So, you have decided officially to become a “business.” Now, what? Well, in order to know how well your business is doing, you will have to keep track of income and expenses: just guessing is not enough.
Unless you have specifically chosen otherwise on your tax return, you’ll be reporting on a cash basis. This means there is no income until you actually receive the money and you only incur an expense when you pay it by cash, check or credit/debit card.
One of the simplest most straight-forward methods I have been able to think up involves the use of several envelopes. These can be small size or legal size or larger on up to even 9”x12”.
Start by labeling the envelopes. Get a broad-tipped, black permanent marker. Print in block letters big enough to be read easily. This is not the place to get fancy. Keep it simple and plain.
The first and most important one is “Income.” Into this you could put your copies of the invoices you have submitted to customers for which you have been paid. Or if you would rather keep your copies of the invoices somewhere else, you could just simply start listing—using a black fine line permanent marker—the amounts and dates received and maybe the name of your customer: quick to total up; all at hand.
Now, start labeling one envelope for each type of expense you normally have. Maybe “Supplies” and “Advertising” and “Travel” and “Entertainment.” You get the idea. However, there can be a problem with your utilities if you work from your home. More on that in a later post.
OK, you have all your envelopes labeled using a broad-tipped black permanent marker. Now, let’s make the whole thing work. You have your income all listed on the “INCOME” envelope and you have several labeled expense envelopes. Into each expense envelope, put the receipt for each expense once it is paid—remember paying with a credit/debit card is the same as paying by cash or check. On the outside of the envelope use black permanent marker (this one can be fine-line) and record the date and amount.
As you add more and more receipts, keep the outside record lined up one under the other so that adding them up at the end of the period will be easier. If you use a calculator with a tape to total the items, staple the tape to the outside of the envelope or place it inside with the receipts. Write the beginning and ending dates included in the envelope and the total expenses for this envelope’s category. [Quick Tip: It can make the total easier to spot quickly if you underline it with a double line or circle it.]
Now, get an envelope large enough to hold all the other envelopes. On the outside list the dates covered. Then record the total income for that period. List the name and total of each expense envelope that you added-up. One more addition: add all the totals of all the expenses together for a grand total of expenses.
You have just made a very good Profit and Loss Statement. If you go ahead and subtract the grand total of expenses from the total for the income, you now know how much you made for the period covered by your envelopes!
If you break the year into several periods—say, quarters, you can easily add your totals for each quarter. Add the totals for all four quarters and there is the P&L for the year.
Your tax return is now a snap to prepare!
Another benefit is that you can quickly and easily pull together a Profit & Loss to give to your banker or prospective investors.
Start the process all over again.
This article is part of the Small Biz 100, a series of 100 practical hands-on posts for small business people and solo entrepreneurs, whether in a small town, the big city, or in between. If you have questions you’d like us to address in this series, leave a comment or send us an email at becky@smallbizsurvival.com. This is a community project!
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Glenna Mae Hendricks. She is an entrepreneur and income tax consultant, so we get lots of good tax tips from her. She is an oenophile (“look that up in your Funk and Wagnall’s,” she says), and a wine enjoyment teacher/guide who also writes wine notes at the Allen’s Retail Liquors site. Her political thoughts (and occasional outbursts of domesticity) appear at Old Feminist and Wild-eyed Liberal.
Neat idea. I’ve had pretty good success using BlinkSale (http://www.blinksale.com) to track income; expenses are another story…
Great post – simple is best. I would suggest creating envelopes for each month to keep accounting as simple as possible (I use a variation for storing paper invoices and receipts – but in folders for each month).
Reporting on a cash basis is a lot of easier to understand and report on that accrual.
Also having a separate bank account for your business is useful because it will contain a record of your expenses and income in one spot. Let your bank help with managing your accounting records! :)
Thanks, Bob & Scott, for the good words. You both obviously are doing a good job keeping track of things. Bob, you might want to give the expense envelopes a try.
As regards the time span each envelope should contain, I only mentioned quarters to illustrate that by the month is not the only time available.
Also, many very small businesses benefit from a slightly longer time frame: more accurately shows how things really are going. And, hey, Scott, if folders work for you–great.
This method is just intended to show the beginner that a full-blown “set of books” is not necessary.
I really appreciate you both taking the time to offer further suggestions and ideas. The more the merrier!
Can you still claim business expenses on your taxes if you’re a blog contributor and the website can’t pay you yet because it’s just barely profitable?
Jaiyeded, I’ve asked Glenna Mae to answer this question for you, and here it is: Deducting Blogging Expenses.