through your business account. These include depositing money received from customers, checks you write and debit transactions you authorize to pay vendors for expenses (supplies, advertising, software, etc.), and business loan payments. Do not pay for personal expenses out of your business account. Instead, transfer the funds you need for personal expenses from your business account to a separate, personal account on a bi-weekly or monthly basis. These transfers are considered to be an “Owner’s Draw” (an equity account) and should never exceed your net business income.

3. Maintain your bookkeeping

If your business completes fewer than 25 transactions a month (incoming and outgoing money), you might be able to get maintain your bookkeeping in Excel or even pen-and-paper with some office supply forms. If you have more transactions, I definitely recommend subscribing to an online bookkeeping software like QuickBooks Online or Xero. Desktop software can get you by for awhile, but unless you need it for something specific (like certified payroll in the contracting world), online software is the way to go. Some of those recurring tasks I mentioned above should include these bookkeeping tasks:

Complete weekly bookkeeping (bank deposit, invoicing, bill pay, filing).
Complete monthly bookkeeping (reconcile accounts, review financial reports).
Pay quarterly income tax estimates. Don’t wait to see what your tax bill is at the end of the year. Meet with your tax preparer, estimate your taxes for the year, and make a habit of setting aside a percentage of every dollar you bring in. Divide your total estimated tax by your total estimated gross income to get the percentage. Then, every two weeks transfer that percentage (of the money received during that period) to a tax savings account. You can learn more about this method at Profit First.
Collect W-9 forms for any independent contractors (sole-proprietors) you pay more than $600 during the year. I review this on a quarterly basis to save a lot of stress in January when I have to issue 1099-NEC forms (formerly 1099-MISC).
Prepare your records for annual income tax return preparation. At the end of each year, you’ll want to review both your Profit & Loss Detail Report and Balance Sheet Detail Report for the entire year to ensure consistency. These reports will show you every transaction entered in your bookkeeping system for the year. If bookkeeping is not your forte and you want to be sure things are right, you can always setup an appointment with us to take care of this for you at the end of the year.
Run payroll (if applicable). If you have employees, I cannot recommend paying for a full service payroll subscription highly enough. If you already have QuickBooks, their core payroll service is fine. I also highly recommend OnPay. After the setup, all you have to do with either service is enter the employee hours and click done. The payroll service will direct-deposit your employees pay, remit your payroll tax payments in full and file your payroll tax returns on time. It’s just not worth it to try to do all that yourself or even hire an employee to do it.
File and pay quarterly sales tax returns (if applicable). Again, if your situation is simple, you can probably take care of this on your own. If you sell tangible goods that are subject to sales tax, you will want to be sure to keep track of your taxable and non-taxable sales.

By the way, congratulations! If you’ve added these tasks to your online task tracking system, you now have an online, Standard Operating Procedure for your business where the tasks can eventually be assigned to other people if/when needed! This puts you way ahead of the curve when it comes to small business organization.

My final word on bookkeeping is to caution you against not claiming all your taxable business income and against deducting non-business expenses. The benefits to claiming all the income you make and only writing off the expenses relating to business far outweigh any benefit you might gain from not paying the resulting tax bil. There is a lot of misinformation out there (even from professionals) about “tax write-offs.” Check out my post on maximizing your take-home pay for more on that topic.

4. Keep your paperwork organized

If you haven’t noticed yet, daily business turns out paperwork of all sorts at an alarming rate. Keeping all these papers organized and, most importantly, retrievable, can be a daunting task if you don’t establish a system. In my experience you have two options. Both are perfectly legitimate and you can decide which to use based on your own preference.

Paper or Digital

If you prefer physical paper, I highly recommend the FreedomFiler system for keeping your paperwork organized. In fact, the digital system I’ve developed over the years is largely based on the logic and layout used by this paper system. At the end of each year, you’ll want to box up all your yearly files (described below) in Bankers Boxes and store them for 7-10 years.

Digital filing typically prompts mixed feelings from those who consider going paperless. On the one hand, it grants a lot of freedom. On the other hand, it’s not as maintenance-free as you might think. Using an on-site hard drive to store files can free up a lot of room once used for storing files. However, most on-site file servers must be replaced within three years and require anti-virus maintenance among other professional maintenance.

