Are you someone who gets intimidated by finances in your business, and you just are not sure where in the world to start? Well, I am bringing a very requested topic to you all on bookkeeping 101. I have our friend Olivia with us today and we’re going to talk about the difference between a bookkeeper and an accountant, a few of Olivia’s top bookkeeping and finance practices she recommends for entrepreneurs (and yes, that does include how to pay yourself and how much to pay for taxes), the difference between sales and profit, and the term “knowing your numbers” because that’s something that gets thrown around a lot. Get ready, because you are going to walk away with some super tangible steps from this short, yet packed episode!
Olivia is the founder of Frolic Bookkeeping, a bookkeeping firm for creative entrepreneurs. She lives just outside of Philadelphia. Two of her biggest passions are non-toxic living and bookkeeping. Olivia is truly on a mission to help business owners understand their numbers so they can feel empowered to make financial decisions, scale their businesses, and increase their profitability.
Olivia helps us understand the difference between a bookkeeper and an accountant in terms of photography. If you shoot a wedding, you usually hire a second shooter to capture different events from the day because you can’t be there and capture every single thing. At the end of the day, the second shooter sends you the files they took, and you as the main shooter, take all of those files, edit them, and deliver them to the client.
That is kind of what bookkeeping does. It captures the month-to-month information on a month-to-month basis. They then take that and deliver it to the tax preparer, and then the tax preparer takes that information and turns it into a tax return.
And if you’re wondering if an accountant can do the monthly bookkeeping, Olivia once again uses an example with photography. If you do wedding photography, you probably like to stick to wedding photography as your niche and probably won’t branch out to something like newborn photography. You absolutely can, but usually, you stay with what you know.
Similarly, if a taxpayer wants to do the bookkeeping, they can, but they are usually very involved in the different tax laws and tax law changes that they don’t have time to focus on bookkeeping and month-to-month transactions. A lot of taxpayers like to focus on the tax law and the bookkeeper takes care of the month-to-month and day-to-day transactions.
Olivia says the golden rule of bookkeeping is to have a separate business bank account. For any business or industry, the first thing you want to do is set up a business account and make sure all of your transactions are strictly business related. This means all of your income is coming into that account and all of your business expenses are going out. You don’t want to have any personal transactions commingling in there. It makes life a lot easier, especially if you are an LLC, but also when it comes to tax time because you don’t want to go through 12 months of bank statements if you are mixing personal and business expenses.
Paying yourself truly depends on what your business structure is. Many people are sole proprietors, so when you pay yourself as one, you initiate a transfer from your business account to your personal account. This is called an owner’s drawl, and you do this rather than spending money on personal things from your business account, because again, if you’re an LLC, it’s important that your business and personal assets are being separated so the transfer keeps everything clean and organized.
If you’re an S-Corp, which is a different type of business structure, this means you have to put yourself on payroll. So if you’re an S-Corp, you pay yourself through payroll, and you have to pay yourself a reasonable salary. You would also do owner’s drawls on top of that too.
I also asked Olivia if she had heard of Profit First, and she mentioned that her favorite business bank account, Relay Bank, just partnered with Profit First, and what they do with the partnership is if your income comes into the account you have, you can set it up to automatically transfer all that money within that account to your other bank accounts, so you don’t have to do anything.
One of the biggest mistakes Olivia sees business owners doing is not making estimated quarterly tax payments simply because they are not aware they are even supposed to be making those payments.
So, for example, if you expect to make $4k-$5k profit in your business, that means you owe $1k in taxes for the year, so you should be making estimated quarterly tax payments. Olivia recommends setting aside anywhere from 20%-30% of your profit for taxes so that you are covered. She encourages everyone to make an effort to put that in a separate savings account so you don’t spend it and you have that money when the time comes to make those quarterly payments or to pay your tax liability at the end of the year.
This is something that many online business owners get discouraged about because they’ll hear different people saying they had a $100,000 launch, but that’s only half the picture. That’s the amount of sales they brought in, which is the income they generated from their offerings.
The other half of that picture is the expenses. That’s everything that went into your business to make those sales. What’s left over from your sales minus your expenses is your profit, and your profit is your bottom line. It tells you how much your business made, and then based on that profit, what you should allocate for taxes and paying yourself.
Knowing your numbers means understanding what your profit is, what impacts your profit, having clarity around your financial position in your business, and being able to use those numbers to make business decisions to increase your profitability and make little tweaks to make your business more efficient.
Olivia says there are a couple of routes you can take. The first one is to DIY it, and if you take that path, she recommends a spreadsheet because it’s simple and easy to use. It is more manual since you do have to type everything in, but you can ensure that nothing’s missing. With a spreadsheet, there’s usually just a one-time fee.
If you don’t want to do a spreadsheet, you can use an accounting software. However, there is a learning curve, and it could be overwhelming if you don’t have an accounting background or experience. If you’re new, Olivia says QuickBooks is a good way to go, but her favorite accounting software is Xero. She feels it’s more intuitive to use and they have great reporting functionalities. When you use a bookkeeping software, the subscriptions are typically either monthly or annual.
You should be looking at your profit and loss. As a business owner, it is gold because it’s going to show you all of your sales. What Olivia likes to do with her clients is break out their different sales categories. For example, say you’re a photographer, you could do family photography, branding photography, and wedding photography, and break it out by those sources.
This gives you insights into your business on what’s performing well and what’s giving you the most money. After all of your sales, are all of your expenses and it breaks it out by category. After all of your expenses, it then shows your profit, which is what’s left over after all of your expenses have been taken out.
Olivia suggests having a hands-on experience with your finances whether you do it yourself or have someone do it for you. If you do decide to outsource, Olivia has some questions to ask yourself.
These questions can help you focus on the bigger vision for your business.
In order to budget and forecast, you have to be up to date with your numbers. You can create goals based on your current financial position. For example, if you made $50,000 last year, but you want to try and double that this year, you want to make sure you’re keeping track of how you’re hitting your goals. In order to set those goals, you have to know what your current financial situation is so you have somewhere to aim and reach those goals.
Olivia shares the process of getting in contact with her to what it looks like working with her. The first thing you do is fill out the contact form on her website, which asks a series of questions about your business and current systems. Then, you will have a 15-30 minute discovery call to talk about what you answered on the inquiry form. After the discovery call, Olivia will send a proposal based on the call. Once you accept the proposal, there is then an onboarding call where you get set up in the accounting software, connect all your bank accounts, and go through any questions.
Usually, when clients first start working with Olivia, they need a cleanup or catch-up. You will get started with that and then together, you review those reports so you know and understand what the reports are telling you and how to apply them to your business.
Once the cleanup is done, you continue with monthly services. Every month, you get your reports in your inbox and Olivia will send any questions she has for clarification. Her clients also have Voxer access so she is there if any questions pop up.
When clients first start working with Olivia, they have no idea where their profit is at, or even how much money they are making. They just feel stressed and they have this weight on their shoulders. During their time working with her, she sees her clients gain more confidence in their businesses, and when they get their reports sent to their emails every month, it motivates them to continue to do well in their businesses because they can see the financial results paying off. It’s her favorite part of her job to celebrate wins with her clients!
Check out Olivia’s profit and loss spreadsheet. You can get 20% off with the code ALLANGLES.
This spreadsheet is so easy to use! You take your bank statements every month, type in your transactions, and then the rest of the spreadsheet populates for you. It has some visual reporting charts and also has a profit and loss by month and year to date. It really helps you understand your financial position to start making money changes in your business.