What is bookkeeping? Why do you need it as a small business owner? How do you get started?
In this episode, Steve and Tyler dive into these questions and give you practical tips, whether you're just starting out, you are doing the books yourself, or you're ready to hire a bookkeeper.
[00:00:00] Steve: So I have a question for you, Tyler. What percentage of statistics do you think are made up on the spot?
[00:00:09] Tyler: First of all, how could we know?
[00:00:11] Steve: Well,
[00:00:12] Tyler: that's
Second of all, I had a teacher in high school who always used to say, liars figure and figures lie, so I'm just gonna go with 80%. 80% of statistics are just made up. Why
[00:00:22] Steve: Okay. I'm about to tell you a stat that is very close to 80% that, that I looked and looked and looked and could not find the source for this, but lots of people quoted it, as being from Jesse Hagen of US Bank. But anyway, the stat is that 82% of businesses that failed cited cash flow problems as a contributing factor to their failure.
[00:00:46] Tyler: Makes sense.
[00:00:48] Steve: You know, if the cash is not coming in and going out in proper sequence , in proper volume you're gonna have a hard time running a business. So that makes sense to me. And that our topic today is going to go into a little bit of how you avoid those kinds of problems with your business.
[00:01:06] Tyler: Yeah, don't let this be you.
[00:01:09] Steve: 82%.
Hello there. Dear listener, I am Steve.
[00:01:19] Tyler: And I'm Tyler, and this is, it's not about the money where we discuss a wide range of topics related to creating and running small businesses.
[00:01:27] Steve: The two of us are small business owners ourselves, just trying to make sense of the world. One podcast at a time.
[00:01:35] Tyler: Today we are talking about bookkeeping. We're gonna talk about what it is, what it is, not. Why you should do it for your business and how to get started. And fortunately, Steve is an expert on this topic, so I'm gonna be asking him a bunch of questions.
[00:01:53] Steve: Let's do it
[00:01:53] Tyler: you're ready, Steve,
[00:01:55] Steve: I hope so too.
[00:01:56] Tyler: Because in real life I ask you these questions all the time. So now we're just making it public. We're recording it so we can have it for, for me and posterity and anyone else who, who might be interested in this topic. So Steve, let's just start at the beginning. What is bookkeeping?
[00:02:11] Steve: At a very high level, this is learning where the money in the business comes from and where it goes. So practically speaking, that means keeping track of your income and your expenses in the business. That's basically it. There's some other aspects of it that are like taking those numbers and doing things with them, getting reports and
that kind of stuff, but that's, that's basically what it is.
[00:02:34] Tyler: So keeping track of income and expenses, great. How is it different from, or the same as what we just call it, accounting and a business?
[00:02:45] Steve: Accounting can also encompass a lot of other things which might be budgets or forecasting or auditing. And so bookkeeping is. I suppose a piece of that constellation,
[00:03:00] Tyler: Okay.
[00:03:01] Steve: encompass all of it.
[00:03:03] Tyler: Well this leads into my next question then. What is bookkeeping not.
[00:03:09] Steve: It's not those things that I mentioned. Budgets, it's, you could sort of say it's budgets. That's kin-- it's very related to budgets, but it's not forecasting necessarily. As far as looking into the future, what do we think the revenue's gonna be like a year from now, five years from now? That's sort of strategic planning. And it's not auditing as far as like trying to uncover fraud or make sure that you, your company is following all of its internal controls, those kinds of things.
[00:03:38] Tyler: So would you say bookkeeping is comparable at the personal finance level to like balancing your checkbook?
[00:03:45] Steve: Yes. That is a good comparison.
[00:03:48] Tyler: I'm just keeping track of the balance of my account. Essentially when money leaves and when money comes in and what it was for.
[00:03:56] Steve: Mm-hmm. Yeah. And especially on the, what is it for point, you can break it down into what kinds of income was this? Like what sorts of client work am I doing that generates income? Because you might want to be able to break that into buckets and see which ones are more profitable than others. Yeah. And as well, the, on the expense side, being able to track this much of it went to software, this much went to contractor wages, this much, went to supplies, those kind of things.
[00:04:26] Tyler: Okay, well that sounds like it could come in handy later when you're filing taxes.
[00:04:31] Steve: Definitely. And that's one of the main reasons you need bookkeeping for your business is, is for taxes. Because on your schedule C or on the Form 1120, if you have a an S Corp or a C Corp, you have to break out your expenses into a bunch of different categories. So if you've already got that figured out throughout the year from your bookkeeping, you're in really good shape when tax time rolls around.