Unless they’re in the tech industry, cloud-based digital file storage is normally the route I advise my client’s to take. Depending on the level of security needed for the documents, you could use SmartVault, Box.com, Dropbox, or even Google Drive. All these services provide web-based access to your files which will give you an immense amount of freedom, especially in considering where you prefer to work.

Accessibility, however, is limited to the standards maintained in the digital filing setup and maintenance. If you intend to store your files digitally, I cannot stress the next point strongly enough: Decide on a filing naming convention for your files and use it, without fail.

If you had paper files, you would probably setup file folders for each vendor and customer for each year. You would sort them in alphabetical order. You might even punch holes in the documents and secure them to the folders to keep your documents neat. Digital filing needs the same level of care.

I recommend writing and updating a text file in your root directory with the naming convention that should be used for each file. For example:

VENDOR/CUSTOMER NAME YYYY-MM-DD Document Title or Description

I’ve personally used this file naming convention for all my business files since 2012, and it has yet to let me down. This way, your files can line up nicely in any sub directory, and any orphaned or misplaced files can be found with a simple search (and moved if needed).

SEQUOIA BUSINESS SOLUTIONS 2020-10-05 Inv 1000
SEQUOIA BUSINESS SOLUTIONS 2020-11-05 Inv 1050
SEQUOIA BUSINESS SOLUTIONS 2020-12-05 Inv 1100

The text file with your filing naming convention should also include acceptable abbreviations (e.g. Inv for Invoice, Stmt for Statement, PO for Purchase Order).

In addition to a solid file naming convention, you will also need a workhorse of a scanner. On that front, I can highly recommend the Fujitsu ScanSnap products.

Once you’ve decided whether to use paper or digital files, you should keep and organize the following documents:

Permanent Files

Legal name: Copy of your personal, social security card
The IRS letter which assigned you an EIN (Employer Identification Number). Side note: If you’re operating as a sole-proprietor, even if you don’t have employees, I recommend you get an EIN to protect your social security number. It doesn’t cost anything, and it will allow you to freely share your business tax ID number with customers, vendors, banks, etc.
Bank, credit card, loan account setup documents
Online merchant account setup documents (e.g. Paypal, Square, QuickBooks Payments, other credit card processor)
If applicable:
1. IRS S-Election effective date
2. California EDD (Employment Development Department) Employer Tax ID Number
3. California Secretary of State ID
4. CDTFA (California Department of Tax and Fee Administration) Sales Tax Resale License / Account No.
5. DBA(s): Fictitious business name statement(s)
6. Business vehicle records

Files Updated as Needed

Insurance policies, such as:
1. General liability
2. Workers’ compensation
3. Fidelity or surety bonds/policies
Property and equipment lease/renewal documents
Vendor contracts/renewals for ongoing services (e.g. phone, internet, janitorial, bookkeeping)

Yearly Files

Income tax records (current year + 7-10 past years)
1. Customer invoices
2. Vendor bills
3. Bank statements
4. Financial reports
5. Income tax returns
6. Vehicle records (for any vehicles used for business)
7. Bottom line: Keep the documents that will back you up in case of a tax audit.
Payroll records (current year + minimum 4 past years)
1. Time sheets
2. Payroll reports
3. Check stubs
Work product documents (by customer or work order/job)
1. Signed estimates, proposals, or contracts
2. (Other documents are highly variable, depending on industry).
3. Bottom line, keep the documents that will back you up in case of a claim against the business by a customer or vendor. If there’s any suspected fraud, these documents could back you up in a tax audit as well.

Employee Records

Current + anyone employed in the past 4 years

Resume, employee application
Employment contract
Form W-4
Two forms of ID (usually) and Form I-9
Direct deposit authorization
Status change records (change in pay, work duties, schedule, etc.)
Time off requests
Performance evaluations

5. Do the work you set out to do

Unless you’re a bookkeeper, this area is probably jam-packed with a hundred other tasks you need to do to serve your customers. Keeping up with this ever-expanding list can be overwhelming and result in only taking care of the squeakiest of squeaky wheels. If (when) that happens, take a deep breath and return to your task-tracking system. Listing what you have to do will ensure your priorities remain clear.

