Nothing is worse than hearing a small business owner say their books were set up by a relative many years ago and no one has changed the bookkeeping system since. Almost all small businesses need to take the initial step to set up their Chart of Accounts in QuickBooks for helping track their money, profits, expenses, and a number of other things. Although it needs to be done, this doesn't always mean the chart of accounts was set up correctly.
Having the books set up the right way from the get go can save a lot of hassles down the road, and save some cash too. Although QuickBooks has different industry choices, the customization doesn't go far enough. This is where an experienced bookkeeper can come in really handy and set the Chart of Accounts up to fully fit your business. This QuickBooks basic topic has been written about before, but this time let's look at it from a different angle; Owner Equity and the impact on tracking startup costs as well as Cost Of Goods Sold and break even analysis.
Owner Equity And Start Up Costs
This is such an important step especially when the business is just starting. The obvious reason for setting up an Owner Equity Draw account is to track money that has been drawn out in lieu of payroll and this will come into play at year end. Secondly, an Owner Equity Contributions account will make sure that all expenses are showing up on the books and the owner is getting credit for contributing money to the company and again this will come into play at year end. Let's get past those and fast forward 3 years.
Let's say three years have gone by and the business has transformed from a hobby or a lifestyle business to a booming company that has drawn the attention of investors that want to grow. Duplicating locations may be next to impossible if the initial startup costs are non-existent. During the first year of business, all expense reimbursements and owner draws need to be detailed out and recorded with as much info as possible. Nothing is tougher than being told 5 or 6 figures were spent but there is nothing to support this with detail. Scaling a business is tough and the startup costs are a major piece of the puzzle. Put the system in place from day 1 and reap the benefits when your hard work pays off.
Cost Of Goods Sold And Break Even Analysis
Making sure all costs associated with items or services sold allows for some strong financial reporting as time goes by. Your gross profit margin will tell you if you are priced right. Mixing expenses with cost of goods sold is pretty common with small businesses early on. An example is shipping. If each customer order needs to be shipped, then this needs to be tracked separately from the postage used for mailing a bill payment to a vendor. Keeping items like this separated help show fixed costs vs. variable costs. Knowing your monthly fixed costs is one of the main components for figuring out your company's monthly break even. With that number, you can then use the gross profit margin to back into your needed revenue to keep the lights on and your employees paid.
Having these financial calculations in use can allow for some cool analytics tied to marketing efforts. Knowing conversion rates from web traffic, cold calls, etc. and average customer revenue can show a ROI for dollars spent on inbound marketing, content marketing, cold calling, SEO, coupons, PPC, mailers, or whatever marketing tactic your company is focused on.
No matter what, it's important to take your business's bookkeeping very serious right from the get go. Why learn by trial and error if you can get the help you need right now.