[00:05:00] Tyler: Yeah. And. If you don't mind me mentioning this, you actually sat down with me last week and I showed you my books for my small business and asked you some questions about how I could better organize it for those purposes. So appreciate that. That was, that was super helpful.
[00:05:16] Steve: You're welcome. And I wanted to ask you what you got out of that. Because me as a tax pro, I was looking at the numbers and saying, well, you should put this in this bucket because it will line up really well with that line on the Schedule C. And so that would make my life easier if I were your tax pro. Uh, But did you get more value out of it than just that?
[00:05:31] Tyler: that's exactly what, no, I mean, honestly, that's one of the biggest reasons I wanted you to look at it, is because I want to be able to just export a list of my transactions at the end of the year and hand it off to my accountant and have it be easy for him. Yeah. I guess I wanted, so that was actually a big reason. And actually I learned through the course of our conversation that I was doing, I was trying to do more than bookkeeping because I had some categories in there that were not relevant to taxes but that I still personally wanted to track so that I could make some better decisions about how I run the business. So that was also enlightening to me.
[00:06:07] Steve: Okay, that's a good point. And that leads to the next, the other reason why you would want bookkeeping for your business is being able to make those sorts of tactical or strategic decisions about the business, even if it's not gonna have an impact on your taxes at all. But being able to know how your business is running through the numbers can really be impacted on how you categorize things and how you run your reports during the
[00:06:32] Tyler: I, and I think one of the things I'm, I'm interested in, hopefully for obvious reasons, is at what point will I be able to. Take money out of the business. You know, like, like write myself a check basically. It's still early on, so I'm still paying for like startup costs in certain areas and things. So I think, I think I could see how bookkeeping could really help me answer that question. You know, when, when, when do I have enough money to start doing that?
[00:06:58] Steve: Mm-hmm.
[00:06:58] Tyler: Potentially.
[00:07:00] Steve: One of the, there, there's kind of two big reports that you can get out of I don't know, QuickBooks or YNAB, whatever software you're using, and that's the profit and loss and the balance sheet. And the profit and loss is really where, where you'll see my income is exceeding my expenses. By x percent, whatever your targets are, and you can kind of start to see at that point, I'm trending in the right direction, or I can start paying myself a salary now. That kind of thing.
[00:07:31] Tyler: So this is just kind of funny. I noticed driving around town, sometimes I'll see those little signs that someone has staked in the grass on like the corner of a city street. It's like, "Bookkeeping! X number of dollars per month." Like, "Call this number!" I, I see it advertised uh, relatively a lot compared to other things just at that local level.
I'm curious, like, is, are there a lot of people who don't keep the books or, or uh, could benefit for getting from getting a bookkeeper for their small business or, I, I'm just curious about that. Because you see those signs kind of alongside the signs that are like, I'll teach you how to day trade, and so I'm just curious like, what's, what's the mark of Yeah, yeah, exactly.
[00:08:12] Steve: for cash.
[00:08:13] Tyler: Yes, exactly.
[00:08:15] Steve: Yes. I think you'd be surprised at how many small business owners don't even have any idea what bookkeeping is, or, or they don't have proper processes in place for, for managing that. For themselves.
[00:08:32] Tyler: Okay. Well, let's talk about that then. Let's say you're a small business owner. How would you recommend getting started keeping the books, whether you're brand new in your business or you've been doing it for a while, but you haven't been doing bookkeeping and you want to get started cleaning that up.
[00:08:48] Steve: I'm glad you asked. There's a lot of levels here and we could start all the way down at like, if you can't afford to pay someone to keep your books for you, that's totally fine. And you can do a lot of this yourself, most of this, frankly, if you're willing to put in the time to learn, you can, you can figure this out. All the way up to , the volume is high enough or it's complicated enough that you want to hire someone and you're profitable enough that you can support that in the cashflow of your business, then uh, by all means that's a good investment as well.
[00:09:21] Tyler: Okay.
[00:09:22] Steve: I will recommend an episode of another podcast here, which is called "What to Do When You Can't Afford a Bookkeeper." And the podcast is "By the Books." uh, It's by a, a bookkeeper named Lindsay Kline. And that's a really good episode. I'll put a link to that in the show notes. It'll go over some of the things we're talking about today, and she has a lot more detail.
She's full-time dedicated as a bookkeeper, so she has a lot more expertise in this area than I do. So I, I highly recommend her podcast.