Also, in product-based industries, when your customers ask about lead times you can be 100% honest with them and establish clear expectations. For example, if you observe over time that you can process a maximum of 5 orders a day and your order list is nearing 100, your customer deserves to know you’re deliveries are four to six weeks out.

When you first started your business, you might have given the most thought to this one area: Doing the work your customers and clients pay you to deliver. If this area is maxing-out your ability to keep up with the first four areas discussed above, by all means let us know how we can help free up your time.

Small Business Ideas

Why Your Receptionist Should Not Be Your Bookkeeper

One of the often cited – and often ignored – measures of internal control is separation of duties. This is especially true for smaller businesses who have fewer people involved in their operation. Over time it’s easy to let responsibilities flux and change, but it can result in huge losses. Let’s consider the following scenario:

An entrepreneur has a great idea for a new business. In the beginning the business owner does it all themselves, and it’s back-breaking work. They market the business, track the sales, fulfill orders for products and services, invoice the customers, collect payments, handle the banking, and pay all the bills. They’re super human!

At some point, the business owner realizes they can’t keep up with everything. Their phone notifications are constantly buzzing, their email inbox is perpetually stuffed, and things start to fall through the cracks. They decide to hire help to respond to customer inquiries. The new customer service rep helps so much the business owner hands off the task of invoicing all the customers too, but they continue to do the rest of the bookkeeping themselves.

After awhile the business owner decides the data entry isn’t worth their time and energy to maintain, so they cross-train their trusty customer service representative to take over entering customer payments and putting together the bank deposits. “Just make sure you invoice all the completed sales orders at the end of the day and everything will run like clock work!” It’s what the business owner has done hundreds of times before and they trust their highly competent assistant will probably do it even better than they did.

Relieved to finally have more time to devote to sales, the business owner charges ahead with all the leads they didn’t have time to pursue when they were bogged down with invoicing and banking. Revenue soars and everyone is happy.

Since handing off the invoicing task worked out so well, the owner decides to finally let go of trying to keep track of all the bills that have to be paid. The paperwork is pouring in now that sales have increased and trying to keep up is draining all the owner’s time and energy.

The seasoned customer service rep gets a promotion to “office manager” and trains on entering bills. The promotion comes with a generous raise and all kinds of praise and thanks for being willing to step up to the challenge and be a team player.

Time passes and both business owner and office manager settle into their routines. The business owner starts taking business trips out of town which often double as weekends away with their significant other. The office manager starts to feel chained to their desk and underappreciated.

Then the office manager makes a mistake.

The business owner overreacts and doesn’t apologize for the outburst. They disregard any claims that the workload is too much and they refuse to make any changes that might make the system more efficient. “I did it just fine for all that time before I handed it off to you. You just have to be more careful!” the business owner asserts. The owner continues on with their same routine without regard to why the mistake might have happened. And the office manager doesn’t forget.

Then the office manager makes a mistake… and the business owner doesn’t notice. Instead of bringing it to the owner’s attention they just make an adjustment to the account. It avoids the confrontation, the outburst, and the humiliation. “What they don’t know won’t kill them,” the manager justifies.

Over time it becomes obvious that the business owner really isn’t paying attention to the financial details. The manager decides to test the theory. A new customer places and order and pays with cash while the owner is out of the office. Instead of advising the customer that cash isn’t accepted, the manager takes the cash, logs the payment in the system, and gives the customer a receipt.

Before the owner returns, the manager deletes the payment from the system. Then they delete the invoice. Finally, they shred the sales order. As far as anyone can tell, the order never existed. The manager pockets the cash, sure that the business owner will never find out. They justify the decision based on the way their treated, the feeling that they’re underappreciated, and the thought that the raise they got was pathetic compared to how much more work they do.

On it goes until the office manager becomes over-confident or slips-up in their new scheme and the owner discovers the manager’s secret cash-skimming habit. The business owner fires the office manager immediately with no way to prove how much money was actually stolen.

