This article was originally written for and published in The Business Bulletin.
There’s a sign hanging up in our office break room that says, “Drink more coffee, do stupid things faster!” That same principal applies to computers like this, “Use a computer, do stupid things faster!” After all computers are not “smart” like many people think they are. They are simply very fast and very consistent. They only do what you and the programmer tell them to do, and they do it blindingly fast and dependably.
So while the makers of Quick Books might lead you to believe that their system is the answer to getting your bookwork done quickly, I like to say that there are no such things as Quick books, unless maybe they are Cooked books. In other words the computer is a great tool, but it’s no substitute for knowledge, ability, and diligence, or whatever word you use for the opposite of procrastination.
Three important principals of successfully keeping your books:
1. Keep it Smart and Simple (or K.I.S.S.)
2. Do it Regularly.
3. Be Consistent
Keep it Smart and Simple:
Start by using a simple chart of accounts (or categories if you’re working with Quicken). Ask your accountant for a standard set of accounts and force yourself to stay within those accounts. If you have an expense or income that you don’t know where to place, put it in an account labelled “Ask my Accountant.” Then you can periodically review those transactions with him or her and get advice as needed. Concentrate on keeping your checkbook balanced and each check and deposit assigned to one of those accounts. After you have mastered #2 below, then and only then can you consider adding complexity for more useful data, like class tracking, entering bills, etc.
Do it Regularly:
Never get a bank statement in the mail before you have reconciled and completed the previous bank statement cycle. Consider using computer checks and deposit slips, so that when you write the check or fill out the deposit slip your bookkeeping is done. I promise that you will get addicted to knowing how much money is in the bank today, right now. And if right now you are thinking you can call the bank to find out how much is in there, than we have other issues to discuss, too lengthy for this article. Be Consistent: When entering checks, don’t put checks to Southwest Implement under “Repairs” one time, “Tractor Repairs” another time and “Maintenance” the next time. Usually the proper answer to this case is to simply have one account named “Repairs and Maintenance.” But the point is, put it in the same place each and every time. So when you later discover that pickup insurance should be under “Car and Truck Expense” instead of “Insurance” or “Liability Insurance” or “Job Expense” you can go to that account and find all the transactions and fix them efficiently.
So what are “Cooked” books?
Well, it could be several things. One of my clients told me he was sitting at his desk trying to do books and he had smoke coming out of his ears! Others use the microwave method and when I get them it’s like a nice batch of cookies cooked black. They are all there in rows but they aren’t good for anything. You may be offered to save time and import transactions from your bank or credit card online. This can be a good option if you take the time to learn how to do it properly, but it can turn into a disaster if it isn’t done corretly.
One client told me they liked Quicken because it “guessed” where to put things while Quick Books forced you to choose a category. Maybe that’s why most of his fuel ended up in the “Personal Expense” category because the name of the fuel supplier on the credit card statement was Tobacco Plus. So learn to follow the advice of the old horse trainer: “Take the time it takes, so it takes less time.” Set it up correctly so you don’t have to redo it all later. Changing the subject just a bit:
Lately I have had people ask me questions like “Do you see trends among your clients while preparing their taxes? Does it show the economy is down?” “Is it harder to be keep prices high enough to be profitable and not lose work?” “Does it take more to live now?” “Is labor becoming more expensive?”
In answer to questions about the economy, I can’t say that I understand the ups and downs and why and where. If it’s harder or not to keep prices high enough to be profitable depends on many things including competition, demand, efficiency and even how we look at or value our own work. And if it’s taking more to live, than labor should be becoming more expensive, because employees need more to live too.
But whether or not it’s taking more to live is something we will each have to take personal responsibility for. We may have raised our standards, or prices may have gone up, or we may be wasting more, or we have a bigger family now, or tens of other things. Here’s where to start:
Basic Rule 1:
Use separate checking accounts and a separate credit card accounts for your business and your household. It’s the law, IRS code specifically states it as a requisite. But more than that, it’s the first step in having a sense of where your money is going. If you mix your business and personal income and expenses together in the checking accounts, you never know where you stand, except for looking at reports (if you’ve kept a decent set of books). Reports are just numbers in black and white, and while they tell a story, they don’t speak as loudly as having “too much month at the end of the money.” In other words you might increase your business profits substantially and not even notice because you have money in the account that you just keep spending. At tax time when your accountant explains that you owe X dollars in tax because of X dollars of profits you just keep saying “I don’t see how!”
If you are taking a regular salary or draw from the business account and depositing it in the household account, you are at least in a limited way, budgeting. You will notice if you are having money left over, or running out too soon, it’s just that Smart and Simple.
Basic Rule 2:
Now that you know followed Rule 1, you know if it’s taking more money to live or not, so you can move on to why it takes more to live. So we’re back to that chart of accounts that is the foundation of your set of books. In your household account, you need enough accounts to track your living expenses, but not too many. For example I have clients that may have just a few accounts such as Medical, General Living, and Charity. On the other hand I have clients with as many as 175 different accounts. Their profit and loss report is so many pages that nobody knows where and why the money got away, even if it’s carefully recorded to the proper account. It’s like trying to count trees in a thick forest.
For starters, you want to track Charity, Medical, Vacation and Leisure, Hobbies, Personal Auto and General Expense. It would be nice to track clothing and groceries, also. But it’s getting more difficult to do that because of places like Walmart, where you get everything from tires to toothpaste to basketballs to beans.
So do you wonder why the categories I mentioned? I’m going to leave my opinion that we should know how much we are giving to Charity. I know that our older brothers preached to us “Not ‘posed to let your left hand know what your right hand giveth.” I’m just not sure we’re interpreting that passage correctly. But what if we discover that we’re woefully short of even 10%? And the reason I mention Medical, Vacation, Hobbies and Personal Auto is that those are the areas that I see us channeling more money to than ever before. We can only make changes if we see where the issues are.
Until next time, happy numbers to you!
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