Now that we have created a way to enter in the sales we need to enter in all of the expenses. Remember in previous post we went over accruals. Expenses are not only when we spend money, but also when we know we are going to have to spend money in the future.

There are different types of expenses and they have different impacts on different accounts in our accounting software. Let’s look at the simplest first.

We have stamps on hand so that when people want to purchase them we have them available. We have purchased these stamps previously. When we purchased the stamps it was NOT an expense. Technically we have just changed one asset (Cash) for another (Stamps). The stamps are part of our inventory. So we need a new account in our accounting software for these stamps.

I am going to first create an account called inventory since there will be different categories of inventory and then I will make stamps a sub category of inventory.

I choose to use “Other Current Asset” to stop Quickbooks from helping me in ways that confuse me.

Here I make Postage Stamps a Sub Account of Inventory. I could have just called it stamps, but then it would have been really easy to mix up the Stamps – Income account with the Stamps – Inventory account. When I buy stamps I debit the inventory and credit the cash. Accounting is flexible and I could accidentally debit the income account and credit cash. Quickbooks wouldn’t know that it was a mistake. Debiting the income instead of the inventory would be as if someone returned stamps and I gave them cash in return. The inventory would be off. The sales would be off. The cash would be correct and I might not notice for awhile.

If expenses do not come out of inventory then there is either no associated expense with the sale, which happens with sales of services, or the sale affects a payable account.

An example of a sale that affects a payable account is a FedEx sale. In a FedEx sale I charge the customer and collect the money. I will have to pay FedEx after they deliver the package. I technically owe them the money the minute I take the customer’s money. However I won’t pay FedEx (even after they deliver it) until they bill me. That is what makes it a payable. The expense is immediate, the cash transfer is delayed.

So let’s take a look at the new accounts I will setup. I have two new categories under which I put sub categories, Inventory and Sales Expense Payables. One is a current asset the other is a current liability. I grouped these together in a way that will make sense to me. I could put all of the payables together, but I want to see the sales expense payables separate. I stay away from the Quickbook account types like accounts payable because I don’t understand all of the things that come with that. It might be very useful, but I don’t know what those things are and I have seen things get screwy when I use the non-generic account types.

 

Notice also that I tried real hard to stay away from similar account names of different types. My answer to UPS is United Parcel Service. There might be a better naming convention, but I am sure that not having a UPS income and a UPS current liability is a good thing. I have seen large companies give every account a number. That is an extreme way of keeping track of things.

I have a couple more accounts to add before I create the General Journal entry that I will have QuickBooks memorize. I am going to accrue employee expenses, credit card charges, franchise fees, and travel expenses on a daily basis. These are expenses that occur before I have to pay them. I also have to setup the associated expense accounts. Before I had one expense account and that was Cost of Goods. I am going to leave that account and create sub accounts underneath the Cost of Goods accounts.

Expenses work this way. I buy stamps. There is no expense. There is a change in Inventory and cash. Someone buys the stamps. There is a change in sales and cash AND a change in expense and inventory. Double accounting means that two accounts are always affected.

Now a side note. Someone will pay us for a full year of mailbox service. Technically I cannot count that as revenue until I deliver the service. I have gone round and round on how to manage that and I have finally decided that the payment patterns are close enough to actual service patterns that I am going to call it immaterial. In other words I may collect $200 from one customer and $0 from another but I provide the service equally and I will count the revenue when I receive the cash. It could be argued that this is misleading, but I am going to call it immaterial.

Some expenses that I am not going to accrue are the monthly utility expenses. So there will be days where I will pay the water bill and it will make that day look less profitable. I have thought of accruing utility and other expenses, but for now I am not going to. I might do that in the future. I do not want to make the accounting so complicated that it becomes less useful. Since the expenses are once a month and every month the information is going to be comparable across months.

Here are all the accounts setup. (There are more, but that comes later) I did change the name of Cost of Goods to Cost of Sales.

Here is the general journal entry that I memorize. I can recall the memorized entry and just change the date and the values and entering in the accounting information is quick.

That is it for daily sales and expenses.

There is no way to work on the next steps without specifics. I am going to use the numbers from my business. Hopefully this information will be generic enough that it can apply to any business. At least that is my hope. The numbers are mine and are real so you can have a realistic picture of what happens in a business of this type and size.

The next step in building out the accounting system is to break out the sales to different categories. Why not just keep all sales in one category? You could. There is no harm in doing that, however I like the information that accounting can provide. For example I want to know what is my most profitable category and look for opportunities that might increase the sales or reduce the expenses of that category. A specific example from my business is the sales category of copy services. I had a gross profit of $2,343 in copy services in all of 2015. That is not very much compared to other categories. Now I can either try to grow that number by increasing sales or I can reduce expenses or I can leave it alone and focus on other sales categories. If I wanted to increase sales I might consider how I would do bigger and better jobs and how I would market or advertise to get those better jobs. That might mean purchasing or leasing new equipment. For now I see this as an opportunity that I may want to pursue in the future. I will choose to maintain the service I have and do nothing more. This is how accounting helps me make these decisions, but the decisions are not automatic. They still require thought and planning. It is not an engineering exercise, but an art project.

So here are my sales category numbers from last year.

Revenue is how much cash I brought in.

Direct expense is the direct cost for delivering that sale. For example the cost of a stamp in the stamps category. We do a lot of work in sorting mail but I do not count that as a direct expense because we can do it when we have time and we certainly will stop to help customers in the middle of sorting mail.

Gross Profit is the difference between the Revenue and the Direct Expense.

Gross Profit percentage is the percentage of profit from a sale. Because Mailbox services has no direct expense (neither does UHaul) it is 100% profit. This is important because increasing sales in a low margin sales category does not produce as much profit as increasing sales in a high margin sales category.

Percentage Profit contribution is the percentage of all gross profit that the particular category produces. I have ordered the sales categories in order of this.

I have broken out the shipping in to individual shipping providers. Shipping is the second largest contributor to gross profit. Within that category I can see my largest revenue and gross profit contribution is from metered mail (United States Post Office) even though it is the lowest margin of all the shipping categories.

In addition to the decision I made about copy services I have also looked at the level of effort and the results of selling online. I could try and improve those small numbers, but I am shutting that down this year. I could revisit it again later. What are some other decisions I have made based on this information?