[00:09:52] Tyler: Great.
[00:09:53] Steve: As far as, if you don't currently have anything in place, should we talk about where, like where do you start
and what are the what are the next steps? If you've already got some of these, you can kind of see where the next logical progression would be.
Does that sound good?
[00:10:09] Tyler: Yeah, let's do it.
[00:10:11] Steve: Okay. One that I always start with is have a separate account for your business. And it doesn't have to be like a business checking account per se. It can still be a personal account, but have a separate one. And the, the reason for that is it makes it really easy to plug in some software later because you can say, just look at this account. Everything for the business is in that place. And it could just pull in everything and you don't have to sort through it and say, well, this one was personal and this was business.
And then the other thing is it makes things very straightforward for the Tax Pro, or if you ever get audited by the IRS, it's a lot easier to say the, the business is all in this account.
[00:10:59] Tyler: Okay, so step one, basically the most basic thing you can do is create a separate bank account for all of your business's income and expenses.
[00:11:07] Steve: Mm-hmm.
[00:11:09] Tyler: Okay, so, so once you've done that what would be like maybe the next level of complexity?
[00:11:15] Steve: Yeah, from there I would say at least make sure that you're checking those accounts regularly. Maybe once a month, maybe every week, depending on what frequency you're comfortable with and what, how, how many transactions you have coming through.
So at least be checking them, but maybe you decide to take those statements and put them into Excel. Most banks have a way of exporting the transactions in like a CSV file or an Excel file. You can pull those down and keep track of them all in one place.
If you are already using a system like Mint or TrueBill, which I think is called Rocket Money now, or one of those that does tracking, expense tracking, you can plug your account into that and that will give you some categorization functions built in. It'll maintain the history for you and all that.
And if you use a budgeting software like YNAB or Everydollar, or there's probably more that you can name. You could also plug your accounts into those, and that'll give you not just the expense tracking of the categorization, but also budgeting, which is very useful for a small business owner as well.
[00:12:33] Tyler: So those are more actively involved, those compared to like so, so basically you're listing these off in order of how much uh, work you wanna do, kind of, right? So you have a bank account, step one. You could conceivably export the transactions periodically, like once a month or once, once a year if you really wanted to. And that's like very minimal effort. Right?
Then you talked about apps like Mint or TrueBill, which kind of automate the categorization of the spending. They can connect to your bank account, look at the transactions and say, oh, this was for travel, this was for meals, whatever. But it's pretty passive.
And then you mentioned apps like YNAB or Everydollar, which can also connect up to your bank account and import transactions, but they're gonna require you to actually have a more hands-on approach in not just categorizing those transactions, but approving them and making sure they're part of your budget.
[00:13:31] Steve: Yeah, that's right. So that's kind of a good um, explanation of the stepping stones there, depending on how involved you want or need to be.
If you wanted to go one step further than that, you could use something like QuickBooks or FreshBooks or Bench, which is like dedicated accounting or bookkeeping software. And you can get the, the full blown package there. But that, depending on how big your business is, those might be overkill, especially at the beginning. So I don't necessarily recommend jumping into those.
QuickBooks especially can be. Well, so here's, here's something funny. I was at a, a networking lunch the other day and the guy across from me was explaining how QuickBooks is so complicated and nobody wants to use it. And then somebody new came and sat down next to us and we were asking each other, what's the one tool that you can't do without? And she said, "QuickBooks. I love it. It's so intuitive." And we were like, wow, you're, that's great. Great for you. That's not the experience of most people.
[00:14:34] Tyler: Interesting. Well. Sounds like you found your people there.
[00:14:39] Steve: Yeah.
[00:14:41] Tyler: That's awesome. Okay, so what would you say are some common mistakes that people could make in bookkeeping for their small business?
[00:14:51] Steve: Yeah. Number one I would say is not keeping your receipts. That's the primary thing you're gonna need if you ever get audited is your receipts. And they don't have to be the physical receipts. You can keep them digitally in a Dropbox folder, or if you're using QuickBooks, you can like email them in or scan them in and it will actually attach them to the transactions, which is nice.
But just some way of keeping your receipts so that if you ever need them in the future you've got 'em, even if it's a shoebox. But a lot of the receipts that are printed on thermal paper will degrade over time, so the, they'll eventually fade out. You won't be able to read it anymore. So I definitely recommend a digital version if you can.