The 2018 Association of Certified Fraud Examiners (ACFE) Report To The Nations claimed that internal control weaknesses were responsible for nearly half of all reported occupational frauds. Also, 42% of the cases reported throughout the world occurred in private companies and small businesses with less than 100 employees. The median loss reported in small businesses was $200,000.

Source: https://s3-us-west-2.amazonaws.com/acfepublic/2018-report-to-the-nations.pdf

The scenario above painted a picture of just one way the lack of separation of duties can result in fraud. If you’re looking to hire someone, by all means hire someone to fill the need; however, you’ll be much better off hiring a second person (or bookkeeping firm!) to cover your accounting tasks when you’re ready. Don’t put it all on just one person.

Pages 76-77 of the report mentioned above includes a fraud prevention checklist which I highly recommend using for your own business self-assessment.

Also, consider implementing one of the 18 fraud controls studied by the ACFE. In every case, the presence of one of these controls reduced the company’s potential losses:

Code of conduct
Proactive data monitoring/analysis
Surprise audits
External audit of internal controls over financial reporting
Management review
Hotline
Anti-fraud policy
Internal audit department
Management certification of financial statements
Fraud training for employees
Formal fraud risk assessments
Employee support programs
Fraud training for managers/executives
Dedicated fraud department, function, or team
External audit of financial statements
Job rotation/mandatory vacation
Independent audit committee
Rewards for whistleblowers

Thank you for reading! Please visit the Home page to let us know if you would like to meet for a free estimate to take care of your bookkeeping and accounting needs.

Small Business Ideas

Maximize Your Take-Home Cash instead of Minimizing Your Taxes

It’s October 21st and many of you just completed your 2018 taxes. There might be a few who managed to get their documents to their tax preparer in plenty of time to file by the April 15th deadline, but for the most part, if you just filed, it was because you needed the time to sort out your records. Frustration and stress followed by likely disappointment because of how much you had to pay in taxes and how much you had to pay your tax preparer to tell you how much you owed. And here comes the end of 2019, just around the corner, raising a curious eyebrow at you to see if this year will be any different. It’s a vicious, debilitating cycle and it often steals the joy out of what business owners manage to accomplish from year to year.

If you’re just starting your business, please do yourself the biggest favor of your professional life right now. Call the bank that has your personal checking account, open a savings account, and transfer 15% of your checking balance to the savings account. From now on, do not spend a penny of the money you pull out of your business until you’ve transferred 15% of it in the savings account. Because here’s the deal: If you’re a sole proprietor, then 15% of every dollar you take home, every dollar you spend on personal expenses, will have to be paid back in federal self-employment taxes.

If this comes as a shock to you, please consider the fact that you no longer have an employer who is withholding taxes from your check. As a self-employed individual, you will have to withhold and pay your own taxes (social security and medicare). This simple fact, I am convinced, is the bane of the sole proprietor’s existence, and it can be defeated with some basic cash flow planning. That savings account you just opened is your new best friend. It’s going to ensure that you have enough money to pay your tax estimates throughout the year. It’s also a friend you’ll never see or talk to except four times a year when it’s time to pay taxes. Don’t check the balance. Don’t wonder how much is in there. Don’t tempt yourself to use it for an emergency and pay it back. If you need to nickname the account “The Government’s Money” or “Don’t Even Think About It,” to help yourself out, you should go ahead and do that.

I actually ended up separating my funds entirely. My tax savings account is at a different bank entirely from my personal checking account which is a different bank from my business checking. I linked the tax savings account to my business account so I can transfer funds, but there’s no fast way for me to move funds from my tax savings to my personal checking. In fact, I never do. Once it’s in my tax savings account earning interest, I don’t touch the funds until it’s time to pay my estimates. Then I transfer the balance directly from the savings account to the IRS. It never hits my personal checking account. It’s like the funds don’t even exist except for the bit of interest it accumulates, thanks to Alliant Credit Union‘s 1.884% interest rates on their savings accounts. Other than the few dollars a month it earns, the funds just sit around looking pretty for no one to see for most of the year. It’s the practice that’s kept me and my firm stress-free when it comes to tax planning.