1. Stamps are low margin, but worth doing well. Because of that we have decided to have a nice display and try and keep at least one sheet of every available stamp on the counter.
2. Shredding is highly profitable from a percentage point of view. We need more sales. We placed a very large ad in the local yellow pages to see if that will increase sales. We also decided to do our own shredding rather than paying a service. It could save us $1000 this year.
3. Passport photos are highly profitable. We have applied to become a passport agent (we are on a waiting list) I will visit the passport office in LA and see if we have options for providing extra service. We keep a spare printer and paper in inventory with local sources for supplies so we never will be without the passport supplies.
4. Gifts are a unique category. I believe it should be 10% of our sales and 90% of our marketing. Our focus is not on what sales, but what makes the store look better. I think we are headed in the right direction and it confirms our strategy that the gross profit contribution is over $13,000. I expect that to nearly double which will make it as profitable as notary and individual shipping categories.
5. All shipping combined is still our second largest category with Post Office shipping increasing. We raised prices on some of our post office prices. We do not want to be the price leader there. We need to look at ways to improve the smaller shippers OnTrac and DHL.

So these are some of our insights from the numbers. I am going to add these to our new accounting system.

Here you can see the chart of accounts with the new income categories. When you add the accounts QuickBooks will try and order them alphabetically. You can click on the little icon next to the name and drag the account up or down, ordering them the way that you would like. I like to put them in the order of importance. There is no reason to do that, but when I create reports it keeps the accounts in the order I like.

Now I am going to create a general journal entry and memorize it. This is money that is coming in from sales in order to purchase goods and services. I am going to have all of that money go into one account called cash. Now of course some will pay with a credit card and some will pay with a check. I will show you how I handle that later. For now I am assuming that all sales go into an account called cash. That label cash might be a little misleading. It might have been better called Cash Drawer or something like that. Anyway, on to creating a General Journal entry. (Under activities in the chart of accounts)

BTW these are real numbers for a day in the store.

Here I have all of the sales categories in the general journal entry even if there were no sales in that category. When I memorize the entry it will always have all of them and I can quickly enter all of them, even those with no sales.

If you are really paying attention you will see a new account “Sales Tax Payable” This is a current liability. I collected the cash for sales tax so it will affect the cash I have on hand, but I have to set it aside to make sure I know how much I will pay the government tax collectors. I will write more on that later. The point is that I have to account for all of the cash (money) I received. I have another post about taxes. My POS tells me how much I collected in sales tax.

My POS (point of sale) software doesn’t have all of this information in one place for example my POS separates color copies from black and white copies. I don’t distinguish and I just combine the two. My POS combines Passport Photos and Shredding into one category office services. I separate them. All of the information can be quickly retrieved and making this daily entry in a memorized transaction is pretty easy. Mistakes I have made is getting the dates wrong or I will get the information after I have already helped some customers and my numbers don’t add up. Fortunately I can’t save a Journal entry if it is not balanced. I do not have to do these every day. Sometimes when I am out of town I will make a single entry for multiple days. I like doing it everyday just to stay on top of it all.

What are other Sale-other? It is the catch all for things I don’t care to track. For example any office products or services that happen occasionally fall in that category. Some of the other stores in the Franchise have huge sales in office products. If I ever got there I could always add that category. I am not there.

Now let’s look at our important reports

Our Net Income is really high. That is because we haven’t entered in all of our expense (next post) Also notice in our balance sheet that there is a lot of cash (true) and another liability Sales Tax Payable. In the next post we’ll look at expenses which is a little more difficult.

If you understand double entry and accruals then the next principle to understand is depreciation, appreciation, and capitalization. They are actually all the same thing and very similar to accruals. Remember when we talked about accruals we said it didn’t make any sense to only count an expense as happening when it was paid. I pay for earthquake insurance once a year, but I enjoy the benefits all year. If I only counted the expense when I paid it then I would have a very unprofitable day when I paid it and the rest of the year would look better than it really is. The point of accounting is to be able to understand a business. Counting a once a year expense only when it was paid would be misleading and not helpful for understanding the business.

Depreciation is sort of the same thing. When I buy a computer it can be a big unusual expense, but I get to enjoy its use for several years. Well enjoy might be an exaggeration and several years might not be totally true. The point is that I have to account for its expense as I use it. If I buy a computer for $100 and I use it for 100 days, then the expense is $1 per day. That makes sense. Well it is more of an estimate than you probably imagine. I know how much I will pay for an item, but how long it will be useful and what its value is when I am done are good estimates, but still estimates. Doesn’t everything we buy get used over time and therefore depreciated. No. There is a basic principle of accounting called materiality. I may buy a stapler for $1 and use it for 10 years, but the cost of the stapler is not material. In that case I would just expense it the day I bought it. Where is the material line? There isn’t one. It is a judgement call. Again the goal of accounting it to provide the best information about a business. And then there are taxes…

Tax accounting and GAAP accounting are not the same. They are similar, but definitely different. For example there is the section 179 deduction in taxes. I won’t dive into the details but essentially you can elect to count the expense in a single year rather than depreciating it over several years. If you do this then taxable income and GAAP income can vary dramatically. And then there are all the odd rules like you can’t take a section 179 deduction on air conditioning. Why? There has to be a reason, but I don’t know what it is. I am going to stay away from section 179 deductions for now.

I am going to buy 3 computers for a total of $1500 and show how I would depreciate them over time.

Here you can see a new account called office equipment. It is not a current asset. A current asset is supposed to be an asset that would be used in a year, most often cash or its equivalents. You can see the entry I made increasing the asset by $1500 and increasing my credit card balance by the same amount. (Remember double entry and increasing a liability is a credit). Now let’s see those critical statements.

You see here that even though I spent $1500 It does not affect my profit and loss. You can see the Asset in the balance sheet.

For this example I am going to depreciate the computers $300 a year for 5 years. It is perfectly acceptable to re-evaluate the value of assets. Let say that after 4 years I look at the computers and decide they are worth nothing. I could go back and restate the depreciation expense, but most likely I am going to take a $600 depreciation expense that year. Or let’s say that after 4 years I realize that I am going to keep the computers for an extra year. Well after depreciating it for 4 years the asset value is only $300. My depreciation expense is going to be $150 for those last 2 years. What do you do if you depreciate an asset like let’s say carpeting over 2 years and then after 2 years you decide to not replace the carpeting. Well since you have already expensed the value to zero it makes sense to stop depreciating.

There are few different ways to depreciate assets. They are all supposed to match the use of the asset with it’s depreciation or expense. Double declining depreciation is one such method. Then there are taxes…

Here is the entry where the asset is depreciated.

I created a new expense account called depreciation. I could have separate accounts for each depreciating account or contra asset accounts. If that is helpful for understanding the value of depreciating assets, then by all means. There could be better asset tracking methods. Quickbooks has some asset tracking features. The simplest is to not track the details of each asset in the accounting software. 

