– Part 1
Credit: Jeff Scott
Last month I wrote in-depth on how to set up your QuickBooks account the right way for a service business doing under $5M in revenue. This article and the one that follows will tackle the other components you need to have a solid financial system and how to efficiently assess your performance and make quick, sound decisions. After all, your business results are solely a function of your decision-making, and as your business gets bigger and more complex, so make the decisions you need to make, as well as the data you need to make them. When you first get started, you can manage the business by your bank account and fly by the seat of your pants, but at some point, your gut isn’t quite good enough to be the only source of decision-making prowess. You need to check your numbers. Here is how to set up your business finances in the most efficient manner so that you can make the decisions you need to make and get on with your business.
Start with a Business Checking Account
First and foremost, a small business financial system has to start with a business checking account. That probably goes without saying, but let’s start from the beginning and progress from there. Mixing personal and business stuff means you have a hobby, not a business. If you want to get serious and grow a profitable business, you need to separate business and personal, plain and simple.
Second (and this isn’t for everybody), you should consider using a credit card for your daily business expenses. There are two fundamental financial reasons to do so. 1) You delay the money leaving your bank account for an average of about 30- days from the time you swipe the card that massively helps your cash flow, and we all know that in small business, cash is king. 2) You get credit card points that usually amount to 1-2% back on all of your expenses. Over the course of a year, that adds up to hundreds if not thousands of dollars back in your pocket that otherwise would not be there. You just can’t argue with that. The drawback to credit cards is that if you can’t pay the bill in full each month, you pay interest rates that wildly negate the value of having the credit. So, the hard and fast rule here is to use a credit card only if you are able to and disciplined enough to pay them off in full every month. If you end up paying interest rates of 20%+, not only are you negating the value of a credit card, but you are also wiping out the majority of the profit your business generates. Not good. So, if you employ this tactic, make sure you stay on top of it.
Third, you need to understand that you are both an employee and an owner. Those are two different people with entirely different roles. It just so happens, in this movie, you play both parts. Regardless of the company’s size, you MUST know when you perform duties associated with either of these roles.
The owner is an investor, not an operator.
Credit: Sean Webb
The employee version of you should be on payroll and get a paycheck. The employee’s pay shows up on the Profit & Loss. As an employee, your salary should NOT be based on how much money you need or want to make; just like if your employees told you how much money they needed or wanted to make, you would laugh and point them to the door. Instead, your paycheck needs to be structured for the style of pay and amount of compensation that you would pay someone else to do the work. If you are on the truck most days and pay your employees hourly, you should structure your wage the same way. If you spend your time making sales and paying your salesperson with a draw plus commission, you should structure your pay that way. You’re probably going to wear multiple hats, so you may even have a combination of ways that you calculate your salary. Don’t worry, and it doesn’t need to be all the precise. Just get it close, so you are at least reflecting your replacement cost when you need to fire yourself and hire your replacement.
Counter to that is the owner version of you. The owner is an investor, not an operator. Investors don’t earn a wage for doing work. They make a return for putting their capital to work and get paid when that investment has excess profit that it can’t or decides not to reinvest in the business. These payments to owners are commonly referred to as distributions or draws and are essentially the same things as dividends paid out by large companies to their shareholders. These payments are not business expenses but are deemed returns of capital to the owner(s). Hence they do not get recorded on the Profit & Loss as wages do. These payments are recorded on the Balance Sheet as a cash outflow of the business’s equity. Again, this is not an expense like the wages are. This is simply the owner(s) of the company deciding not to reinvest the business’s profit and instead distribute it to the shareholders. Of course, there will be times when, as the owner, you dictate that you will distribute some extra money beyond your wage to maintain your lifestyle. That’s fine, but always understand that such a decision is made by the owner version of you, not the employee version of you.
Now that we’ve got that square, we’re going to insert the classic: TO BE CONTINUED HERE. In next month’s article, we will breakdown what to do with this structure in your QuickBooks account and how to look quickly at your books and assess your business’ performance.
Dan Platta – CEO – Blue Skies Services
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