Many owners I work with will kick the tax plan down the road as far as possible and hope to God that their tax preparer will be able to work some magic when it comes time to file. I have to tell you though – that magic usually comes in the form of your purchasing an expensive, depreciable asset. If you go out and buy a $75 thousand truck, your tax preparer will be able to write off a majority of that truck under section 179 and wallah! No taxable net income. But now you have five years of paying $1400 a month on a truck payment and an insane gas expense and insurance bill to go with it and guess what? You’ve already written off all five years of those truck payments to avoid paying taxes. Next year, your tax preparer will likely tell you to buy some new equipment so they can write it off and save you on taxes again. Genius, right!? But now you have another monthly payment and your cash flow takes another giant hit.

It absolutely kills me that tax preparers advise their clients to buy assets they can’t afford in order to avoid taxes. It makes the tax preparer a hero in the moment, but it often signs the death warrant of the client’s business. You cannot sustain a healthy cash flow with that kind of planning. It should be illegal, punishable by fines and prison time for a tax preparer to tell you to take out a loan for a vehicle or equipment or a building so you can avoid income taxes. It’s asinine and irresponsible and short-sighted. By minimizing your tax bill, they have insured that your take-home cash is virtually non-existent.

Instead, your tax preparer should estimate the total taxes you will owe each year, divide that by the amount of revenue you expect to earn and give you a percentage of your revenue to set aside. Mike Michalowicz’s Profit First is the absolute king for describing this method in detail. This calculation should be completed quarterly to ensure that you aren’t setting aside too much or too little. You want to maximize your take-home cash, not minimize your tax bill.

Taxes are inevitable. What I witness in the form of avoidance and frustration and aggravation every year far surpasses the alternate reality business owners could live in if they could just take a deep breath and talk to someone about how to maximize their take-home cash rather than worrying about how to minimize their tax bill.

Small Business Ideas

How to Adopt a Business Document Formatting Uniform and Why it Matters

If you don’t already wear a uniform to work or to school, can you imagine for a moment what it might be like to remove that level of decision-making from your life? You could wake up in the morning and never have a thought about what you’re going to wear. Your clothes would already be chosen. You could reserve a few more brain cells to find the coffee pot and meditate on how great your day is going to be rather than staring at your clothes, willing them to come together.

This is what it’s like to define a uniform format for all your business documents. Every time you create a new internal or external document, rather than wasting time staring at all the formatting options, you and everyone else in your organization can bust out a pre-defined format and move on to the real work of writing the actual content for that document.

Not only does this reduce the barriers to getting the document produced, it also reduces the brain power needed to find and recognize the document in the future. The ability to identify documents created by your business should be instantaneous. Anyone inside or outside your company should be able to recognize it. This is done simply by defining and enforcing a standard:

Margins. Keep it simple. A one-inch, all-around margin is any easy standard for document formatting and it’s easy to remember. If the majority of your internal documents are lengthy and you want to save on paper in the long-run because you must maintain paper copies, then feel free to adopt a half-inch standard margin.
Logo. Including your logo on all your documents is a sure way to easily identify everything created by your business; however, I don’t recommend including a photo-realistic logo on every document. The possibility of your logo devolving into a pixelated, unrecognizable mess is very real, and the perceived professionalism of your business will suffer both internally and externally. Guard your logo with your life. Never allow it to appear smaller than three-quarters of an inch (3/4”) high or less than 150 DPI (dots per square inch) when printed. I recommend using a single-color, un-shaded version if you have it. If it doesn’t look clean when it’s printed or exported, then you must use a higher quality image or simply leave the logo off the document.
Company name. Unless your company name is included and easily read in your logo, then you should include your full, legal name or DBA on all your documents. This should be the name your customers or clients will make their checks payable to, the name your vendors will bill, etc.
Page numbers. It really doesn’t matter where this goes on the page as long as you’re consistent. Any document longer than one page should have page numbers. Ideally, it should also include how many pages are in the whole document (e.g. “Page # of ##” or simply “# of ##”). Dropped documents and orphaned pages happen. Do everyone a favor and number them.
Contact information. This seems obvious, but any relevant contact information for the decision maker on the other side of the document is crucial to smoothing out communication wrinkles. The added step of looking up an address or an email or a phone number to resolve whatever decision needs to be made regarding that document should be eliminated from all your business processes.
The freaking date! This might be my biggest pet peeve about business documents in general. It is staggering how many documents I review that simply leave off the date; as if these documents could be used as a reference to apply to all of human history. The date is crucial in accounting and often makes or breaks a legal argument. When was the document created? When was it signed? What time period does it apply to? All good questions. Please answer them when you create your documents.
Font. If you use proprietary software that has default format settings that can’t be altered (such as font type and size), then model your standard font off what you can’t change. For example, QuickBooks Desktop uses Arial for all its reports. Rather than choosing a different font for your internal documents and forever fighting with QuickBooks to change its ways, join the blase majority and adopt the Arial uniform.