[00:15:33] Tyler: Okay. Well, I am glad we are doing this episode because I do not know if I have been keeping all my receipts. A lot of 'em come through email, so I guess that's nice
[00:15:43] Steve: Yeah, if they're in your
[00:15:43] Tyler: find them if I really needed them, but, Okay. So for someone like me, would you suggest like creating like a little bit more organization around that?
Should I have a folder in my email for receipts or a tag or something? Or even save them down to a file, like a folder on my computer or, you know, cloud drive or something?
[00:16:03] Steve: Yeah, if they all come through email, then yeah, just having a tag in your email is great. If you've got some that are like scans of receipts, you could make a folder in your Dropbox or Google Drive or wherever you're keeping your business documents.
[00:16:18] Tyler: And this is in the event of an audit, you said,
[00:16:21] Steve: That's right.
[00:16:22] Tyler: okay.
[00:16:23] Steve: And your day-to-day business bookkeeping, like just the, the transaction that you get from the bank is probably all the detail you need, but it's really just in an audit where you need to be able to prove what it was that you bought and that it was a legitimate business expense that you would need the receipt.
[00:16:41] Tyler: if the IRS is listening to this, I'm sorry. And I'll do a better job going forward. Okay. Well thanks. I'm glad to, to learn that. So what, what other common mistakes do people make bookkeeping?
[00:16:54] Steve: If you provide a service that is taxable or if you sell goods that are subject to sales tax uh, you need to account for sales tax. Make sure you're, you're collecting it from your customers and then you remit it to the state or the municipality, whoever is collecting it in your area. You can run into a lot of trouble if you're not doing that properly. And I am not an expert in sales tax, so I always defer to bookkeepers that I work with when one of my clients has sales tax questions, cuz there's a lot of complexity there. But that's something to watch out for.
Uh, the other one the other one I would say is claiming personal expenses through the business when they were not actually really business expenses. Your business is not your personal slush fund. So
don't, don't treat it that way.
[00:17:46] Tyler: Darn it. Just kidding. I had no intention of using it that way. No, but yeah, no, that's interesting. There's like jokes about this, right? Shoot, what is that one? Oh yeah, if you ever I remember seeing the show, shits Creek it's a write off. They say that about everything when in reality it's not
If it, if it's for personal use. That is,
[00:18:07] Steve: Right. If it's legitimate business expenses, it's a write off. If it's personal, not related to the business, it's not.
Oh, one other thing I should mention if you if you use a payment processor for most of your income, like people are paying you through PayPal or Stripe or Venmo, or a platform that uses one of those things, like I use Ignition for a lot of my client billing and they use Stripe under the hood, but a, anyway, the, the payment processor will often have a reporting system that they give to you in a dashboard or in PDF reports or Excel reports, those kind of things.
You can often use those statements for tracking your income. If you get it all through one or a handful of payment processors like that. So if you're using one of the, one of the simpler functions that we use, like maybe you're just looking at your bank accounts periodically or you're just pulling down the CSVs and importing them to excel, then that works for the expense tracking and then you can rely on the payment processor's reports for your income tracking.
[00:19:17] Tyler: Yeah, that's actually what I'm doing for various reasons. One of which is that my payment processor takes out the transaction fee before they send me the money. So I am not really able to account for that in my current system, and so I just will use the report from my payment processor at the end of the year.
And accounting of my full income.
[00:19:40] Steve: That makes sense because that will show what the gross amount was and then what percentage they took as a fee.
[00:19:49] Tyler: That's right.
[00:19:50] Steve: Even though the amount that hit your bank account was the net after the fee, and so it's a little hard on the bank account side to see what the gross was.
[00:19:57] Tyler: Exactly. Yep.
[00:19:58] Steve: Yeah, that make sense.
[00:20:02] Tyler: Okay, so let's say you're keeping accurate books, you've got a system in place, you're professional, you're keeping all your receipts. What is some of the benefits that you should expect to see, or some of the information or results that you should have because you're doing all this?
[00:20:18] Steve: Well, the first thing is you'll always know how much cash you have on hand, and this will help you avoid the, that 82% of failed businesses that cited cash flow problems as a reason. If you've got a good handle on how much cash is actually in your accounts right now and how much is coming in and going out in a given time period, you've got a good feel for what your cash flow looks like and how well you'll be able to make payroll and buy your supplies and all that kind of thing.