When we see how this new expense is reflected in the statements we can see that there is an additional $300 expense that lowers Net Income and the asset in the balance statement is now $1200.

How much time and effort should be placed on depreciation? That is a judgment call. Certainly for taxes you want to have the information and expenses. The other day our air conditioner went out. I thought it was the landlord’s problem, but it turns out that it is my problem. So we are going to have to spend about $10k for a new air conditioner. We assume that the air conditioner is going to last longer than me. I don’t want it to be a single expense because I am going to use it forever. I should have been depreciating the air conditioner that we inherited with the store. I did not. So I am going to take a $1000 expense every year for the air conditioner. That will lower my profitability, and my tax burden but it does nothing for my cash flow. That is a completely different accounting problem.

I haven’t mention appreciation or depletion. They are essentially the same thing. Appreciation is increasing revenue and depletion is the decreasing value of an asset that really does get used, like a copper mine. The goal of all of these methods is to match the expenses and revenues and use of assets with the actual use of those items and to not have them match to the actual cash flow.

Accrual accounting is the only accepted way of doing accounting. When I say accepted I mean GAAP compliant. It really is the only way to do accounting because accounting is a way of keeping track of where and when money is moving. Cash accounting doesn’t do a very good job of doing that.

In its simplest form accrual accounting means I keep track of expenses when I have incurred the expense, not when I paid the expense. I pay about $60,000 in rent every year. Part of that is pretty regular. I pay $3990 each month. In addition to the base charge I have to pay for any maintenance or repairs that the landlord makes to the property. That expense changes every month. Sometimes it is $150 and other months it is $600. They may decide to pave the parking lot and when they do I know I am going to get a bill for it. I am also responsible for my share of the property taxes. That gets paid twice a year. Lastly I am responsible for my share of property insurance. This is called a triple net lease or NNN. Expenses can vary and the actual payments of expenses are not evenly distributed. Even though I only pay my share of the property insurance once a year I enjoy the benefits of that insurance all year. So the expense should be spread out over the entire year. Since I cannot predict with 100% accuracy what my expenses will be I have decided to accrue $200 a day for rental expense. I will make an adjustment at the end of the year and re-evaluate as to whether I am accruing the right amount or not. I tend to over accrue which is more conservative. I will make one adjustment at the end of the year instead of going back and changing the monthly accruals. December may be a more profitable month because of that, but hopefully my estimates are good and the difference is not material.

I am not paying $200 everyday so I need a separate account to balance the expense. That account could be either an asset or a liability depending on how you want to set it up. You can argue with me, but it really doesn’t matter which. If I pay my rent at the beginning of the month and then use the property I already paid for then the rent expense could be a pre-paid asset. If I pay the rent at the end of the month I am increasing my liability as I use the building before I pay for it. Either way is acceptable. I could have separate categories for property insurance and maintenance, but that level of detail provides me no benefit so all related expenses are going to be kept track of in a single asset account called Pre-paid property payments. The problem with making this decision now is that if I wanted that level of detail later it will be harder to recreate, not impossible. I tend towards simple is better than too much detail.

I am going to offer a note of advise. There is no reason I couldn’t have called the expense account rent and the asset account rent also. But doing that would make it easy for the bookkeeper to make a mistake. I would rather have different account names even if they may be a little awkward in their naming.

Here is what the accounts look like in Quickbooks. 

Now I am going to make an entry for the expense of the day. I am going to just make an entry in the register by double clicking on the Pre-Paid Property Payments register rather than making a general ledger entry.

Remember I said that there are no negative numbers? Well I didn’t enter in a negative number, but because the asset account technically had money taken out without any money being in the account it’s balance is negative. This is supposed to be a pre-paid rent payment so I should have paid rent at the beginning of the month and this number would not be negative. However before I make that July insurance payment the balance could become negative, so don’t get hung up on the negative balance of an asset other than cash and bank accounts. Let’s add the rent payment at the beginning of the month. I am going to pay with my credit card since my Cash account only has $50 in it.

Now the balance is not negative but it will be later as I accrue the expense throughout the month. I am accruing for all future expenses. I like accruing expenses daily so that I can get a quick look as to how the month is looking. It would be misleading if I didn’t accrue the expense. It would look like I was making money all month except the last day when I accrued the rent. Again this is about choosing the level of detail you want. I find it useful to look current month before the month is over to see how we are doing. There is nothing wrong with making these entries once at the end or beginning of the month.

Make the entries in the register is sometimes easier an quicker, but it sometimes confuses me. The headings Decrease and Increase instead of Debit and Credit can sometimes be counter intuitive. Another thing that Quickbooks does is it that it has an entry type. You can see that the previous type was a GENJRN or General Journal and this last type was a DEP or Deposit. I am sure that Quickbooks is trying to be helpful, but this ends up confusing me when for instance I go look in the General Journal for this entry and it isn’t there. Here is the General Journal entry for the expense:

 

With a General Journal Entry you can combine entries but they have to be entered in all on the same day. I will show that after I add another accrual.

The second biggest accrual for me is employee expenses. I like to accrue these on a daily basis also. This is definitely seems like a liability to me as employees work before I pay them. I owe them the money after they work, just like a credit card.

There are a lot of parts to payroll. There is the money I pay employees. There is the money I pay the Federal and State governments and there is workman’s comp insurance. I am sure there are more details I could add, but there are other ways to get the same information. I would never use the accounting to see what I had paid each employee. That information is kept elsewhere. I am only going to have a single liability account called Payroll payable. Remember what I said earlier about being careful with names? If I had an expense called payroll and a liability called payroll, it would be very easy for the bookkeeper to mistakenly mix those up. So I am going to call the expense employee cost and the liability payroll payable. It looks like this.

Now I am going to make a General Journal entry for the Employee cost. I have estimated that my daily cost including taxes and workman’s comp is $110 per employee. I can make adjustments later if I am over or under accruing. For employee expenses I usually make the adjustment once a month. 

That is just the start of accruing and account setups, but we are off to a good start. Based on what I have entered so far let’s look at the two important statements.

It looks like I am losing money. Well with $50 in sales of course we are losing money.

Here is the balance statement. The balance statement is always a snapshot in time for a specific day. The income statement (or Profit and Loss) is over a specified time period.

Finally as promised I am going to show the daily entry of employee and rent costs in the same same General Journal Entry.

Here is the General Journal entry that combines the daily payroll and rent expenses (I know I mixed the terms with the account names) Now I may have bad mouthed Quickbooks a little bit and now I am going to tout its benefits. Since I will do these entries daily I will memorize this. Once memorized I can bring up the memorized function and just change the amounts. You can see the memorize button just next to the big delete button. It will ask for a name. I have two memorized transactions. Sales and Expenses. I could combine the two and in fact I may do that. But that is for a later post as I build all of this out.

