Detail, Inc., Part Iv :Good Bookkeeping Practices

Saturday, November 11, 2006

This is the fourth in a multi-part series dedicated to the "business" of detailing. In last month's column, we discussed employee issues. I started by suggesting to employers that they must take at least some of the responsibility for the performance of their employees. In fact, poor employee performance can often be traced to one of three reasons: inadequate training, inadequate motivation, and poor recruiting.

To combat these problems, I suggested that the employer consider the process of recruiting to be a never-ending activity. To that end, the employer can have a plan to continuously search for quality employees. Once the right people have been retained, train them on pre-established standard operating procedures, which allow the employee to achieve the standards that the employer has established for each of the shop's clearly-defined detail packages. Finally, I suggested that keeping excellent employees is like keeping excellent customers - you have to take excellent care of them! WHAT ABOUT THE $$$? So now that your employees are buzzing away, completing paid job after paid job, you need a way to keep track of all that incoming revenue. Additionally, you need a way to keep track of expenses so that you can figure out just how much money your business lets you take home. We're talking, of course, about bookkeeping and accounting - which is the subject of this month's column.

The attitude at many smaller detail operations is something like, "Hey, just so I'm payin' the bills, I don't really care about the books." I believe this is not so much a disregard for good business practices, but more a normal apprehension or misunderstanding of correct bookkeeping practices.

Yet most successful business owners will tell you that they attribute part of their success to "staying close to the numbers," (i.e., practicing good bookkeeping and regularly checking reports). There are several advantages to keeping good records of your income and expenses, including: the opportunity to determine the specific sources of income, for example, from different advertising campaigns. This allows you to make decisions about future advertising purchases based on historical performance the ability to monitor expenses, thus allowing you to make cost-cutting purchasing decisions minimizing your tax liability by thoroughly tracking all legitimate expenses the ability to show profitability should the opportunity arise in the future to sell the business Now, let's be realistic here. I am not a Certified Public Accountant, nor a professional bookkeeper. The advice that I am including in this column is based mostly on my experiences in my own business, which is supplemented regularly by retaining the service of a professional CPA and bookkeeper who both specialize in accounting for small businesses. The information provided herein is intended to help you understand the importance of accounting and give you some ideas. It is strongly recommended that you seek the services of certified accounting professionals to assist you in your accounting decisions.

START WITH A PAPER TRAIL So, how do you set up a good accounting system? It starts by making a "paper trail" of all of your business transactions. It is a business essential to have a separate checking account for your business. You should also have a credit card that is dedicated solely to business purchases. These two items will make the tracking of business expenditures immensely more simple than if you combine business and personal accounts.

Next, get in the habit of keeping a record of all of your business transactions. Save all receipts that include business-related expenses. Also, write invoices for each job that you perform. Finally, keep a spiral notebook on hand to write down anything for which you might not have a receipt.

Then, at the end of each business day, take 15 minutes or so to file the receipts and invoices, and to check your notebook for other entries that need to be made. How to "file" or "enter" is the subject of the next section.

ORGANIZATION IS THE KEY! What do you do with all of this paper? You organize it into logical categories for future reference. For income, create categories that make sense to you. For expenses, create categories that make sense to the Internal Revenue Service (and, hence, also to your state and local tax authorities). Income Categories These are the most fun because they represent money coming in! But it's still important to categorize your income so that you know the sources of your income. For example, you may have different promotional campaigns that yield unique customers. It may be handy to know the income that is generated by each promotion. So you could have a category for all income that resulted from "Yellow Pages" ads. You could have another category for income that resulted from drive-up customers. Then, at the end of the month, you can check to see which advertising technique yields the most paying customers: Yellow Pages or good signage.

You can also create income categories for the different services that your shop provides. For example, I have separate categories for "detailing" and "windshield repair." You could also break down "detailing" into "new vehicle protection packages" and "standard detailing." You could also go crazy with too many categories! Remember, the idea behind income categories is to help you record transactions so that you can make business decisions in the future based on past revenue sources. For example, if you are making a large percentage of your income on new vehicle protection packages, you may decide to spend more promotional dollars on this service.

