BUSINESS RECORDKEEPING -
HOW DOES YOURS MEASURE UP?
The recordkeeping systems used for craft businesses are as unique and creative as each crafter is! They can range from special marks in the checkbook to elaborate computerized point-of-sale inventory control systems. While I may have my favorite systems, I will usually approve of any system that meets my three basic criteria of a good recordkeeping system. Let's take a look at these criteria and you can be the judge.
TIMELINESS
How often each year are you able to examine complete information on your sales and expenses and inventory? The reason you do your recordkeeping is to organize the financial details of your business activities into a format you can understand, compare with other time periods or other businesses, use to make decisions, and to show to others who might be interested, like a bank or the IRS.
Many of us focus first on the last. That is, we do our recordkeeping only as often as we need to do our tax returns. For some, that means once a year on April 14th! Now, I ask you: What good is that information for you, the owner of the business, three and a half months after the end of your year? Not much.
I recommend that you have relatively complete information about your business at least monthly. Soon after the end of each month, you should prepare a P&L (Profit and Loss Statement) which lists the totals for the month of your sales and each category of expenses. If you have this every month, you will be able to compare it with last month's results, or with the same month in the previous year.
Ideally, you will also have a year-to-date summary in the same format: Sales minus expenses equals profit or (loss). This shows the results so far in the calendar year. You will be able to compare it with the results at the end of the same month in the last year’s summary.
From these reports or summaries, you will begin to understand your business better. You will see the actual timing of the ups and downs of your sales and when you have extra need for cash. Sometimes you will see graphically the impact of certain marketing actions you have taken. This information is valuable to you, every day as you run your business. If you keep this monthly summarizing going all year, the twelfth month results will be the core of what you need for the tax return or the bank. No more April 14th all-niters!
ACCURACY
Do you know the saying about computers... GIGO? It stands for "Garbage In, Garbage Out". The same holds true for your recordkeeping system, whether or not it’s computerized. You want to be able to look at the results and trust the numbers!
It doesn't help if we always have to make mental adjustments. You know the scene..."Well that's my sales for the month, but it was really higher because it doesn't take into account the..." or "These are only the expenses I paid for by check. I spent cash at the shows that I haven't added in. The receipts are in that envelope over there." It is important to find a way to include ALL the business transactions in your summary. (See December 1994 issue of The Crafts Report - Money at Work on p. 65 for the OOPS! method of recording out-of-pocket expenses.)
Another aspect of accuracy is having a system that will assure that you catch any mistakes you make. We're all human and we DO make mistakes! Recognizing this, accountants have built a whole profession around systems that eliminate errors. We call the process "balancing". Balancing your checkbook is a way to assure that the amount you think you have in your checking account is actually the same amount the bank would say you have. We look for ways to prove that the numbers we have in the summary are actually correct.
If you are using a computerized checkbook system, this balancing will be automatic and the reconciliation will be a snap. In a manual or handwritten system, it will mean adding up all the income totals in the summary and seeing that the total of totals agrees with the total of the deposits made that month. You would also want to add up the expense totals and see that it agrees with the total of all the checks written that month. Of course, the total of the deposits made and the total of the checks written can and should be checked to what shows on your bank statement too.
Some systems are easier to balance than others. The computerized checkbook systems like Quicken® are automatic and very accurate. The one-write checkbooks are set up to make it easy and often have on each ledger page reminders of the steps to take in proving the totals. You only need to do it! Systems like the Dome books or tallying business activity from your regular checkbook and a collection of receipts are practically impossible to prove.
EASE AND EFFICIENCY
The most important test of a recordkeeping system is whether or not you use it. The best system is no good if you don't like it and don't use it. I have found people are more likely to use a system if they believe it takes less time. Time is such a crucial factor for us these days! If we can use fewer pieces of paper, have fewer numbers and words to write down, have it take fewer keystrokes to enter the information, we're more likely to do it. I recommend you find the most efficient system that you feel comfortable with.
The comfort I'm talking about is more psychic than cushiony, too. You need to have a system that is friendly to you, one that doesn't intimidate you. It needs to be one you feel confident with, confident that with a minimal effort you will be able to get numbers you can trust on a monthly basis. It's your business; you love your work. Let’s make sure you can have timely information that is accurate. Let’s make sure you trust and enjoy the process of using the system. That's not too much to ask.