I want to go a little deeper into Accounting, but I first must get on my soapbox. Accounting is great for many reasons. You can find out how your business is doing in an infinite number of ways. However analytics and analysis can do damage. Let me give an example.

I can measure payroll as a percentage of sales. Last year it was 12.75% This year so far it is 16% of sales. Accounting is good at getting these numbers. But what do they tell me? At a first glance it would appear that things are worse. If that was my conclusion I might be tempted to cut costs. But that spiral could lead to lower sales and then more necessary cuts. But let me ask first. Are things worse? We are more profitable and our cash flow feels stronger. So maybe the rise in payroll cost as a percentage of sales is not telling me to cut costs.

My point is that running a business by the numbers can be dangerous. Numbers are tools and they can be used for building a business or as they can be used as crude weapons.

So now lets talk about accounting. It is nice to have numbers and to be able to dive in to details. The first thing to understand about accounting is that there are no negative numbers. Well at least you never enter in a negative number. Money just moves from one place to another. That is what double entry means. There are credit and debits, but even experienced accountants have to think hard about when an entry is a debit or a credit. The point is not whether the entry is a debit or a credit those terms are completely arbitrary and meaningless. The point is that if you debit one account you must credit another. That is the basics of accounting. Remember accounting is the setup, analysis, and strategy behind the numbers. Bookkeeping is the entry of the numbers in the accounting system.

The most basic accounting setup must have at least two accounts. The list of all the accounts is called the Chart of Accounts. You have to debit one and credit the other. Here is a picture or Quickbooks without any accounts in the Chart of Accounts.

Quickbooks tries to be helpful, but in doing so it can get in the way. If you setup a company and you can’t delete some accounts, then just make them inactive. An account is one of 5 types. I know I said that there are not any negative numbers and this little chart makes it look like there are. Ok so some accounts will look negative but you (as the bookkeeper) will never enter in a negative number. So here is the basic categories of accounts and how they are related.

Quickbooks gives you a lot of other options. For example they have an option of setting up a bank account (an asset) or a bank loan (a liability) There are reasons to choose those, but I am going to force it to be simple for a little bit. I am going to have exactly 5 accounts. 1. Income which I am going to call sales. 2. Assets which I am going to call Cash. 3. Liabilities which I am going to call Credit Card. 4. Expenses which I am going to call Cost of Goods. And finally 5. Equity which I am going to call owner’s equity. Here is what that setup looks like.

 

Now I am going to do some bookkeeping. The way I am going to do that is to make a general journal entry. At the bottom of the chart of accounts you can select it below activities.

Now remember I said that Accounting is double entry. This means that the debits and credits have to add up. If you try and save a General Journal entry that is not balanced Quickbooks won’t let you do it. Good for them. So here is a simple journal entry where we sold something and the customer gave us $50 for whatever it is that we sold them

I am going to make another entry. In this entry I used my credit card to buy something I am going to sell. I didn’t pay cash for it. That looks like this.

And now we can look at our chart of accounts.

It shows that we have a balance of $25 on our credit card and that we have $50 in cash. Now the two most important reports are the income statement and the balance sheet. Quickbooks calls the income statement a profit and loss report. Here they are:

That is it for now. You know how to setup accounts although you may not be sure which accounts you want to setup. You can have a lot of detail that provides no added value. I guess you could have a cash account for each denomination including coins, but why would you do that? I have three registers with cash in them. I have one account called Drawers. I don’t need to know how much is in each one. Having a separate account for each bank account will make it easy to reconcile and find missing or incorrect information. Surely you want to have sales accounts for major product lines can be helpful. That is what accounting is all about. Deciding what accounts you will have and what information you want. The bookkeepers will enter the information in wherever they are told to enter it.

In the next post I am going to talk about accrual accounting. Accrual accounting is important to get a better picture of what is happening in a business. The IRS allows you to select your accounting method as cash, but it really never should be done.

 

From the previous post we had put $128,987 as the cost of goods. This section of the Schedule C is where that number came from.

This is not very complicated is it? The first entry is our inventory at the end of last year, which is going to be zero or the number from last year’s Schedule C.  The next line is all of the stuff we bought that went into inventory. Do you need accounting software for this number? Well it would help, but it isn’t necessary. If you have one Credit Card that you use for all of your inventory purchases then you can just look at your statements. No Accounting Required!

A quick note about inventory. I worked at a big company that didn’t know for sure what their current inventory was. This is physical stuff that sits on the shelves. It was somewhere between $6 million and $9 million. The only way to know for sure was to pay someone to go into the warehouse and count it. They had no motivation to do that. The accountants/book keeper wanted the number. They just looked at what they had purchased and what they had sold and figured what was left was inventory.

Inventory is the easiest way to lie about your taxes. More inventory at the end of the year means more profit and less inventory means less profit. Generally accepted principles of accounting say that inventory should be valued at cost. I paid $1 for an apple and even though I can sell it for $4 it is only worth $1 until I do sell it. We generally mark up things 100%. When I sell $100 worth of gifts I estimate that it cost me $50. That is very inaccurate. Sometimes shipping (which is a legitimate inventory cost) makes us round numbers up or down. Inventory sales are only about 10% of our sales so our count is accurate enough.

We are a shipping company so cost of goods includes postage and fees to companies like FedEx. This is a snapshot of our cost of goods for each major category of our sales. 

If you are quick you noticed that the total cost of sales here does not match the total cost of sales above. The reason is that I put my Franchise Fees in a separate category on the taxes even though I have it in cost of sales here. That intuitively makes sense to me since it is directly related to sales even though for tax purposes I put it in another place. That is the only difference. Interestingly the item I spent the most on “stamps” were my least profitable. I do put Bank Card Charges under cost of sales in my taxes. I am not sure that is the right place for them. They work just like the Franchise Fees.

So I have my beginning inventory, my ending inventory and how much I spent on cost of goods. I can easily calculate my cost of goods sold. Without an accounting system I would use bank account or one bank card for all costs of goods and the ending inventory from last year to give me this year’s beginning inventory. How would I calculate the year’s ending inventory? I would count everything I had. That would be more accurate than any accounting system.

Is it worth it to track the individual cost of sales. I think so. I am not certain. Am I going to do something different depending what the numbers look like? I don’t know. It does make me feel better to see the numbers improving, but do I really need these numbers? Well sometimes yes. Let’s look at the cost of shredding. I spent $845 on shredding. Some stores do their own shredding. We are trying to do that this year. I could save $845. That is money right in my pocket. But I am focusing on taxes first. This part was easy. The next part isn’t that hard. It is the deductible expenses. There are 20 different expense categories. Some are simple and straight forward. Some require a little more.

