Financial Management

BookKeeping, Taxes, Spreadsheets, Budgeting, Inventory

Software

I recommend QuickBooks as the best financial software for business. It will help you track just about everything. You can enter item numbers, price, and markups, and it automatically calculates the markup. It creates invoices, and when you type in an item number and the amount, the price is automatically entered. Using it once it is set up is simple for some things. Be warned though, setting it up is time consuming if you have a lot of product items to enter, and updating the products is also a royal pain. The software also demands information from you that you might not be tracking with a simpler accounting method, and it does not leave room for errors, or special circumstances - It pretty much only knows one way to keep books, and one means of doing business. If your business conforms to the standards it likes though, it can save you time, and integrates with tax software at the end of the year.

The simplest bookkeeping consists of a ledger that shows income (and whether it is taxable if you have sales tax to pay), and expenses. Usually there are a couple of columns for different types of income, and a few for different types of expenses. You can total up profit or loss at the end of each month. This can be done with a handwritten ledger or with a spreadsheet on a computer.

We keep two sets of file folders. One for income, one for expenses. Each has pockets for each month. We toss income receipts and records into the income pocket, expense receipts and invoices into the expense pocket. At the end of the month, it is simple to transfer the records into a ledger. This is about as basic as it gets. But it works! This works because we have a relatively low overall volume of orders.

Federal Tax information and issues are discussed on the IRS website. Some of it is a little difficult to understand, you may need assistance interpreting what it all means.

We suggest that the simplest and least expensive method of doing taxes for a sole proprietorship is to purchase a copy of Turbo Tax, or other Tax software. It will walk you through, question by question, in an interview format, and it covers all common possibilities. For a sole proprietorship, your job income and self-employment income will be combined on the same set of forms. This software asks you questions about the types of income you have, and if you have it, takes you through documenting it, if you don't it goes on to the next section. All tax forms that you need are there, and it ensures that you get earned income credit, child tax credit, or any other credits you need also. We have used it for several years, and as we persuade other people to use it, no one ever goes back to doing it by hand or hiring it done. I really cannot recommend it highly enough as being both simple and totally efficient at getting it done.

State Tax information can be found on your State Website. The Department of Revenue for your state will be happy to help you determine whether or not you need a sales tax license, or other business tax license.

You need to consider the following tax types:

1. State Sales Tax or Income Tax

2. Federal Income Tax

3. Self Employment Tax (paid instead of Social Security Tax)

Spreadsheet software can help you chart expenses, keep a ledger, create a budget, and create self-calculating product price lists. Learning to use it is a bit difficult at the start, but once you learn, it opens up a lot of possibilities.

Here is one example:

We have one product catalog that has over 1000 items in it. There are seven different markup categories in those 1000 items. We also like to calculate shipping into the total cost, except there are 4 different shipping cost possibilities. And some items have a surcharge on them as well.

We can create a spreadsheet with columns for item number, description, weight, and then 4 price columns (for the 4 different shipping options). We then create another column for the base price, another for the wholesale price, then one more for surcharges. We can put a formula in the top box of each column, for example, price times markup, plus weight times shipping rate, plus surcharge. Each item references the column that has that information, in other words, weight does not use the weight number, it uses a reference for the column that the weight is listed in. We can then use the Fill Down command to copy that formula to all lines. The only thing we have to hand edit then is the individual markup percentage on each item, and type in the surcharge. We do that only once. After that, all we have to do is go in and change the wholesale price as needed to update the entire price list.

We create catalog listings from this price list (by setting it to print only as far over as the pricing columns - chopping off the base price, wholesale price, and surcharges), and can transfer it directly to our website as well. It shows up as a table. We just copy the columns that are applicable. Because we put the wholesale price and surcharge columns last, we can copy or print just the part that the customer needs to see.

Spreadsheets are great, because once you get them set up and the formulas in place, you can change the input numbers as much as you like, and they automatically recalculate. We use them for the above price list, for ledgers, budgets, even shopping lists. They can be time consuming to set up, but amazing when they are going.

The best way to create a budget is on a spreadsheet. We make one up with all expenses itemized, and a few blank boxes for things we may need to add. We make one that shows several months worth of data at one time, so we can budget out in advance, for debt removal, major expense planning, etc.

Budgeting for a business can be tricky, because income can be unpredictable. I earn some money on a continuing contract, so usually I budget that money, and estimate other earnings. The nice thing about doing it on a spreadsheet is that you can change that income amount whenever you like, and the thing just recalculates to show you the updated balance. I always estimate ahead of time, then correct it when I know for sure.

The best way to track inventory is with software. If you set up QuickBooks, and use it properly, entering in purchases and sales, it will automatically track inventory for you. You just need to go in and do a physical inventory count every so often to verify accuracy, account for loss, or whatever.

You can run a business carrying little or no inventory though, even if you sell products. It can play havoc with your accounting software, but certainly simplifies the tax process!

You need a financial cushion. How much you need depends on what type of business you run. You need to keep enough to be able to give refunds if required, and if you offer warranties on any products, enough to cover several warranty returns at once. The larger your business, the larger the cushion needs to be. The more directly you handle products, the more you need also.

We suggest saving 50% of profits for the first year that you make a profit. After that, 10-20% is sufficient if your business is in a stable growth pattern. Things can be dicey prior to the time that your business makes a profit.

Make sure you purchase business insurance as soon as you can realistically afford it. Dinky little out of the house, three tiny orders a week businesses rarely get sued - 100 order a week businesses that are making a good profit though will have increased risks (and an increased ability to afford the insurance). Contractors, or others who work on the property of clients though can be at much higher risk, as can anyone involved in personal care services. The higher risk your job is, the more important it is that you carry insurance. Because if your business does what you expect it to - that is, it grows, then someone will eventually get ticked off enough at you to either sue you, or set you up. It happens. Be prepared and it takes much of the sting out of it.