Bookkeeping is the one area of running a video business that many videomakers give short shrift. Yet they do so at their peril. We’re not just talking about the IRS–although adequate record keeping can help prevent tax problems.
There is even more at stake here–namely the very future of your business. Financial records are the only sources of comprehensive data small business owners have. Without access to such data, you won’t have the knowledge you need to make the decisions that ultimately determine whether your business succeeds or fails.
In this month’s column, we’ll examine the bookkeeping habits you need to develop to keep your business in good financial health. For practicality’s sake, we’ll assume you run a one-person or one-couple operation. No partners. No employees.
Now let’s hit the books.
Keep your business and personal finances separate. Mixing business and personal funds is a certain road to disaster–ranging from business failure to divorce.
As soon as you decide to start a business, open a company account at the bank of your choice. Shop around for options, as charges for checking accounts vary. Your checking account functions as one of the main recording tools for your business. The following checkbook rules will get you off on the right foot.
- Balance your checkbook every month. I know, you can barely handle this on the personal side. But an unbalanced checkbook will only lead to those dreaded NSF (nonsufficient funds) checks. If you don’t know how to balance, your local bank representative will gladly take you through the process.
- Pay all business expenses with business checks. This provides documentation (via a canceled check) should you ever need it.
- Place all deposits in your business account. You can easily track any cash or check payments made to the business through checkbook records.
- Only write a check for “cash” if it’s for personal use. Do not use the business checkbook for personal expenses. Always write a check to yourself, then use the money for your expenses. Do not intermingle accounts.
- Keep all canceled checks and bank statements. Store all bank information for three years. This documentation is the best defense you have against tax or payment problems.
With your bank account in place, it’s time to start the actual bookkeeping.
The Single-entry System
Accounting buffs may wince at the term “single entry.” But for the rest of us, it’s salvation. Double-entry bookkeeping is an elaborate, commonly accepted form of accounting. Most every middle-to-large businesses use this system. So why use the single-entry method? Simplicity.
With the single-entry system, you make only one entry for every transaction. Whether it’s money coming in or going out, you only record it once. This method keeps accounting, arithmetic and paperwork to a minimum. Single-entry certainly isn’t the most foolproof means of accounting, but it still provides the information you need to make informed business decisions. Before you begin making entries, you must choose between the cash method and the accrual method of bookkeeping. With the cash method, you record income when receiving cash; you record expenses when paying bills. With the accrual method, you record all income as you bill it, and all expenses as you incur them– paid or not.
The major difference between these systems is how you handle credit. Use the accrual system, and you’ll record sales the day you extend the credit for them. Cash systems, on the hand, demand that you record the sale when you receive the payment. If credit enters into your business plans, then the accrual method is the simpler, better system. If you’re not planning on either extending credit or buying on credit, then it doesn’t matter which system you choose.
The Income Ledger
There are two steps in recording income in the single-entry system.
Step One. You create a sales record, better known as an invoice, for you and your customer. You then record the sale in your income ledger. For most video production services, the preprinted invoices available at your local office supply store will do just fine. Just make sure your business name, address and phone number appear on it. Also print the customer’s name and address, a description of the sale, total amount owed, sales tax, date and invoice number. Fill out the invoice in duplicate; keep a copy for your records.
Step Two. Summarize your sales in the income ledger. This document tells you at a glance how much income you’ve earned in any given time period. As a business management tool, it reveals busy and slow periods–vital data when planning advertising, sales and capital expenses. A basic income ledger with seven columns should work for most small businesses. Each of these seven columns contains important information:
Column 1. Date: the day of the sale.
Column 2. Customer: a brief description of the sale, usually the customer name.
Column 3. Invoice: the invoice number.
Column 4. Taxable sales: the amount of the sale prior to taxes.
Column 5. Sales tax: the amount of sales tax for the sale. This is a percentage of the sale amount.
Column 6. Nontaxable sales: any nontaxable sales. Many companies are tax exempt from certain purchases; your video work may qualify as such for some of your corporate clients. Record those sales here.
Column 7. Total: a total of all numbers in the row, including sales tax.
Posting is the act of actually recording figures in the income ledger. Unless you are working on one big job for a long period of time, it’s wise to “post” at least twice a week. There are no hard and fast rules to this process–as long as you don’t fall behind. When the paperwork piles up, even accountants hate accounting.
So keep up to date. At the end of each month, run a total, and start a new income ledger. Never let a posting period cross months–unless you really want to experience bookkeeping hell.
When the year’s over, record the monthly totals on a yearly summary page. If you’ve used the accrual method, your work is done. No adjustments are required.