I like Excel and I like QuickBooks. I am going to show you how I would set this up in Excel.

 

First I create a column with all the types of expenses. Then I Define the Name of those items in Excel. I could have added the inventory as part of this. I would be a little worried about 27 – Other. You will want to have those defined. For example franchise fees or something else that you are going to list on your taxes. There is no catch-all for expenses on your taxes.

I would then create another sheet where I am going to enter in all of the expenses

 

 

I would set the Data Validation so that only one of the categories can be chosen. Then as an expense happens you could enter it in and choose the right category. This is very simple. You could also list how it was paid or from which account it came from, but this is just book keeping for tax purposes.

Finally I would add an array function so that I could easily sum the totals. That looks like this:

 

 

 

 

If you are not familiar array functions, they are gold. If you enter in the formula as it is listed above it will NOT work. You have to hold down the Ctrl-Shift buttons and hit enter. It will add the curly brackets.

There you have it for accounting made easy. You could use Google Sheets instead of Excel and you would have a complete free solution.

I did not go into details on the individual expenses allowed for tax purposes. That might be good for another post. Here are mine for 2015:

So if you subtract all of these expenses from my gross profit according to my taxes I made about $48,000 in 2015. This does not seem like a lot when you compare to a W-2 that you might get as an employee, but it is actually pretty good. It is equivalent to probably about $60K W-2 income. Not enough to live in Southern California, but it is improving and that is the point of running a business. The upside of minimizing this number is that there is a self employment tax that will come into play here. Keeping this number low will minimize that tax. The upside of maximizing this number is that it is used for financing and evaluating the value of the business. It is not uncommon to value the business at 2 to 3 times the Schedule C net profit. I am looking at purchasing another business, but because he wanted to pay lower taxes he actually showed a loss on his schedule C. He wants $340k for his business, but it is worth about $50K because that is all the assets are worth. His ongoing business is worth $0. He might get someone to pay that, but they would not be a very smart buyer. That is what he did and why he wants to sell now. He found out that he bought a business that is not making any money. I guess he hopes to find someone dumber than himself. Those people are out there.

 

But I digress. There you go simple accounting.

 

I like accounting. That makes me weird I know, but I do. I am going to break down what I do and hopefully it will help someone. I will sprinkle in some accounting principles while I go. The first principle to understand is that there are more than one set of books. The IRS does not have the same rules that are useful for accounting purposes. I am not making this up. There is a lot of material out there about how to reconcile GAAP rules with IRS rules. I will also drop in some book keeping, which is a close cousin to accounting, but they are not the same thing. So let’s start.

To begin I am going to use Excel. I am surprised how far Excel has taken companies. When I was at Gateway Computers they were running into problems running a multi-billion dollar company on excel spreadsheets. But it is amazing that they were doing it at all. I will transition to QuickBooks which has its problems, but is a step up from Excel. Even though Quickbooks seems like a low end solution it is not, and it is certainly better than Excel.

I am also going to do things backwards by starting with the IRS requirements. Well here we go a bit deep for a second. You have a company. It means that you have registered with your state. If it is an LLC and there is only one owner then the IRS is going to treat you the same as an individual and you are going to file 1040 just like you would if you were employed you are going to add  a schedule C to account for your business income. If the LLC has more than one owner then you might be a partnership that would mean that at the end of the year you will file form 1065. That form is informational there aren’t any taxes associated with that. Part of that form is schedule K which reports the income the partners received and which they will report on their 1040 as income. Now you might have a real corporation. Unlike a partnership you will pay corporate taxes when you file form 1120. I am not going to go any deeper. You will pay taxes on income. There is no getting around it without lying. Since the single member LLC Schedule C addresses enough of the issues I am going to use that. There are tax advantages to doing that anyway.

Now I could spend a whole lot of time just talking just about the tax implications of just car expenses. Let me just say this. All expenses are deductible if they are ordinary and necessary part of the business. You know when you are fudging the truth. That lunch you bought yourself is not a normal part of your business. Keep in mind if it is a normal part of the business then you can deduct it as an expense. Let’s start with income. I have Point of Sale software that is required by the Franchise. It keeps track of a lot of information for me so no need for Excel yet.

I brought in $333k last year. Already I have some “fudginess” Don’t worry accounting is full of fudginess. People think it is straight forward math and everyone would get the same answer if they knew what they were doing. That is simply not true. You have to be comfortable with it. So my POS shows I made $875 more than what I am reporting here. The reason has to do with timing. When I get a check from UHaul I enter it in my POS. When I have earned the money I consider it income. The difference is 0.2% so another principle of accounting comes into play and that is materiality. If the amount is too small to make a difference then there is no reason to account for it at that level.

Phew that is a lot, but I want to try and cover a lot here.

Now (I am still on line 1) the other part that is not included is the un-reported cash sales. Some business owners use those sales to line their pockets. Un-reported cash sales escape taxes and franchise fees. I am not a fan of un-reported cash sales. The other day I traveled to a hospital to do a notary. I was given $80 in cash. I could have taken that money and not reported it. That is dishonest. Honesty is not just what can proven. However when I have a customer come in right before closing and that customer makes one copy and gives me a dime. I am most likely going to throw that in the drawer and not worry about it. If you claim you made $40K a year and you are driving a nice car and supporting a large family the IRS might suspect that you are not reporting all of your income. More important you will know. Be honest,

The second line up there is returns. I should have to report sales if a customer returns the item. You could have allowances for bad debt too. If you reasonably believe you are not going to get the money, then you can deduct it from your sales. I do not use this line. I do have occasional returns, but they are rare. When a customer returns an item I deduct it from sales for the day. Just my way of accounting for returns, not the only way. If you have a lot of returns you may want to track it to see if there is a pattern or for any other reason. With so few I do not separate it from the regular sales.

Next we have cost of goods. That is another section of the schedule C. I have a lot of say about that. I will go into that in the next post. At its basic level if an apple cost me $1 and I sold it for $5 then with my cost of goods being $1 my gross profit is $4. Now if I bought 10 apples for $1 each and again I sold 1 for $5 my cost of goods is still just $1. I still have 9 apples I can sell. My gross profit is the same $4.

My gross profit in 2015 was $204,755. Was I profitable? No way to tell from these numbers. I did leave out one line. Other income. We only bought and sold stuff. We could have got some money from investments or tax rebates or any number of things, but we did not have any of that going on. Just assume if money came into the business that was not borrowed it has to be accounted for here.