Obviously, you can create templates that have these standards defined and you should; however, if your company or organization has existed for more than a day, it has probably already generated documents that don’t wear your shiny, new, well-defined formatting uniform. This is why I recommend that you distribute a one-page reference sheet to everyone in your organization with the defined standard.

In order to implement the update within your organization, you should campaign on two fronts. First, if your organization is small (less than ten people), teach everyone how to change the margins in the software they use, how to update a header and footer, how to insert page numbers, how to change the fonts, etc. Google training videos to make the training easier, and make sure everyone is clear on what the standards are and how to update old documents to match. Set a date and from that day on, not a single document should be printed, exported, emailed, saved, or in any other way generated that does not follow the standard.

Second, I recommend that you gather, review, and revise all the key documents in your organization before the roll-out date (e.g. invoices, sales orders, business cards, letterhead, envelopes, requests for time off). This will reduce the mass chaos in implementation. (Okay, it’s really not that dramatic, although you may find some nay-sayers pitching a fit over the change. It’s hard for some people. You’ll have to plan on being patient, but also firm.)

If you’re concerned about getting your team on board, then make it clear how critical your brand is in today’s business environment. It takes a decision maker a fraction of an instant to decide whether your organization is legitimate and trustworthy. Do you really want to continue to allow that decision to made against you and for your larger competitors (who are already do everything I’m talking about, by the way) all because your fonts and margins are jacked?

In the scheme of all the things that could possibly harm your business this is probably the easiest to fix. Not only that, but it will have a positive, long-term impact on both your company culture and on the external perception of what you’re trying to accomplish.

That’s it! If you need help, it’s literally what I do for a living. Let me know when you’re available and I’ll get in contact with you.

Bookkeeping

How to Organize Your Statements

If you already have a system to keep all your bank and loan and credit card statements organized, I have to applaud you. If you’re like most, non-accountant small business owners though, your statements are probably dispersed between your desk, the glove box in your car, your kitchen table, and that file folder you created when you first started.

Believe it or not, the fact that your financial information isn’t organized is adding to your stress. It may be a low-grade worry that cringes every time you think about trying to get things together for your tax person at the end of the year. Or it may be something that keeps you up at night because you really don’t have a solid grasp on what’s going on with your finances.

As a consultant, here is the process I go through when I get a small business organized.

Order Supplies. Unless you have a paperless office, I suggest that you start with a two-inch (2″), three-ring binder and a set of monthly tabs (Jan-Dec). (You can always get a wider binder if you need more room.)

Create a Checklist. Next, you’ll want to setup a worksheet with your accounts listed down the left and the months listed across the top. This typically looks best in a landscape orientation. You’re welcome to download and customize the basic Excel spreadsheet I designed for this.

Reconcile Your Accounts. If you don’t know how to reconcile your accounts or you don’t think it’s necessary, please visit my walk-through post. Once you’re done reconciling the account, staple the reconciliation report(s) to the front of the statement, and file them in the appropriate month, based on the statement ending date. For example, your bank statement that ends June 30, 2018 and your credit card statement that ends June 18, 2018 will both be filed under the June tab in your binder. (Yes, you also need to reconcile your credit cards.)

