Do you remember a time from your childhood when you really didn't want to do something? Did you ignore it hoping it would go away or did you angrily stomp your feet hoping whoever asked you to do it would simply give up. For far too many small business people, this is the same approach they use when it comes to their books. Throughout this post, I will briefly outline many of the common questions people have when it comes to keeping their books. The goal of this post is to hopefully provide a new perspective for you to consider.
For the record, I have included a picture of an ostrich. He is looking at you expectantly...hoping you don't bury your head in the sand and will take this post to heart.
I want to get this out of the way right from the start. I highly recommend using an accounting package for small business to attend to your books. I usually suggest QuickBooks. It is what I use for the majority of my clients and what I use to run my own business. There are also free and cheaper options such as Wave Accounting or old reliable Excel. However, feature for feature, QuickBooks is the best option in my opinion. If your business is small enough, collecting your receipts in a shoebox or envelop might seem like it will work just fine but ultimately, this introduces a whole host of issues I will save for another post. I will say this about manually collecting and keeping receipts for tax time, they are easy to lose and over time some even become impossible to read. I can't tell you how many receipts that have come into my possession covered in food grease or faded from being left on the dashboard of a car until the sun bleached the receipt making it unreadable and ultimately unusable.
Before we begin, I want to define two terms. Proprietorship and Corporation. I am boiling these terms down to the simplest definition and they are both more complex than the simple definitions I am providing, but it should be enough to follow along with this post. For the purpose of this post, a proprietorship is a non-incorporated business. It could be a small business with one owner or a partnership with multiple partners but it is not incorporated. Obviously, this leaves incorporated businesses. These are incorporated either federally or provincially. It is important to make this distinction because the rules are different for both types.
Where Do I Start?
This is probably the single greatest issue small business owners have with keeping their books. I know it’s a cliché, but the truth is, you start at the beginning. This beginning will be slightly different depending on if you have a proprietorship or an Incorporated business. The proprietorship will usually begin from the first day following the last year you filed taxes. A corporation is different. You need to start keeping records as soon as you incorporate. In fact, you will likely be able to claim some expenses from before you incorporate. It is a great idea to have a conversation with a Bookkeeper or Accountant as soon as you are able for direction on corporate expense tracking. The single best day to start with keeping track of your bookkeeping is the day you decide to start your business. The second-best day is today, right after you finish reading this post.
What Do I Track?
Obviously, you keep a record of all your sales. Most businesses have little trouble with this. The trick is to figure the expenses out. This will also differ slightly between a proprietorship and a corporation, but the concept is the same. If the expense is directly related to the day-to-day operations of your business, it’s likely a valid expense. This includes labor costs, raw materials, office supplies etcetera. Meals, gas purchases, car insurances are all gray areas. My philosophy is to have the clients post the obvious expenses and save the less obvious ones for a conversation with me. It avoids confusion and surprises around tax time. A great hockey man once said “Hockey is a simple game, you try to keep the puck out and you try and get the puck in.” The Bookkeeping equivalent of this is “Bookkeeping is a simple task; you add up the income of the business and you subtract the expenses of the business.” If you keep this simple statement in mind, your books will start to make more sense at its most fundamental level. I am going to make this offer to you reader, even if you aren't a client of mine, feel free to send me an email at Peter@PlanWithPathway.ca and let me know you read my article and have an expense question. Include a brief description of your business and a little about the expense and I will send you back an email with a simple yes or no answer as soon as I am able. Absolutely no cost or obligation. I might need a little clarification but for the most part I will have an answer for you without too much additional information.
What If I make A Mistake?
This must be said…and I can’t stress it enough…you ARE going to make a mistake. You will. Even if you took some Accounting courses in High School, College or University, it’s inevitable. OK…now that that’s out of the way, if you stick to posting your sales and expenses there is no mistake you can make that can’t be fixed. Accounting is a system of very rigid rules but within the confines of those rules there are methods to address any error that may crop up. A good Bookkeeper or Accountant will be able to utilize these rules to correct pretty much any mistake you could make. Fun fact, the system Bookkeepers and Accountants rely on is called "The Double Entry System" and there is strong evidence that it was practiced as early as the 13th century AD. In the 800 years of "The Double Entry System", plenty of mistakes have been made and corrected. I can confidently say you are very unlikely to make a mistake so monumental that there isn't a technique in the system to address it.
What If I Don’t Have The Time to do My Bookkeeping?
This is a valid concern but honestly, if this is the point you are at it's time to offload this to a Bookkeeper or Accountant. There are a number of excellent people in the SBCN community to help with this, and as the author of this article, I humbly include myself to this list. I will say one thing here. I almost always prefer my clients to, at a minimum, generate their own invoices. Cash into a business is one of the most important things to monitor and by generating your own invoices it gives you a much better feel for this, Of course, it is not always possible and, especially in cases where you are always late sending out invoices, it might make better financial sense to have a Bookkeeper or Accountant take care of that for you.
What if I don’t See The Point of Tracking This Information?
This is a common issue as well. I mean, it would be easier to simply keep everything in a shoebox and at the end of the year, add your income and subtract your expenses. Yep…it would…and for some businesses, it may seem like enough. However, you are cheating yourself and your business if you don’t use these numbers you already have to make your business run more efficiently and more profitably. If you only look at your numbers at tax time it will almost certainly be too late to gather any meaningful and actionable information from your income and expenses. Depending on your business, a meeting with a Bookkeeper or Accountant every quarter will lead to some useful information about your business. This is only possible if your books are current and accurate. To illustrate the importance of doing your books, I am going to tell you a little story. I had a client who was pretty busy. He sold a number of different things including a highly specialized product that only he sold. He sold a lot of this product, in fact it accounted for a major part of his sales. When it came time to do his taxes, he brought his shoebox of receipts in and after everything was tallied, he didn't end up having as much profit as he had hoped. I ended up asking him a few questions about the costs of his business and he couldn't answer them with any degree of certainty. He started tracking his sales and expenses more diligently and after the first quarter of the new year we made a startling discovery. It turned out his star product that accounted for a major chunk of his business was costing him nearly as much to manufacture as he was selling it for. We found a way to decrease his costs and we increased the price a little. He started making a profit on the product almost immediately, without driving any of his existing customers away. This was only possible because we started tracking and analyzing the information he already had. This example works for a provider of services as well. Most services have costs associated with them, it might be labor or printed manuals or even equipment rentals. The fact remains that knowing how much it costs to make your goods or provide your service is vital to a businesses continued growth and survival.
What If I Don’t Want To Know How My Business is Doing?
Hmmm…yeah…I get this. Most people worry about a lot of stuff and business owners have more to worry about than most people. This is a valid concern for many business people. I can’t promise you that knowing your numbers will guarantee your business will succeed but I can promise you that ignoring your numbers is a sure-fire way to run your business into the ground. Your business speaks to you almost constantly if you know how to listen and the language your business uses is numbers. Your business will tell you if it is happy or sick or even if you need to make an adjustment or two, but you must listen to it. The best way to hear your business is to put a priority on your books.
I have covered a lot in this post, more than I usually would, but I feel like these things need to be said. The point of this article was to give you a few points to consider and I hope I have done that. I can't stress enough at how important it is to know the financial health of your business. Unless you are a Bookkeeper or Accountant, you didn't start your business to add numbers but it is a fundamental function of operating a health and profitable business.
I appreciate the time it took for you to read my post. If you have any questions or would like to have a further discussion about your Bookkeeping and Accounting needs feel free to contact me at Peter@PlanWithPathway.ca