One of the most common telemarketing calls we get are for merchant services. These are the services you pay in order to accept credit cards. I always brush them off. Credit Card processing is important. I am going to change processors soon. Last year I paid $5,035 in credit card processing fees. Credit Cards make up 56% of our sales. I paid 2.6% in processing fees. That isn’t a horrible number, but it isn’t great either. I think I can save about $500 a year in processing fees, but it will probably cost me about $1000 in new equipment. I wouldn’t bother, but two things are motivating me to solve this. First our payment gateway (I’ll get into that later) is at its end of life. If it were to stop working I would not be able to process credit cards. Second I will eventually have to have a Chip reader solution (EMV technology) eventually. So I am learning way more than is necessary about how this works. When I bought the business I was overwhelmed with a lot. Processing credit cards was something that was already working so I didn’t want to mess with it. I just had to redirect the funds to go into my bank account. When I finally did start looking in to it I made some mistakes that cost me over $1000. So now I am trying to make a change and I want to do it right.

The industry has evolved and will continue to evolve I am sure. I remember as a kid watching the gas station attendant swipe the credit card on one of these:

I didn’t know that the gas station attendant had to mail in the slips of paper to actually get the credit. I also didn’t know until writing this that these devices are still being sold and used.

When I graduated from High School I started working at a bank. I remember when the first ATM machines were installed at the bank. It was almost magic. You could get cash any time day or night. About the same time credit card processing machines came out. This is a newer version of the same type of machine, but this is what they looked like

The old ones worked over the phone lines. The new ones still can, but it more likely to be attached to the Internet. This is a pretty basic model that can do everything. It has a built in printer for signing slips and printing receipts. It has a magnetic strip reader on the right side for swiping cards. and it even has a place to insert a chip enabled card.

Right now I do not have anything like these pieces of equipment. I have a payment gateway which is a windows program. I connect to it with my Point of Sale (POS) software. The Franchise requires that I use PostalMate as my POS. I have to pay them $75 per month. I will have to pay them whether I use them or not. Here is the screen shot of the settings in the POS.

 

I am currently using PC Charge as my payment gateway. A payment gateway is like the software in the credit card processing machine above but running on a PC so that other programs can talk to it. This is great for websites that want to take payments without a sales person having to be involved. I think I paid PC Charge a one time fee when I first bought the business, but I do not pay them a maintenance fee or a per transaction fee. PC Charge is NOT the credit card processor. It is just a software program. PC Charge is no longer supported. It continues to work, but eventually it will stop working and that will be the end of that. The other payment gateways you see listed charge a per month and a per transaction charge for their gateways. It might be less convenient, but I am going to move towards using the machines above. One of the motivations for doing so is that there is not a working interface into the POS that will read chip cards. At least I haven’t found one. Some fellow franchisers say that they have ordered them, but it has been almost a year and they haven’t received them yet. If you pay attention when you shop you will see a lot of places like the grocery store and the post office have the chip reading devices but they ask you to swipe the cards.

I have to replace my payment gateway and I want to be able to accept chip cards. Neither of these things involve the merchant services. However since I am looking at the machines and payment gateways I decided to look at the whole solution.

First let’s see who the players are. There are the banks. They issue credit and credit cards. I give people credit. I also have taken deposits that people can draw off of. I don’t give them cards that they can use elsewhere, but just like a bank I have debit and credit accounts. The banks connect to a credit card network. There are a couple (AMEX, VISA, MasterCard, etc) I am only going to refer to VISA since it is the biggest, but they all work about the same. Visa’s network is called VisaNet. Visa is a spin off from Bank of America. The Bank of America name really didn’t work internationally. By connecting to VisaNet the banks can communicate with merchants about how much money a customer can spend. Most people don’t know this, but the bank also gets a small cut of that spending. This is why how a bank makes money even if you never pay any interest. In order to make its network more valuable VISA wants every merchant to connect to their VisaNet. That is how they make money. Every time a customer spends money on their credit card VISA charges the merchant (me) money. This is fair since they have spent a lot of money on building the infrastructure and relationships to make it all work. And besides I the merchant get the money right away even though the customer may not pay their bank for 30 days. Then of course someone has to pay for all those frequent flier miles and rewards that banks use to entice people to use their card.

I as a merchant could connect directly to VisaNet through their MDEX program. They recommend that you process 500,000 transactions per month for it to make sense. I process about 500, so you can see I am not close to having that make sense. VISA wants me to connect to their network but they really want me to work with an “acquirer” These are the merchant services people whom I pay and who in turn pay Visa. Of course they need to make money so they will charge a little on top of the VISA charges. I can’t negotiate with VISA. I can only negotiate with the merchant services provider, or acquirer, or payment processor. They are called different things. Now there is also a group of people called Independent Sales Organizations or ISO. These people do not actually have a connection to Visa, but they sell those services as if they did. That is not a bad thing.

Most of the connected payment processors came out of the banks. It makes sense since the banks had to have connections to VisaNet in the first place. Some are still directly connected to the banks but operate as different divisions of the bank. They know that the merchants are going to have bank accounts and that the bank referrals are going to be key to their customer growth. Chase (the #1 largest bank in the US) has a payment processing division called Paymentech. HSBC (the 9th largest US bank) just parted ways with their payment processor Global Payments. Global Payments now operates as an independent processor. There is a potential for fraud, but there is a higher chance that a legitimate processor will be unscrupulous in how they charge for their services. This includes Wells Fargo and Bank of America both of which I have had problems with.

The ISO’s are the most aggressive. Their only job is to sign up more merchants. They do not have to worry about a lot of the things the real processors have to do. They probably pay their sales people on commission which saves them on cost. That can also cause them to lose money on customers until they have been with them for a year or two. Imagine an ISO pays a sales person $500 for a new customer and that customer generates $25 in profit every month. Obviously that customer will have to stay around for almost 2 years before the ISO makes any money. That is why they want to sign you up for a long term contract. ISO sell their service and send bills in their name. Sales agents sell for either an ISO or a payment processor most likely depending on who pays the best. A payment processor may charge a merchant $20 for services, but discount the service to $10 for an ISO. The ISO in turn may charge the merchant $15 for the services. Therefore going direct is not always the least expensive.

You have to sign up for merchant services or you have to change your merchant services. How do you choose which one? I am going to offer several suggestion but the number one suggestion: DO NOT tie anything you do to the equipment or payment gateways that you buy. Interestingly the equipment manufacturers sell their products through payment processors and banks. You can’t buy them directly. But the worse scenario is that the banks will offer to lease the equipment. Unless you are desperate for cash flow this is rarely a good idea. A $200 machine can end up costing you $1000 and you won’t even notice because it will be built in to your bill.