Run Your Financial Reports. Once all your accounts are reconciled for the month, go ahead and run the basic financial statements:

Profit & Loss Report (also known as an Income Statement)
Balance Sheet
Statement of Cash Flows

File these statements in front of all your account statements and their reconciliation reports.

Review Your Financial Reports. Take a look at your financial statements and choose at least a few numbers to keep a close watch on. These are called Key Performance Indicators (KPIs) and they can form the basis for business goals. For example, if you’re in a manufacturing industry, depending on your field, you might want your gross profit (total income minus cost of goods sold) to be about 40-60% of your total income:

Income: $10,000 (100% of Income)

Cost of Goods Sold: $4,000 (40% of Income)

Gross Profit: $6,000 (60% of Income)

You also might want to keep an eye on discretionary expense accounts like “office supplies” and “meals”.

Relax.Once you get used to the process, this might only take you an hour a month to complete. The payoffs are well-worth the time investment. First of all, you’ll have a much better idea about how you’re doing, financially. Next, you’ll be ready to do your taxes… early! Also, you will have all your account statements in one place if anyone ever needs to see them (banks, loan officers, auditors, etc.). And finally, you’ll eliminate the stress associated with being financially disorganized.

That’s it! If you need help, it’s literally what I do for a living. Drop me a line and I’ll get in contact with you as soon as possible.

Bookkeeping

How to Reconcile Your Accounts and Why

With online access to bank and credit card accounts, I am seeing a massive departure from the standard business practice of reconciling accounts on a monthly basis. It’s an easy trap to fall into and the fees (bank fees) can be extraordinary.

If you have business checks or if you have costs that automatically come out of the account you use for business, you need to setup a bookkeeping system. No matter how good you think your memory is, the fact is that at some point you’re going to forget about the check you wrote for supplies or (yikes!) rent or the EFT you setup to pay your insurance it’s going to clear the bank on the worst possible day.

Like the day you land an awesome contract and purchase a bunch of supplies to get it done (because your online bank balance says there’s enough in there) and there’s a whopping $1,000 left in the account. All it takes is a few lagging transactions to eat up that buffer and land you in the hole. I’ve seen this happen hundreds of times, and it always results in overdraft fees and non-sufficient funds (NSF) fees.

The bank might work with the business owner once or twice if this happens infrequently, but at a certain point the bank stops refunding the fees and the owner has to eat the costs for the bank to cover the account.

Talk about taking all the fun out of “making a living”.

The solution to this maddening cycle is to keep a check register. If you want to go old-school, then pull this sucker out of your box of checks:

It’s fairly self-explanatory. Enter the date, the check number (of EFT for Electronic Funds Transfer), the payee (the name of the person you paid or paid you), the amount of the payment or deposit, and the ending bank balance. If you’re somewhat computer savvy and want to kick it up a notch, use Excel or Numbers, or Google Sheets to keep track of your transactions. You’re welcome to download and customize the basic Excel spreadsheet I designed for this.

If you find you can’t keep up with the number of transactions going in and out of your account(s) and you keep missing things, I would recommend setting up a bookkeeping system in QuickBooks or Quicken that can automatically link to your online bank account to be sure you’ve entered everything.

Regardless of what system you use to keep track of your transactions, you will want to compare what you’ve recorded with what appears on your bank statement at least once a month. The easiest way I’ve found to do this is to layout the record of what I’ve recorded (the check register) side-by-side with the monthly bank statement.

Start with the oldest transaction you recorded and see if it appears on the bank statement. If it does, then highlight it on the bank statement and in the check register. If it doesn’t appear on the bank statement, then circle it in the check register. Likewise, if it doesn’t appear in the check register, then circle it on the bank statement. When you’re done with this step, you’ll have something that looks like this:

Next, you’ll want to add any transactions that cleared the bank that aren’t in your register. In other words, you’ll want to enter the transactions that are circled on the bank statement in your check register.