[00:20:50] Tyler: and you know, I know this episode is geared towards bookkeeping for small businesses, but I cannot help it. As a budget coach, but draw uh, or notice similarities between this and personal finance and, and having a, a personal budget or, or ch you know, register of your accounts cuz you can answer the same kind of questions for your personal life, right?
Like how much money, knowing how much money you actually have on hand. Pretty useful knowing if you have enough money to spend on groceries and gas and fun stuff and everything. Like there's a lot of parallels. Obvi, it's basically Well, I guess it's not budgeting, cuz you said in the beginning, bookkeeping is not budgeting, but it's half of budgeting.
It's the half of budgeting where you're keeping track of your income and expenses. It's not the half of budgeting where you're using that I guess to allocate the cash that you have towards your goals and things. But anyway, just how to throw that in there.
[00:21:42] Steve: Right, and in, in the business context, budgeting often means like forward looking.
Like this is, this is the budget for the next year. And that's more in the forecasting lane, which is why I kind of broke it out. But I don't, I'm not married to that distinction.
[00:21:57] Tyler: I mean, it's, it kind of, it's all mixes together sometimes, you know? Yeah. But anyway, I, I, I love the similarities between this and, and personal finance.
[00:22:10] Steve: mm-hmm. And on the personal side a lot of times if you've, if, if you have like a credit card and you're paying it off every month, you can kind of fudge that. You can float on the credit card,
[00:22:22] Tyler: Oh yeah, people. People do that all the time.
[00:22:26] Steve: And it can get outta hand if you don't actually know how much cash you have on hand. Like, do I actually have enough that I could pay off the credit card right now if I needed to? Because if you don't, then chances are you're riding that float and it will eventually get away from you. So being able to nail it down and say that I do actually have the cash on hand, even though I'm choosing to use a credit card.
[00:22:49] Tyler: Yeah. You know what's wild? I have yet to work with a client who doesn't have that problem. Even individuals who are high income, even individuals who are not carrying what you'd traditionally consider credit card debt. Yeah. I haven't worked with anyone yet who, who wasn't writing the credit card float, as you put it. It's fascinating and I think that's just a, that's a result of the way the billing cycle works for credit cards. Like, you know, when you pay your credit card off, you're paying for stuff you bought a long time ago. Really?
[00:23:19] Steve: Yeah. Yeah, like at least a month, maybe two months ago.
[00:23:22] Tyler: Exactly, yeah. So, yeah, that's a really good point.
[00:23:26] Steve: Mm-hmm. Well, let's see. To get back to your question, what else? The result of having accurate books, you always know how much cash you have on hand. You can learn a lot from these numbers. As far as like how much do you earn from the particular types of customers you have. Maybe you, you sell three different sorts of services and you can break those down.
Be able to tell, I get. X percent of my income, or maybe even X percent of my profit. If you wanna break it down that far from this service and this other service is actually not very profitable but maybe that's okay because it's a loss leader for you or whatever it might be. So those are there's a lot of really interesting insights hiding in your numbers if you can get them in order. And then along with that, you know how much your overhead costs are and what your inputs costs. If you need material, if you're making a physical good and you have to buy the materials to make those, you know what those cost. If you're doing a service business, you typically won't have that, but you might have a lot of overhead costs and you can figure out how long does it take to amortize those so that you're profitable despite the overhead costs, those kind of things.
[00:24:42] Tyler: And not to mention, when tax time does come around, it'll be much easier for both you and your tax accountant.
[00:24:49] Steve: Definitely, and even throughout the year if you need to pay estimated taxes throughout the year you'll always know how much you need to pay because you know what your revenue and your profit was for each month of the year. So that makes those calculations really easy as well. And so not having tax surprises in April is like the name of the game for me.
[00:25:14] Tyler: Yeah, no, that's obviously,
[00:25:16] Steve: So this is a big piece of, of that for my clients.
[00:25:19] Tyler: yeah, that's obviously a huge benefit. Well, great. I think this has been a great overview of the basics of bookkeeping.
I'm really excited for our next episode cause we're gonna go a little bit deeper. And talk specifically about a couple of software options that small business owners could consider using to keep the books for their small business.
[00:25:39] Steve: Yeah, that'll be fun. Kind of dive into the tools a little more,
[00:25:43] Tyler: and the pros and cons, right? Like what, you know, this is, this is a, this is a big question I think for a lot of people. I know it was for me. So All right. Thanks Steve.
[00:25:51] Steve: You're welcome Tyler. Thanks for the good questions. And we will see you all again on the next episode of, It's Not About The Money.