I haven’t had any links or pictures in awhile. So here is a good one. Visa-USA-Interchange-Reimbursement-Fees-2015-April-18. These are the published rates by VISA. This is what VISA will charge the payment processor. These are the numbers you should see on your bill. This is called Interchange rates or cost plus billing. In other words you will see all of the costs of the payment processor and then you will see an additional charge for the processor’s services. How much additional charge? 5 cents per transaction or 50 basis points. That is a good price. And you may be able to do better!

I know this is hard to read, but this is a slice of my merchant statement. The first line is what I paid for someone (actually 123 people) to use their VISA Debit card. If I look in the published VISA rates this matches exactly. I am paying cost plus merchant services. The regulated part of the name is from the Durbin Amendment. This was a law put into place by congress that said that .05% (or 5 basis points) is the most the credit card companies could charge for a debit card transaction. They can charge 22 cents for each transaction as well. The total cost to me was 73 basis points. That is a great deal. Imagine someone buys a stamp from me and uses their debit card. I make 12 cents on that transaction. VISA would charge me 22 cents. Ignoring all the other costs you can see I lose money on that deal. The Durbin Amendment also allows merchants to set a minimum on a debit card transaction. Before the law was passed a merchant could not set a minimum purchase even though a lot were doing it. Carl’s Jr. Charges a flat $1 for the use of a debit card. In case you were wondering the break even point is somewhere between $7 and $12. My average purchase was over $32. I am not going to set minimums in my store. I think that leads to a bad customer experience. But that is another post.

I can go through and verify most of these charges with the VISA published rates. I trust my processor but I did spot check a couple out of curiosity and they did match. The last line on this portion of the statement is the processor adding in their profit. You can see that I am paying 52 basis points. Not bad. There are other charges that make that number go up like a monthly service fee of $9.

In between that you can see a variety of card services that VISA has. You can see that the VISA Signature Preferred Standard has a transaction cost of 10 cents and a transaction rate of 2.95%. For my transactions that came to 3.28% on that particular card. That is what VISA is charging. Any processor who claims they will ONLY charge 2.5% or less is lying.

How is that some merchant services say that they can offer 1.5% processing fee? They are doing one or two things to make sure they do not lose money.  The first thing they can do is not offer cost plus. They will offer something called tiered pricing or something like that. The 1.5% is the charge for only certain cards. They will charge a lot on a per transaction basis. Just on a transaction basis I am paying 24 cents. So a processor could charge as high as 35 cents per transaction AND a percentage and they are going to come out pretty profitable. The other thing they can do is have a large cancellation fee. I have heard of fees as high as a couple of thousands of dollars. Wells Fargo told me there was no cancellation fee and then after I changed they sent me a bill for $700. They can lock you into a long contract but not into a rate. So they can lose money on you for the first year and clean up in subsequent years.

These are just a few of the tricks that a processor can employ. They have to make money. I don’t begrudge them that. But they know that no one is going to change processors just to pay the same amount. I am satisfied with my processor. I am changing because I couldn’t get good answers on the EMV chip readers and interaction with my POS. They did delay my payments a couple of times, but other than that the service has been great. That is another sales tool that doesn’t work for me, but is legitimate. Since all of your customer information is going through the processor they can offer data and analysis to help improve your sales by marketing better. They could offer you equipment or software like a new POS in order to get you to change. All of these might be worthwhile exploring. Take my advice on the equipment. DO NOT LEASE.

So now that you have a better understanding of how all of the pieces work after reading this abbreviated explanation, (I did leave out AMEX and MasterCard), who would I recommend?

I am going to give 2 recommendations. The first is AdvoCharge. Why? Because they seem to be the only one who will tell you their pricing up front. The most common sales tactic is to ask for your last 3 merchant statements to demonstrate how they can save you money. Why can’t they just tell you what their pricing is? The second recommendation is Gravity Payments. Although they did get a little salesy with me it was more about how they educated me, listened to me, and then offered me a path to get where I needed to go. They loaned me some equipment at no cost. I can try their solution on one of three registers and then when I decide that it will work I can easily transition all of my payments to them. That is trust I need.

If you are a fan of big banks then I can recommend Chase with Paymentech, I will absolutely not recommend Bank of America or Wells Fargo. Both of those cost me over $1000 unnecessarily. What equipment would I recommend? I have no idea. Maybe another post.

 

 

I am not claiming any expertise in financing, but I will share my small experience.

When I first bought the business I paid from a fund I had left over from selling our house in Arizona. It was essentially cash. We needed to wire the funds which was going to cost us like $200. It could have been more, but the amount was enough that I thought it was excessive. My dumb move was to just give them cash. So we had to collect $80,000 in cash. It shouldn’t be a surprise that most banks do not have that much cash laying around. I had to go to 4 different branches to get all the cash together. I then deposited the cash into our Wells Fargo account. Everything went through and we had other things to worry about. Then I noticed a $200 charge on my bank statement. It turns out that there is a charge if I deposit too much cash. So I got the charge I was trying to avoid in the first place. The bank workers tried to give me some tips on how to avoid these charges. Create multiple free accounts deposit in the different accounts etc. It all seems so strange. Whatever. They can have whatever rules they want. I don’t begrudge them that. I just had no idea that there could be a charge for depositing cash.

At Wells Fargo I had a Credit Card with a credit line of $7500. I thought that was going to be enough. But then I started running all of the expenses through that credit card. It was easier to keep track of the money for me. I was quickly using more than $7500 per month and I had to make mid-month deposits which if I didn’t keep an eye on the balance I would have some transactions declined. Especially in the gift buying months. I could easily buy $10,000 worth of gifts and then my normal expenses like stamps and FedEx and other things. It was starting to not work for me. I asked Wells Fargo to increase my credit limit. They politely declined. I started looking for another bank.

When I met with other banks I felt like I was talking to HS graduates who chose to work as a teller rather than going to college. They were nice, but I did not get the warm fuzzies that I was dealing with an adult or a professional or some one with experience. They most often pitched me on how to avoid bank fees to get the free checking. Funny thing is I went with the bank that charged the most fees. I don’t mind paying $20 a month if I am getting service.

So I moved to Chase. They gave me a credit card line of $10,000. I told them that I wanted to talk about buying my competitors the following year. They were very professional and kind of told me where my numbers needed to be in order to get that financing. I was very hopeful. Soon the $10,000 credit line was getting maxed out. I asked for an increase. They gave me a $15,000 credit line with just a phone call. I moved my merchant services to them partially to get away from Wells Fargo completely. That is another story.

