accounting and bookkeeping basics for local businesses

bookkeeping definitions you need to know

• Bookkeeping: The process of recording and organizing all financial transactions in a business, including sales, purchases, payments, and receipts. It's the foundation of the business's accounting system.
• Employee Cost: This includes not just the hourly wage or salary of an employee but also additional expenses such as benefits, payroll taxes, training costs, and equipment or software they use.
• Cash Flow: The total amount of money being transferred into and out of a business, especially affecting liquidity. It’s a key indicator of a company's financial health.
• Invoice: A document issued by a business to its customer, detailing products or services provided and the amount owed.
• Collection: The process of pursuing payments of debts owed by customers. In bookkeeping, it refers to the successful receipt of payment against invoices issued.
• Costs of Goods Sold (COGs): The direct costs attributable to the production of the goods sold in a business. This includes the cost of materials and labor.
• Vendor: A party in the supply chain that makes goods and services available to companies or consumers. In bookkeeping, it often refers to suppliers of business essentials.
• Profit Formula: A calculation to determine earnings, typically represented as Revenue minus Expenses (including COGs). It shows how much money a business is making.
• Depreciation: An accounting method of allocating the cost of a tangible asset over its useful life. It’s used to account for declines in value over time.
• Payment Processing Fee: A fee charged by payment processors for handling transactions. This can include a percentage of the transaction value and/or a fixed fee per transaction.
• Certified Public Accountant (CPA): A professional designation given to accountants who have passed a qualifying exam and met government-mandated work experience and education requirements.
• Profit Margin: A financial metric used to assess a company's financial health by revealing the percentage of money left over from revenues after accounting for COGs.
• Net Profit: The actual profit after working expenses not included in the calculation of gross profit have been paid.

about cogs and vendors

COGs: The Invisible Sprites of Business

Costs of Goods and Services (COGs) are like mischievous sprites dancing unseen around your business. They're in everything you touch – the nails you hammer as a roofer, the pipes you wield as a plumber, and the seeds you sow as a gardener. These sprites whisper of costs you might overlook, like the hidden expense of storing all those shingles or the fuel guzzling in your fleet of service vans. They're a tricky bunch, often forgotten in the excitement of a job well done but always nibbling away at your profits.

Vendors: The Enigmatic Allies (or Foes)

Vendors, on the other hand, are the enigmatic characters you encounter on your quest. They offer you tools and treasures to aid your journey – a new software system for scheduling, a bulk deal on window-cleaning supplies, or perhaps a shiny new lawnmower. But beware – not all vendors are allies. That $500/month Customer Relationship Management (CRM) system? It might just be a glittering dragon hoarding your gold without giving enough in return.

The Dance with COGs: A Delicate Balance

Navigating the world of COGs requires a dance with precision. Take for example a window washing enterprise. You need squeegees, cleaning solutions, and safety equipment. But each of these has a cost, a little sprite tagging along. The trick is to dance with them gracefully – knowing when to spend, how much, and on what. It’s about making each dollar stretch its legs but not break a limb.

Vendors: Choosing the Right Partners for the Ball

Selecting vendors is like choosing a dance partner for a grand ball. You want someone who complements your steps, who adds to your performance without stepping on your toes. For a sheet metal business, this might mean choosing a supplier who offers quality materials at a fair price, not the one with flashy promises but lackluster delivery.

The Hidden Pitfalls in the Shadows

Lurking in the shadows of COGs and vendor relations are pitfalls waiting to trip the unwary. Overlook a small recurring cost, and it becomes a gaping hole in your finances. Choose the wrong vendor, and it’s like having a partner who constantly steps on your feet during the dance.

profit formulas and considerations

The Fundamental Spell: Revenue Minus COGs Equals Profit

This is the cornerstone spell in your grimoire, dear service wizards. Imagine you're a wizard of window washing; the gold you receive for making those panes sparkle is your revenue. But ah, there's a catch! The cost of your enchanted squeegees, the potion-like cleaning solutions, and the chariots (vans) that carry you to your destinations – these are your Costs of Goods and Services (COGs). The true magic happens when you subtract these COGs from your revenue. What remains? Your hard-earned profit!

The Caveat of Counting Dragons Before They Hatch

In the world of plumbing knights and electrical mages, it's tempting to count your dragons (profits) before they've fully hatched (realized). You've sent out an army of invoices (see the previous chapter on Invoices vs. Collections), and it feels like a hoard of gold is coming your way. But remember, these dragons are still in their eggs; they aren't real gold in your coffers until they've hatched into actual collections.

The Sneaky Goblins of Depreciation and Payment Processing

Beware the goblins that lurk in the shadows of your profits! Depreciation is a sly creature, diminishing the value of your magical tools over time – be it your enchanted hammers, spell-infused drills, or fleet of roving chariots. And let's not forget the payment processing goblins. They take their tiny cuts from every transaction – a few coins here, a few there, nibbling away at your profits like mischievous imps.

