In its simplest form, bookkeeping is keeping track of your money. Most everyone does it for his/her personal finances to some extent – even if it is only to check your balance before making an ATM withdrawal. It’s not GOOD bookkeeping, but you get the idea.
Bookkeeping starts with a Chart of Accounts. Think of these as buckets in which you put your money. There are a few different kinds of buckets. We could give them technical names and talk about the accounting equation, but that’s not necessary for every day bookkeeping. Let’s call them Plus Buckets and Minus Buckets. Plus buckets are things like bank accounts (including credit cards), invoices/sales or assets. Minus buckets are loans or expenses. At the end of the year, the taxman wants to know how much you’ve taken out of your Plus Buckets and put in your Minus Buckets. Most of those Minus Buckets are deductions to your income.
The Content of Your Buckets
The best way to keep track of your buckets is with accounting software. There are so many programs out there. The better ones are not free, but just about any accounting software is better than a spreadsheet. Spreadsheets are a lot of work, and they require multiple entries of the same transactions to get the same information you get with accounting software. My personal favorite is Xero; it’s easy for a layperson to use but has added features for the Financial Advisor and Xero has great customer support.
For the most part, there are usually just a few Plus Buckets. Accounts Receivable or Sales, Bank Accounts and maybe a credit card or two. There are many, many Minus Buckets. These are the buckets that your tax authority is most concerned with because these are the buckets that you can use to deduct from your income. You definitely want to deduct as much from your income as legally possible.
Good bookkeeping is about creating habits. If you create the habits I list here, you will barely notice the time you spend on the books, and your cash flow and productivity will improve.
#1 – Five Minutes a Day
Doing the books each day is beneficial in many ways:
- You don’t have time to forget what you bought or whose money you were depositing;
- You can catch errors as they happen. In some cases, you have a time limit to dispute a transaction or fix an error so the earlier the better;
- It saves time at the end of the month;
- It will remind you of costs or expenses that need to be passed on to a client – so you can recoup the cost and make more money.
At some point in your day, preferably at the same point in your routine each day, either download or enter your transactions in your accounting software. Programs like Xero and QuickBooks Online will automatically download your transactions daily from most banks so that all you have to do is review them (QuickBooks does not work well with PayPal). Review each one and place it in a bucket. This is called categorizing or expensing.
Whatever the name, it’s a bucket. Most accounting programs have an automatic set of buckets, but those can be changed to suit your needs. If necessary, associate the expense with a client, or if that isn’t possible, create a draft invoice with that expense on it for use later when you are ready to bill your time. If you do this daily, reconciling your bank statement will be a breeze.
Make use of otherwise unbillable time
Most accounting software applications now have smart phone or tablet apps. You don’t have to use time that you would normally be working to do everyday bookkeeping. I reconcile my business bank accounts on my iPhone while watching TV or waiting in line. It’s time I can’t bill for anyway, I might as well make it worth something. With my Xero app, I can create an invoice on my phone, and it might even be paid before I get back to my desk!
#2 – Five Minutes a Month
If you invoice for your time on a monthly basis, about two weeks after your monthly invoices go out, send statements to any client who has not already paid. If your invoices are due 30 days after receipt, then change the timeline to five weeks. Since you are keeping track with your five minutes a day, you will know exactly who has paid and who hasn’t.
People are forgetful. They say to themselves that they’ll pay that invoice next week, and then it completely slips their minds. A simple statement via email reminds them, and many will pay quickly after receiving the statement. Most accounting software allows you to create and send statements very quickly and easily. This will increase your cash flow and reduce your Accounts Receivable.
As a side note, I hope you are emailing most if not all of your invoices. This is not only cheaper but also faster with no trip to the mailbox or post office. Clients usually pay more quickly without the snail mail lag time.
#3 – Ten Minutes a Month
At the beginning of each month, use your accounting software to run a Profit and Loss Statement or an Income Statement (same thing) for the previous month. On this statement you will see how much you made and how you spent your money. This is where you can decide that you need to cut back on certain expenses or that you have the money to make that big purchase you’ve been considering. Ten minutes of review will give you a much better perspective on the health of your business. As you go forward you can compare month-to-month or year-to-year.
#4 – Receipts
The taxman loves receipts! If you are not keeping your receipts or only haphazardly keeping your receipts, you are playing with fire. The shoebox method works (that’s throwing them all in a shoebox labeled by year) but it’s messy. I prefer electronic storage for receipts. Whenever I buy something business related, before I walk out of the store, I snap a picture with my smart phone app. If I make a purchase online, I forward the email receipt to my app. It takes maybe 20 seconds, but I have my receipt forever and no little pieces of paper swirling around my office, car, purse or wallet until they reach their final home. Once I have snapped the picture, the receipt goes straight in the trash.
My personal preference for receipts is Receipt Bank; it’s not only simple to use but it integrates with Xero so I can see the transaction and the receipt all in one place (and so can the tax man). However, there are many great receipt storage products out there that integrate with all sorts of accounting software. Find the one that’s right for you. Seconds at each purchase will save you hours searching for that receipt to make a return, organizing your receipts later and getting your documents together for your accountant.
I’m sure some of you are saying, “But apps and software cost money! I want to MAKE more money not SPEND it!” Me, too! However, if you can save yourself an hour a month for which you can now bill a client, then you’ve paid for the app and software. More than likely your increased productivity and cash flow will far outstrip the cost.
Five minutes a day and 15 minutes a month should be all it takes for most designers and web developers, even if they have a subcontractor or two. If you have many subs, send more than 25 to 30 invoices a month, find over time that it takes a lot longer to do the books or you just can’t or won’t create good bookkeeping habits, you might want to seek the assistance of a bookkeeper.
You will still reap the benefits of increased productivity and cash flow, with the added bonus of not having to do it yourself.