Accounting 101 for Wedding Professionals: Part 2
Ahhh… Accounting! Ain’t it grand? OK – maybe not. But, the truth is if you don’t know your numbers, you will not make it very far in business. Yes, yes… I know the stories of the amazing people that have built empires purely because of their art. But, you are in for a harsh reality if you think that these people are anywhere near the norm.
Give yourself a competitive advantage by being a smart BUSINESS person.
Read that again.
What does that mean?
It means that most businesses fail. Want to survive? Learn how to run your business smartly. Learn the numbers behind the biz. And, put the business owner before the artist. You own a business.
OK now… yesterday, we chatted about getting organized. That is the first step in knowing your numbers. Today and tomorrow, we are going to work on RECORDING. We are going to work on processing all of your accounting. Remember all of those receipts you gathered in your “accounting inbox file folder” yesterday? Well, monthly, you need to record those. Steps 2 & 3, below, prepare you for the recording:
Knowing your Numbers Step #2: Keep your personal banking and business bank separate
Make sure you HAVE a business bank account! I thought that this went without being said… but I found out recently that some of you have only personal bank accounts. (SHRIEK! The horror!) I am not here to judge. (God knows I have my share of business peccadilloes.) Let’s just all get on the right foot. Before you do anything else, please get a business bank account. Call your bank right now and do it. It’s so easy to do, you’ll kick yourself. There is no way you can keep your business organized with one account. (It may be possible, but it really is insane. And, the IRS doesn’t like it either.)
Knowing your Numbers Step #3: Learn the basic transactions
I’m going to get a little tech-y here… but stick with me! We are learning to be “tourist fluent” in accounting, remember? You have to learn the terminology. Like with any new language, you may need to revisit this a few times until it makes sense.
Money – or cash – flows in 2 ways: into your business and out of your business. The “flow” is also known as “cash flow” or “transactions”. The purpose of the game is to make sure that more cash flows in than out. Let’s study the ins and outs of cash flow:
INWARD CASHFLOW:
- Sales (AKA Revenue or Income or Cha-ching) – every time you receive cash from a sale (from a paying customer) this is cash that flows into your business
- Equity Investment (AKA Owner’s Equity) – every time the owner of the business (hey, that’s you!) puts his/her personal funds into the business, this is cash that is flowing into your business.
Remember how I had you separate your personal account from your business account? This is one of the reasons why. You need to remember that any time you take your personal money (particularly when you start up) and put it into your business it is an equity investment in your business. This is like buying stock in the stock market. As an owner, you are taking out stock in your business. - Loan or Credit – I would advise against taking out loans or credit for your business unless you have a SOLID business plan that shows this money will be earned back within 6-18 months and give you 3×4 times the value of the loan. (That’s a post for another day.) But if you do take out a loan, this would be cash that would flow into your business. This is cash that you have to pay back over time.
- Other – there are a few miscellaneous ways that cash may flow into your biz (a refund from a customer) but we’re gonna keep this simple
OUTWARD CASHFLOW:
- Expenses (AKA overhead expense or operating expense or administrative expense) – every time you pay for something to administratively support your business (rent, paperclips, website design, phone service, salary) this is an expense.
- Cost (AKA Cost of Sales or Cost of Good Sold) – every time you pay for something that is used in the production of your good or service, this a cost. It’s a cost of production/manufacturing (not the expense of operating your business.) These are costs directly associated with producing one product or one wedding. (For photographers, this would be albums. For invite designers, it would be paper and printing costs.)
- Equity Draw (AKA Owner’s Equity Withdrawal) – whenever you withdraw money from your business and use it for personal use (or put into your personal bank account) this is an equity draw (see below for more explanation on draw vs salary)
- Loan/Credit Payment – whenever you make a payment on your business loan or business credit card this is an outflow of cash. This is not an expense. You are paying down your debt.
- Asset Purchase – whenever you purchase an asset for your business, this is a cash outflow. An asset is something of large value (usually $300+) that provides future benefit to your business. (Examples include a camera, a printer, a computer, office equipment.)
Expense vs. Asset
An expense is usually expended in a short timeframe. An asset will give your business long-term benefits.
Expense vs. Cost
These can get confusing.
An EXPENSE is something that your business would pay even if you had zero paying customers (website design, phone service, etc). A COST is something that you pay ONLY when there is a sale attached to it (the intern who is assisting you at a wedding.)
Salary Expense vs. Labor Cost
Salary EXPENSE is the cost of payroll if you have ZERO sales. It’s your salary that you pay yourself regardless. It’s the salary of the person you pay to file your paperwork. Labor COST is the cost that goes into PRODUCTION (producing one invite, one job, one album, one wedding design.) You’ll only have COST if you have sales.
Equity Draw vs. Salary
First things first: you must pay yourself SOMETHING every month. If you are a sole proprietor, your “salary payment” is actually an equity draw. You own the business. There are no legal separations between you as the owner, you as the employee, and you as a person. Therefore, everything your business does in terms of cash flow has the same impact on you as a person. As a sole proprietor, whatever your net income is at the end of the year, is your personal income.
If you have a corporation, you will pay yourself (and any employees you have) a salary. Any money you take from the business (after this salary payment) is considered an equity draw.
Does all this make sense? Please post a question below if you need help. I’m happy to help.
Every month all of the “little papers” that you stick into your “accounting inbox” will reflect transactions going in or out. Every little receipt from the coffee with your client, the invoice from your paper purchase, the credit card statement, the bank deposit slip… all of that reflects money in or out. It’s your accounting job to record this monthly. Ahhhh… tomorrow… I am going tackle recording these transactions! You’re in for EXCITING stuff folks! 🙂