The Spell of Net Profitability

This is a more advanced spell, requiring a keen eye and a steady hand. Once you've calculated your gross profit (Revenue - COGs), you must then consider all other expenses – the spells you cast for marketing, the gold you pay your apprentice workers, and the tribute to the tax kingdoms. What remains after this is your net profit, the true measure of your business's financial health and wizardry.

The Art of Casting These Spells Wisely



Casting these profit spells is not just a matter of waving a wand. It requires careful study of your ledger scrolls, constant vigilance against the goblins of hidden costs, and a strategic mind. Whether you're a landscaper shaping nature's own magic or a roofer guarding against the elements, knowing and understanding these spells can turn your business from a mere trade into a thriving empire.

The Spell of Accurate Financial Tales



Your bookkeeper isn't just a number cruncher; they're the storyteller of your business's financial saga. Imagine you're a roofing company. Each shingle, nail, and hour of labor is part of your story. Your bookkeeper weaves these into a coherent narrative, helping you understand where your gold coins are going and coming from.

The Crystal Ball of Cash Flow:

In the magical land of home services, cash flow is your lifeblood. Let's say you're a landscaper. You've got payments flowing out for seeds, tools, and that fancy new mower, and payments coming in from those manicured lawns. Your bookkeeper is like a seer with a crystal ball, forecasting your cash flow, ensuring you're not spending tomorrow's gold on today's dreams.

The Potion of Profit Maximization:

Bookkeepers concoct potent potions of profit analysis. For instance, as an electrician, you might wonder if LED installations are more profitable than fixing old wiring. Your bookkeeper analyses costs and revenues, guiding you to the most lucrative paths.

The Shield Against Tax Trolls:

Ah, the dreaded tax season – when the trolls come knocking. Your bookkeeper is your shield, ensuring you're not only compliant but also taking advantage of all mystical tax deductions and credits. Whether you're a window washer claiming ladder expenses or a plumber deducting those miles traveled to rescue flooded kitchens, your bookkeeper has your back.

The Advisor in the Tower:

When you're contemplating hiring another knight in your HVAC army or whether to invest in a new pressure washing dragon, your bookkeeper is the wise advisor in the tower. They help you weigh the costs and benefits, ensuring your kingdom remains strong and financially sound.

The Guardian of Your Treasure Trove:

Think of your bookkeeper as the guardian of your treasure. They protect your hard-earned coins from getting lost in the chaos of daily battles. For a sheet metal company, this might mean tracking the fluctuating costs of materials and labor, ensuring you're not unknowingly bleeding silver.

real world examples of how a bookkeeper can help

Multiply known salary costs by 20-30% more



So, you've hired Bob for $20 an hour, thinking, "That's $3,200 a month, easy-peasy!" Hold your horses – it's not that simple. There are hidden treasures (or traps) like benefits, vacation time, and those sneaky software costs. Suddenly, Bob's more of a $3,840-a-month kind of guy. And if your payroll is a whopping $150,000, guess what? You're actually dishing out $180,000! Surprise!

the true costs of employees

Hiring and Recruitment



Most home services, local trades, and skilled labor jobs get their new employees from word of mouth and industry meet and greets. But if you need a highly skilled person to fill a site supervisor role, or operate a piece of machinery that takes a specific license, you may start by posting a job online or hire a recruiter. A recruiter will cost you 10 to 20% of their annual salary. Job sites are more cost effective but require you to do al the work and check on resumes consistently. Either way expect to spend at $500 to $5,000 of time and investment to find them.

Training New Hires



When you run a local trades business like auto shops, gutters, or roofers, you have to train that person on their role, your specific types of customers, the tools, etc.. That time you spend training in real-time work produces slower work for customers and your business, lowering your earning potential during that time. So again, hiring and training fees are huge. Hire smart, and retain them as long as possible.

why our clients use quickbooks

Paying the Piper with Payment Processing Fees

In the bustling marketplace of the home service realm, where trades like magical potion brewing (think of it as your unique service) meet the digital age, there lurks a band of stealthy creatures – the Payment Processing Gnomes. Let’s explore how these unseen entities can nibble away at your hard-earned treasure.

The Tale of Judy the Potion Seller: A Cautionary Fable

Imagine yourself as Judy, a renowned brewer of magic potions (or a skilled electrician, plumber, or landscaper in our world). You've concocted a potion (service) with a 75% profit margin – or so you think. Each potion sold brings gold and glittering coins to your coffer. But wait! As each coin clinks in your treasure chest, a sneaky gnome, known as Payment Processing Fee, takes a small bite out of it.

The Hidden Bite of Processing Gnomes

These gnomes are crafty. They charge a small percentage, plus a fixed fee per transaction. So, when you, as a window washer, receive payment for making panes glisten, these gnomes might take 2.9% plus 30 cents per transaction. It sounds like mere pebbles in a vast mountain, but oh, how those pebbles can accumulate!

