A - Accounts Payable
Have you ever read the term AP and wondered what that meant? Accounts Payable is a term for the amounts that are due to a vendor for goods or services your business has purchased, but not yet paid for. In other words, it is what your business owes.
This can be an invoice that you receive from a vendor, and input into Quickbooks, but have not paid yet. It will show up in your Accounts Payable Report. If you pay everything with your debit card and don't receive invoices from vendors, then you probably aren't very familiar with this term (and don't need to be!).
B - Bookkeeping
Bookkeeping is the recording and organization of financial transactions. This includes categorizing expenses and income, creating reports, and making sure that all your money is accounted for. Sounds pretty simple, right? The magic comes in what you do with all that data...
Bookkeeping can tell you what your profits are, how your expenses compare month to month, what areas of your business are doing the best if any areas need improvement...the list goes on and on.
Why have a bookkeeper?
Quite simply - you have better things to do than inputting transactions into Quickbooks. You can focus on running your business, while your bookkeeper gives you the information to do so more effectively.
C - Cash Flow
The cash flow statement is one of the financial reports I send to all my clients monthly and provides valuable insights for your business. But what the heck is cash flow?
Cash flow is the net of the money coming in and out of your business in a given period. Cash inflows are money received, and outflows are money spent.
D - Difference between Gross & Net Income
Gross income - The total of all of the income your business receives, minus any costs of goods sold. This is before any expenses, taxes, deductions, etc. Gross income is important to pay attention to because it shows you how much your business is bringing in, it is reported on your tax return, and you can use it to calculate your gross profit margin.
Net income - After subtracting your expenses from your gross income, you are left with your net income. The net income takes into account all of your expenses including payroll, operating expenses, processing fees, utilities, etc. Your net income tells you if your business profit, and how much you profited.
E - Expense vs Asset
Have you ever wondered what the difference is? You may be missing out on valuable tax deductions if you're misclassifying these, but don't worry, we can fix that!
The IRS's threshold for classifying an item as an asset is $2,500. So let's say in 2021, your business purchases an iPad for $599 and a computer for $2,799. The iPad is considered an expense, and the computer is an asset.
The $599 for the iPad will be fully deducted as an expense when your 2021 taxes are filed.
For the computer, you should work with your bookkeeper or tax preparer to create a schedule to depreciate its value over its useful life.
F - Fixed Mindset
A fixed mindset belief: abilities are fixed and cannot be expanded - "I'm not good with numbers"
Your mindset plays a HUGE role in your business.
G - Growth Mindset
Growth mindset belief: abilities can be strengthened by effort - "I can get better if I practice"
H - Handling cash transactions
- Decide how much cash you will keep in your register. This will vary depending on your type of business and the number of cash transactions you have, but we typically recommend $300-500 in various bills.
- On a daily basis, in your POS system, you will “open the register” to start the day, notating the amount of cash in it. This should be the amount you decided on in step 1.
- At the end of the day, you will close the register, notating the amount that is left in the register after all of the day’s cash transactions. The amount in excess of your decided amount is removed from the register, placed into an envelope with the date, and put somewhere secure such as a safe.
- Ideally, we recommend depositing weekly, but you could do every 10-14 days. The important thing to remember is that when you make the deposits, make separate deposits for each day’s cash. This will help you (or your bookkeeper) reconcile if an issue comes up.
I - Income Statement
The Income Statement, also called the Profit & Loss, is a report that takes your revenue from a certain period, subtracts your expenses and you’re left with your net profit or loss for that period.
J - Just do it
It can be easy to forget about or put your bookkeeping off but please, stay on top of it! Manage and reconcile your books at least once a month and if you need help, we’re here for you!
K - Know your numbers
Want to know if you can afford that course you’re looking at? Or whether it makes sense to order more inventory for your store (and even which inventory you should purchase)? How about paying yourself?
Knowing the state of your finances can help you make these decisions, and make you feel better about them as well. To remove the fear from business finances, you have to get familiar with them. It may sound uncomfortable at first, but I promise it’s worth it!
L - Learn your lessons and keep going
You will make mistakes along your journey as a business owner. Don’t give up and throw yourself a pity party. Instead, learn from it! Want to hear about my $1,500 mistake? Head to this post!
M - Monthly to-dos to prepare for tax time
- Open a business savings account.
- On a monthly basis, transfer at least 20%, but preferably 25-30% of your profits to the savings account.
- When it comes time to pay your estimated quarterly or your annual taxes, you already have that money set aside and don’t have to stress about it!
N - Say “NO” to using Venmo for business
Ok sure, Venmo for Business is fine and acceptable. But there are better alternatives that give you great reporting and integrate well with your accounting software.
So what do I suggest you do instead? Below are two of my favorites.
Stripe - Fees are 2.9% + 30¢ per transaction. Great reporting options, subscriptions work well, and are very easy to use.
Square - Fees range between 2.6% + 10¢ per transaction (for a card swiped in person) to 3.5% + 15¢ per transaction (for a card that's manually keyed in). Reporting is very in-depth, and inventory management works well. They have several points of sale options that are easy to use, so if you're in retail, I'd consider looking at them first.
For more ABC's of business finance, check out part 2.
