A Simple Guide to Bookkeeping
A Simple Guide to Bookkeeping When You Have No Idea How To Do It!
Whether you are starting a new business or are already up and running, you vaguely hear you’re supposed to track your income and expenses for taxes…and that’s about it! Nobody talks about the logistics of HOW you’re supposed to do it, and newbies are left to fend for themselves in this new financial wilderness.
That stops now.
Think of this as your personal survival guide for tracking your income and expenses.
What is Bookkeeping?
Simply put, bookkeeping is the process of recording and organizing all your financial transactions so you can accurately report them to the government and know what is happening in your business. While understanding a profit-and-loss statement and being able to apply for a bank loan are essential, let me suggest what is also vital to being a business owner – understanding the 80-20 rule. This will help you make better decisions for your business.
Understanding the 80-20 Rule
In the business realm, the 80-20 rule says that roughly 80% of your profits comes from 20% of your customers. Know who those most valuable 20% are and you will be ahead of the game.
You can increase your profits by focusing on marketing and expanding the most profitable areas in your business.
For example, if you own a bicycle repair shop you would have your repair services and sales of parts and products. Keeping track of your service income and revenue by product category can help you learn that while you sell lots of tubes for tires, they don’t bring in the big bucks. It could be your 10 point safety inspection that sells for $150 and takes 25 minutes in labor. Promoting that service over any other will help drive up your profits.
A Simple Guide to Bookkeeping - let's get down to the basics
In business financial transactions include:
- Sales of goods and services
- Deposits
- Purchases
- Bill payments
- Transfers
- Loan repayments
- Owner draws and equity
Basically, it’s keeping track of all the money that comes in and out of your business. And for most new business owners, this means tracking your income and expenses.
By doing so, you’ll be able to see the total you earned, the total you spent, and your net income in any given time period.
What am I keeping track of?
When tracking your income and expenses, you want to log four things:
- The date
- The amount
- The payee or payer (who you paid or who paid you)
- The income or expense category
The category is the most important part. It’s what takes your finances from a jumble of numbers to a system that can answer your most pressing financial questions. For example, if you have a category called “Content Marketing,” you can see how much you spent on content marketing during the year AND if increasing your spending increased your revenue.
Income Categories
For income tracking, base your categories on your different revenue streams and the questions you want answered about your business. Going back to our bike repair shop example, you sell services and retail products. You’d want to know how much you earn from each income stream to understand what’s driving the sales in your business. That’s where your income category comes in!
Expense Categories
Your expense categories – like your expenses – often line up with your tax deductions.
You can further customize your expense categories based on what you want to know about your spending. As a bike shop owner you may want to know how much you spend on general shop supplies, versus repair supplies. Instead of calling everything “supplies,” you can have two categories: shop supplies and repair supplies.
Categorizing your expenses not only makes doing your taxes a breeze (yay free time!) but also gives you valuable information about your financial health.
How do I track all this stuff?
Most new business owners start with a spreadsheet. The nice thing about a spreadsheet is that you can set it up to calculate your monthly or yearly income and expense totals. This gives you a glimpse into your finances without having to sell your soul to your calculator.
However, spreadsheets require manual entry and are prone to human error. If you forget to enter an expense, then you miss a deduction! Also, as businesses grow, spreadsheets become unruly and overwhelming to manage. Many small business owners find that they can’t keep using a spreadsheet forever and move on to digital accounting software, like QuickBooks Online or Wave.
These automated bookkeeping programs sync with your bank account and download your transactions. That means three of the four things you need track – the date, amount, and payee or payer – are automated for you. Your only job is categorization. Pretty sweet, huh?
How often do I need to track my income and expenses?
Ideally, you should do your bookkeeping once a week.
Once a week is the sweet spot between having a break from your finances but not waiting so long that your bookkeeping spirals out of control.
Depending on the size of your business, bookkeeping can take between 30 minutes to several hours a week. The more often you do your bookkeeping, the less time it will take because you’ll build your bookkeeping muscles as you go.
Can't I wait to start tracking?
You really can’t.
As soon as your business has financial transactions you should start tracking your income and expenses. The longer you wait to start tracking, the bigger the headache at tax time because you’ll be scrambling to crunch your numbers AND remember what the heck you bought nine months ago.
That doesn’t mean you need to jump into a digital accounting program, but you do need to track on a regular basis.
A big mistake new business owners make is thinking they're too small to track their income and expenses.
They blow it off until tax time, and then they’re scrambling to get their numbers in order. Take if from me, doing a year’s worth of bookkeeping the day taxes are due is not fun.
The longer you wait to start tracking, the more financial history you lose. It may not seem like it now, but there will be a point when you want to look back on your finances and review your growth. You can only do that with data – data that you get by tracking your income and expenses.
A Simple Guide to Bookkeeping
How do I get started?
Here are the initial steps you need to take to start tracking your income and expenses.
Step 1: Choose a tracking method
Remember, you don’t need to use the most advanced method yet. Start with a method you’ll actually use and build the habit of tracking. After you have an established bookkeeping routine you can level up your system. But keep in mind, that most bookkeeping data isn’t easily transferred from one system to the next. So if you think you’ll want your historical data in one place, pick one system and stick to it.
Step 2: set up your categories
For income categories, consider all the ways you make money in your business. You can start by listing everything you sell and then grouping those items into broad categories. These broad categories should line up with your income streams. For example, in my business my income categories are consulting services, bookkeeping services, and tax planning services.
For expenses, refer to the 20 Business Tax Deductions article and circle all the deductions that relate to your business. Then, think about your spending. Is there anything that you spend money on that’s not listed? Add those to your list of deductions, too.
Step 3: Set aside bookkeeping time
Choose a day and time when you will commit to doing your bookkeeping each week. Aim to log and categorize your income and expenses at the same time every week. Don’t skip out on your bookkeeping time! It might not be the most entertaining thing in the world, but it will be much less fun if you fall behind.
Now there's nothing left to do but just DO your bookkeeping!
The more you practice, the easier is it will become. Over time you’ll find that you stop getting lost and start getting confident until you can toss out the map and do your bookkeeping all on your own.
If you decide you’d like help with your bookkeeping, we’re here for you and offer many services that allow you to make running your business the main focus while we take care of the numbers.