The Illusion of Gross Profit

Back to our potion-selling metaphor: Judy thinks each sale fills her vault with a certain amount of gold. But after the gnomes have taken their share, her real profit is less than anticipated. It's like casting a spell for a bountiful harvest, only to find a portion has vanished overnight. For home service providers, this means what you think you earn per job isn’t the full amount you get to keep.

The Impact Over Time: A Goblin’s Feast

The impact of these fees might seem trivial at first – a tiny gnome’s bite here and there. But over time, like a feast for goblins, they add up. Imagine you're a roofer, and you project a certain level of profit for the year based on your services. Not accounting for these gnomes could leave your projections as fantastical as a fairy tale.

Banishing the Gnomes: Strategies for the Wise

While you can’t banish these gnomes completely (they’re part of the digital transaction realm, after all), you can outsmart them. This involves negotiating better rates, understanding your pricing structure, or even passing on some of the costs to your clients in a fair and transparent way.

The Wisdom of Awareness

The key to dealing with these gnomes lies in awareness. Know their ways, understand their tricks, and plan your finances with their presence in mind. Whether you’re laying enchanted tiles or painting magical murals, factoring in these gnomes will give you a true picture of your kingdom's wealth.

the hidden processing fees

INVOICING VERSUS COLLECTIONS

Combine a CRM with QuickBooks

QuickBooks is great for bookkeepers but for invoicing in the field it sucks. Imagine having an iPad in the field, pulling up a customer profile in your CRM, reviewing the estimate they approved with one click from their phone, and then sending a text to them with the new invoice, to which they pay instantly. The invoice then converts to QuickBooks and your paid. That's the kind of operational efficiency we suggest to all trades and local businesses.

always perform quarterly reviews

Use a Bookkkeeper Monthly, But Use a CPA Quarterly

In the land of home services, where daily quests range from taming wild electrical currents to sculpting landscapes into works of art, there exists a powerful artifact – the Quarterly Company Reflection, akin to gazing into a magical mirror.

The Ritual of Peering into the Business Mirror

Every three moons, it’s wise to pause and peer deeply into your business mirror. This isn’t just any mirror; it’s a mystical surface that reflects the true state of your kingdom – your revenues, expenses, and the progress of your quests (profit goals). Whether you’re a master of the roofs or a guardian of home comfort systems, this moment of reflection is crucial.

The Mirror’s Reflection: Revenues and Quests

As you gaze into this mirror, it shows not just your face but the face of your business. How much treasure has flowed into your coffers? Are your services as a plumber or electrician bringing in the gold you anticipated? And what of your quests – those lofty profit goals you set while dreaming under the starlight? The mirror reveals how close you are to reaching these fabled lands.

The Bookkeeper or CPA: Your Mirror Mage

While the mirror is powerful, interpreting its reflections can be a complex art. This is where your Bookkeeper or CPA comes in – the mage who can decipher the mirror’s cryptic messages. They point out the financial dragons lurking in unseen caves (unexpected expenses) or the hidden treasure troves (areas of unexpected profitability).

The Dance with Financial Dragons

As you scrutinize the mirror, you might spot dragons – perhaps a vendor’s costs have soared skyward or a particular service isn’t yielding the expected gold. These reflections are invaluable, for they allow you to strategize – to sharpen your sword, adjust your shield, and prepare for battle.

The Power of Adjusted Quests

The beauty of the quarterly reflection is its power to guide adjusted quests. If a particular service, say gutter cleaning or window washing, is proving to be more lucrative than anticipated, the mirror suggests it’s time to embark on more such quests. Conversely, if a service is like a path leading to a dragon's den (less profitable), it may be time to chart a new course.

The Ritual’s Outcome: A Strengthened Kingdom



By regularly consulting this magical mirror, your business – your kingdom – becomes stronger, more resilient. You’re not just reacting to the winds of fate; you’re anticipating them, preparing for them, and, when necessary, altering your course to navigate through calmer seas or more prosperous lands.

In this enchanting guide, we've journeyed through the mystical world of bookkeeping tailored for home service companies. From the true cost of an employee to the potent magic of real bookkeeping, we've unveiled the hidden facets of financial management. We explored the clash of invoices and collections, the heroics and perils of DIY bookkeeping, and navigated the enigmatic maze of COGs and vendors. Our quest delved into the secrets of profit formulas and outsmarting the ghoulish payment processing fees.

Every quarter, like gazing into a magical mirror, we emphasized the importance of reflecting on your financial status, understanding that cash is indeed the king in this realm. Bookkeepers emerged as trusty sidekicks, while CPAs stood tall as the grand wizards of finance, casting powerful spells to safeguard and grow your business empire.

Ultimately, this guide isn't just about numbers; it's a call to arms for home service professionals. It’s a tome of wisdom, urging you to embrace the financial aspects of your business with the same fervor as your trade. By mastering these mystical arts of bookkeeping and finance, you equip your business for success, ensuring your kingdom prospers under your wise and watchful rule.

takeaways on Accounting basics

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