Small business bookkeeping done right will save your sanity. Trust me. It’s so much easier to get off on the right foot than to try to wade through months of receipts caught between your couch cushions. What you’ll need is a good old-fashioned spiral-bound notebook and a pen. That’s right; no software yet.
Then you need to be clear on what you’re providing, to whom, and how. The books only capture what you tell them. If you’re like most humans, you’ll manage what you measure.
First, you need to build a CHART of ACCOUNTS that will be the basis for capturing all the activity that happens in the business. These accounts act like catchers’ mitts or categories that will capture all the revenues, expenses, debt and equity activity in the business.
To create a list of these accounts, answer the questions below:
Step 1: Describe Your Business
- How do you plan on making money in two sentences?
- What will you be selling: products, services, or both? Describe your top three products or services in three sentences.
- How will you price your products or services (on a per unit basis) in no more than three sentences?
- What will your payment terms be? Cash on delivery? Thirty days to pay? Two sentences will do here.
- Who will be your customers and what benefit will they gain from your business? Two sentences.
- How do you plan to reach them to promote your products or services? Marketing strategy in three sentences.
Good. Now you know why your business exists. This is no small thing.
Step 2: List Your Expenses to Support This Business.
Below are some standard expenses most of us have. For this exercise, you just care about the categories, not how much you’re spending. That will come when we talk about budgeting.
If you sell products (instead of services), you must list “Cost of Goods Sold” as an expense category. Watch our training videos on “Cost of Goods” if you don’t know what this means.
Then list the other variable expenses in your notebook:
- Phone Lines
- Industry Trade Association Dues
- Conference Costs
- Shipping / Mailing
- Marketing Expenses
- Web Development
- Web Subscriptions
- Professional Bookkeeping Support
- Accounting Support
- Legal Support
- Information Tech Support
If you have an existing business, look at your expenses from last month to “back into” your variable expense categories. If you’re just beginning the small business bookkeeping process for a new business, you’ll have to make some assumptions.
For a new business write down every expense category you expect in the first three months of operation. The list above is pretty comprehensive, but no doubt there are expenses we haven’t listed. List the categories and the amount.
Step 3: List All Possible Revenue Sources for the Business
- Make a long list of all the ways you can bring in money, just like you did for your expenses.
- All revenue and expense categories will be the basis for a “Chart of Accounts.” These categories will sort out your individual transactions and group like expenses so you can see the cumulative effect on the business.
- You want to know where the money’s going so you can predict what will happen in the future. That’s the real goal.
Step 4: Include An Owner’s Equity Account
- If you are a start-up business, you are probably putting your personal or family and friends’ money into the business. You need to capture that.
- Add to your Chart of Accounts a category called “Owner’s Equity.”
- You may need more than one, but your accountant will tell you if you do.
Step 5: Include Debt Accounts
- Do you plan to use a credit line to pay your bills until revenues start growing? Are you using a credit card to pay for expenses?
- Include a debt account for each form of debt you plan on using. I have two separate debt accounts listed in my chart of accounts: one for Credit Card and one for a bank Credit Line.
- The key to these debt accounts is listing every expense paid by credit. Why? Because you want to know what how much you’re really spending on each category. If you pay for 30% of your total marketing expenses, for example, on credit, you don’t want to forget about that and not realize the expense.
- Just write down every single possible revenue, expense, equity (savings) and debt account you can think of in your spiral bound notebook. This will be the basis of your Chart of Accounts that will be created for you by a professional to help you keep tabs on the business.
- Now you have key information in one place; your nifty spiral bound book.
By following these simple small business bookkeeping tips you will save lots of money on your bookkeeping and accounting expenses. Why? Because you’ll do things right the first time and avoid spending all that time and treasure fixing a mess. Once you’re set-up, check out our Top Tips on Recording Revenues and Expenses: Small Business Bookkeeping Made Simple.
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