But if you opted for a cash system, you must do some tinkering. Deduct any credit sales yet unpaid from the year-end total. Since you have received no money for the sale, it should not appear in the cash ledger.
The Expense Ledger
The expense ledger records every business expense payment made. Its most important functions: to separate and classify each of many different outflows of cash.
While you can spend money in a myriad of different ways, not all are necessary for our simplified accounting system. The ones cited below are the most common; but you can add or create other categories specific to your expenditure patterns.
Use the expense ledger as you do the income ledger. Only this time, record when you spend money instead of when you make money. The columns on the left side of the ledger: the date, check number, recipient of the cash and the total amount paid.
On the right side of the ledger: the various categories for expenses. A brief description of each follows.
Column 1. Inventory: all the costs involved with producing your product. In this case, videotape will make up a big portion of this category.
Column 2. Postage and office supplies: any items used during normal business procedures; paper, pens, stamps and so on.
Column 3. Labor: monies paid out to hired help. Hire free-lance assistants to avoid the paperwork payroll demands. But if you insist….
Column 4. Payroll: payroll employee payments. Consult an accountant or the library for help in setting up adequate payroll records.
Column 5. Advertising: all advertising and promotional expenses. Also note business-related entertainment and meals here.
Column 6. Rent: self-explanatory. If you work out of your home, check with the IRS regarding deduction qualifications.
Column 7. Utilities: gas, electric, water and/or heat payments. Again, if you run a home-based business, check out deduction availability. Include telephone costs in this category.
Column 8. Taxes: sales tax collected from your sales and paid to the state. Do not include sales tax you pay on products purchased; list those with the rest of the expense cost in its category. For example: if a new tape costs $8.00 plus 49 cents sales tax, record $8.49 in Column 1.
Column 9. Miscellaneous: expenses which do not require their own columns. Record infrequent or odd purchases here. Also include insurance fees and professional services (bookkeeping!).
Column 10. Nondeductible: nondeductible expenses; cash paid to yourself (personal draws), loan repayments (only the interest is a legitimate expense) and other nondeductibles.
As with the income ledger, keep posting current; do not fall behind on your expense ledger. Total the expenses on a monthly basis in preparation for year-end. At that time, record annual expenditures in a separate summary. This accounts for each month’s total category expenses, any unpaid bills and additional charges like bad checks and depreciation. Have a professional accountant or tax preparation specialist figure depreciation on your equipment.
In addition to your income and expense ledgers, there are a couple of other documents that will help you organize and interpret this accumulated information.
Profit and Loss Analysis
Even the smallest business can make use of a profit and loss analysis. Prepared monthly from your ledgers, this tool can reveal a great deal about your business.
List your income at the top of the form. Below that, divide your expenses into two groups: inventory (Column 1 in the expense ledger) and purchases. You must also estimate the inventory you’ll have on hand at the end of the month. Your beginning inventory plus purchases less the estimated ending inventory gives you the actual current “cost of goods sold” expense.
Your company’s gross profit: total income less this cost-of-goods sold expense. Your net profit (or net loss): gross profit less all your other expenses.
This profit-loss analysis helps you clearly see how individual parts of your business affect your overall profitability, causing losses or gains. Now you can determine whether if it’s the high cost of videotape or the outrageous rent you pay that sabotages your success.
Small businesses die daily from cash flow problems. As you begin your business, you’ll find it hard to make cash flow projections. You won’t be familiar with regular expenses or be able to accurately predict income.
But at least make an “educated guess.” Figure out how much money you’ll need to start your business. Add to that any expenses you’ll need to pay during the first month. Throw in an extra 15 percent to cover unexpected spending. Next, project the amount of income you’ll generate through the business in the first month. Sure, it’s a guess, but it’s the best you can do right now.
Compare your expenses to your income and you have your cash flow. Not a very scientific method, but a good start nonetheless. After you’ve been in business for several months, you’ll find it easier to gauge expenses. Projecting income should become simpler as well. Cash flow predictions warn you in advance of any upcoming shortages. They allow you to plan adequately for major expenses you may not otherwise have anticipated.
No More Guesswork
Admittedly, bookkeeping is not fun; but it’s one of the necessary evils of running a successful business. If you own a computer, you can lessen the burden with accounting software, though understanding the basic principles is still vital.
Understand these principles, and you can create a solid bookkeeping system that will enable you to evaluate your business. Without such a system, you can only guess at your profitability.
Do you want to bet your future on a guess?
Videomaker contributing editor Mark Steven Bosko is vice president of marketing for a commercial production business. Send e-mail to 71161, firstname.lastname@example.org.