Then you can highlight it in the register:

Enter Missing Transaction from Bank Statement in the Register and Highlight

and on the bank statement:

2018-07-29 Bank Reconciliation e.g. 2 zoom 2 — Highlight the Missing Transaction that’s Now Entered in the Register

To check your work, take the bank statement ending balance, subtract any circled payments in your register, and add any circled deposits. These are known as “outstanding” or “uncleared” checks and deposits:

2018-07-29 Bank Reconciliation e.g. 2 zoom 3 — Circled and Not Highlighted Means it’s an Uncleared Transaction

Reconciliation Report

Bank statement ending balance: $8,340.00

Uncleared checks: $800.00

Uncleared Deposits: $0.00

If the register balance you calculate matches your actual register balance (see highlighted below), then you’re done! You’ve reconciled your account “to the penny” as bookkeepers and accountants are fond of saying.

2018-07-29 Bank Reconciliation e.g. 2 zoom 4 — Resulting Check Register Showing the Balance that Matches the Calculated Balance

If it doesn’t match, you will need to go back through your transactions to be sure everything actually matched-up. Here are a couple tips about resolving bank reconciliation differences:

If you’re lucky, you might be off by just one transaction (e.g. you’re off by $35.49, which happens to be the same amount as the gas you bought on the 18th).
If you’re off by a number that’s divisible by 9, then one of the numbers in your register might be mistakenly transposed (e.g. 89 instead of 98 or 54 instead of 45).

That’s it! If you need help, it’s literally what I do for a living. Drop me a line and I’ll get in contact with you as soon as possible.

Training

Now You’re a Teacher

If you’re spending more time than you have to spare on training new employees, you might consider setting up a standard operating procedure for the tasks that employee needs to perform. I’ve seen the learning curve shrink in half by implementing this solution that many small business owners think is just for big, corporate companies.

When I first started training employees one of my biggest pet peeves was that they didn’t take notes. Here I was taking time out of my crazy schedule to show them the ropes and they would sit there with a glazed-over, deer-in-the-headlights look and nod their head after I walked them through each skill. “They’re never going to remember this,” I would think.

At the time, I told myself that it was their responsibility to take control and take the initiative and do their best to learn their new job. Then I had to realize that not everyone likes school. And that’s what learning a new job is. It’s going back to school. And what does everyone get when they go back to school? They get a syllabus and course materials and resources and an instructor with office hours.

Thus began the migration of my love for learning to my love for teaching. My first iteration was a simple outline of the tasks. As I trained more, I added steps to the outline. Then I added more detailed steps. Then I included screenshots. After four years of training being a large part of my full-time job, I had published step-by-step instructions for well-over 200 procedures.

Every time I trained a new employee, I would walk through the steps and revise them as needed to be more helpful, more descriptive, more explanatory. The trick was to format them in such a way that veteran users could breeze through them more quickly. There were tasks that came up only once a month or once a quarter or even once a year. By describing the process briefly (e.g. Step 1: Run this Report) and in detail (e.g. Go to Menu > Reports > Quarterly Report > Dates: Last Quarter, Accounts: Expense Account) I was able to meet the needs of long-time users, first-time users, and everyone in between.

After my transition to small business consulting, this process became invaluable. I started writing standard operating procedures for every system I put in place. These step-by-step instructions are usually kept in a binder with tabs for the task frequency (i.e. daily, monthly, quarterly, yearly, as needed). I’ve also published them in folders on servers, where everyone can access them. For those with Microsoft Exchange Servers, I’ve published them in shared folders in Outlook.

The key is to make the policies highly accessible and to preach their daily use. After all, there’s no point in spending the time to write them if no one is going to use them. If anyone asks you how to complete a task and you know there’s a written procedure for it, ask them to use the instructions. If they still have questions, walk through the instructions with them and revise as needed. As we all know, it’s easy for a teacher to gloss over finer points and to assume everyone knows what they’re talking about.

Try not to get frustrated with the learning process. I realize you didn’t sign up to be a teacher when you decided to start a business, but it will become part of your job description as soon as you hire your first employee. You must teach and teach well if you truly want your employees to partner with you.

That’s it! If you need help, it’s literally what I do for a living. Drop me a line and I’ll get in contact with you as soon as possible.