Expense Categories Most often the trouble with bookkeeping is in deciding how to categorize expenses. The simplest way that I have found to do so is to create categories that match the actual expense lines in the IRS tax forms.

With expenses, it is first necessary to understand the difference between "Costs of Goods Sold (COGS)" and other business expenses. COGS include all of those items that are essential for the performing of the service provided. These are reported to the IRS in Part III of form 1040 Schedule C (for sole proprietors) or Schedule A of form 1120S (for S corporations). For example, to perform an exterior detail, you must have some kind of wax product. A supply of chemicals is essential to perform an exterior detail.

While performing that exterior detail, you may carry a cell phone to receive business calls. Although telephone service is important to a business, it is not essential for performing the act of detailing a car, thus, it is not considered a COGS. Instead, a cell phone would be an ordinary business expense. Business expenses are reported to the IRS in Part II of form 1040 Schedule C (for sole proprietors) or in the "Deductions" section of form 1120S (for S corporations). Examples of legitimate business expense categories (as used by the IRS) include: Advertising: promotion and marketing expenses Car and truck expenses: either per-mile allowance or actual operational expenses like fuel and repairs Commissions and fees: for example, those paid to sales staff Contract labor: if you sub-contract some of your work or special repairs Depreciation: writing off the value of your major equipment over time Insurance: for example, garage keepers policy Legal and professional services: this is when you pay for professional services that support your business (e.g., your bookkeeper, CPA, attorney, business coach) Office expense: computers, printing costs, postage Rent or lease: vehicles or shop/office space Repairs and maintenance: to fix the shop or major detailing equipment Supplies: other than those listed in COGS (most detailing operations would have very little if any items in here) Taxes and licenses: city business license, permits Travel: anytime you go out of town on company business (e.g., to trade shows or training seminars) (Note that all expenses related to the travel experience should go here, including accommodations, transportation, and out-of-town meals) Meals and entertainment: This is for when you "entertain" your current or potential customers, either by buying them a meal or taking them to an event, like a sporting event. Really, anytime that you are talking business over drinks or food, you should keep the receipt Utilities: water, gas, electric, heating oil, cable (in some cases) Wages: the money you pay your employees Other expenses: If you have categorized your expenses properly, there really should be no entries on this line A couple of things about this list: First, you can see that there may be purchases that don't fit into one of the categories at first glance. Nonetheless, it's better to force an expense into one of the categories than to have a bunch of leftover "miscellaneous" expenses. For example, there is no one category above that immediately jumps out as an appropriate place for employee uniforms. I usually put these expenses into the "Advertising" line because it is part of my company image.

Second, don't spend too much time worrying about the appropriate place for certain expenses. The important thing is that it is categorized somewhere and that the expense is one that is legitimate for your business. For example, the bill for printing a second batch of your flyers could go in the "Office Expense" as a form of printing. It could also go in the "Advertising" section because brochures are for promoting your business.

RECOMMENDATIONS Take this information as an introduction to the world of proper bookkeeping for your business. I strongly recommend that you take the time and spend the money to sit down with a CPA or professional bookkeeper to help you set up your bookkeeping system. It is well worth the investment to make your job of record keeping easier.

For larger or busier operations, it may be worthwhile keeping a professional bookkeeper on retainer. Such an arrangement would involve the bookkeeper coming in on a regular basis (once a week or month or so) for a few hours to make all the accounting entries for you. This really makes sense if your time can generate significantly more money per hour than you pay the bookkeeper. He or she can get the job done much faster than you and with fewer mistakes.

Regardless of the amount of help you seek, I recommend that you use one of the popular computer-based bookkeeping software systems that are widely available. It's much easier to make a few entries on a computer rather than using a pencil and calculator.

Finally, stop trying to do it on your own! Get some help, even if it's from another operator who simply has more experience.

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