So I finish my 2nd year in business. The first year I showed a Schedule C profit of $23,000 and finishing my 2nd year in business I showed a Schedule C profit of $48,000.

I won’t go into the details of what profit means here, but you can see that I am claiming $48k profit on $333K in sales. That is 14% which means nothing. I think I can justify all of these numbers, but I haven’t been asked to justify them. The paradox is that I want to keep my profits low in order to pay less in taxes but high in order to qualify for more financing.

The easiest way to manipulate the numbers would be to play with cost of goods line 4. That comes from the looking at the inventory at the beginning of the year and the inventory at the end of the year. If I say I have more inventory at the end of the year then I made less money. If I said I had less inventory then I made more money. There are other ways to manipulate the numbers, but that is the easiest.

A company I worked for did not know for sure how much inventory they had. It was somewhere between $5 million and $10 million. That is a big difference. And they honestly did not know. The only way to know for sure is to do a physical count, which is a hassle and can cost money.

Ok so back to financing. I have to wrap this up. I was told that I could qualify for a loan based on 65% of profitability after adding back in interest and depreciation. I liked that information and it was one of the reasons I was convinced to move to Chase. That was a conversation I had last year. In January I said it was time to talk about how much I would qualify for. I have a really good business plan that involves me paying my competitor across the street a huge amount to move their customers to me.

So sitting down with the banker I was very disappointed. I was offered a credit line of $40K. What happened to the $400k I was going to borrow with an SBA loan? Well since I am in a service business there are not any assets to which a lien can be placed. That is why the $40K in credit was offered. It is was not the sales, the goodwill, the cash flow. It was the  hard inventory that mattered. Even though the SBA site says that it can be used for purchasing service and professional businesses like mine the SBA does not do loans. Banks do loans. And they decide what they want to finance. I was not happy and my opinion of Chase went down a little. It was especially the way it was handled. Very transnational. I wanted them to listen and tell me how to get to where I wanted to go. I wanted advisers, not tellers.

I applied for and got the $40K credit line. It costs me $150 per year and of course interest on any money I use from it. An odd thing happened. I was averaging $20K per month in credit card usage. I knew I was going to have to ask for another credit line increase. Then one day I was looking at my available credit and Chase had automatically raised the limit to $21K. Why would they do that? I am not complaining I just thought it was odd that they didn’t ask.

When I was getting the $40K credit line they kept treating it like it was a big deal. They made me get on a conference call and go over the terms. Again I just submitted my unverified Schedule C. I could have changed the numbers before filing with the IRS. After they gave me the line of credit a banker at Chase who I say Hi to every time I go in to get change congratulated me. She said that she had submitted others that did not go through. What was the magic in my numbers. I asked the guy on the conference call what would be the max amount I could get. He hedged his answer but eventually said about 25% of gross sales. Again these gross sales are NOT verified in the least. They are just what I say they are. So I got essentially 12% of gross sales. Next year I am going to ask for $100K credit line just to see what they will say.

One final note. I am looking at buying another store in Los Angeles. Typical the broker says that the business is pre qualified for an SBA loan. I told him I am interested in the business but I want to get completely qualified before I go any further. He put me in touch with some guy at Community Bank (never heard of them) We’ll see where that goes. Even if I don’t buy the business I want to see if they will actually loan me the money. I have my doubts.

I am an analytics  guy. I did analytics for Bank of America and other companies. I can throw together a mean spreadsheet. I am going to share some of the analytics from my business. And then I am going to contradict myself so be prepared for that.

I always want more details than what people are sharing so I am going to overshare here. Hopefully it will be insightful or at least interesting.

When I bought this store I didn’t know anything. I looked at sales and then I asked about expenses. The guy I was buying it from said, “Yeah I don’t know. When I get a bill I pay it” That should have been a red flag. So let me share some information that I keep track of now.

 

 

This is last month’s numbers. Not bad, but not killing it either.  Let’s look at the costs for those sales.

 

 

 

Now for the most simple minded we could say that we made $14,000 in March. Of course that is not very useful since it doesn’t include all of the other expenses like rent. But let’s look at the gross profits of sales.

 

 

This is interesting. Mailbox services is by the most profitable product because there is not any product cost. (There is other costs like the time it takes to sort the mail) In fact if you add them up the top three products make up 2/3 of all profit. What business am I in? The top three do not have any cost associated with the products so they have a distinct profit advantage.

Now I am going to combine all the shipping carriers and call them just shipping and see what difference that makes.

Ok so shipping makes up a large portion of sales and profits.

The Sales-Other are other costs of sales that do not tie into a product, but are a cost of selling. The two main categories are Credit Card charges and Franchise Fees.

But let’s look at other expenses

 

Now if you add up all of the expenses including cost of sales I actually lost $603. Inside the Non-operating expenses there is a category of distribution. That is money I took out and spent on personal items. But still $900 for the number of hours I worked makes it about $3.25 an hour. That is below minimum wage.

 

 

 

 

Here is where I am going to now reverse myself. Analytics is interesting, however it is useless if it does not influence a business decision. It is best to define that business decision before the numbers are analyzed. So if I was trying to decide whether to buy this business or not, these numbers might be helpful. I could decide that I need to make at least $10 per hour for it to be worth my time. And in this case the answer would be not to buy.

I am very capable of skewing data to fit into what I want to be the truth. I have to be careful of that. This is more art than math, but I need to see the facts for what they are. Here are some other ways to look at the data

 

Comparing last month to this month so far (a week to go) things are looking better.

 

 

This compares this month to last year. Things are looking flat or worse.

 

But I will re-iterate: What is the business decision that needs to be made? I don’t know what that is right now. So all of the data is worthless. No need to drill down, analyze, summarize or evaluate. Figure out what is the decision that needs to be made.

I am about to advertise in the yellow pages. I have to pick a category. Notary makes sense since it is a high profit part of the business. What about shredding? I only made $400 in March. Here is where the art is. Does that mean there is more opportunity in shredding? Or does it mean that I want more notary since I make 8 times more than shredding. I don’t know what the right answer is.

Sometimes looking at the numbers gives me comfort that we are headed in the right direction. We are up 7% this year compared to last year same time period. But what is the use of numbers if they do not cause us to do something different. Even if we do something that impacts the numbers tremendously. Let’s say that we decided to implement a program where we gave a coupon to every customer. And let’s say that it resulted in greater sales. Well if we were going to do that anyway, then why look at the numbers at all. So what is the use of numbers?

I was at a large e-commerce company and we were looking to implement an accounting system. They were $100 million dollar company and yet they didn’t even have Quickbooks. They paid their bills when they came in (not to unlike the bozo who owned this store before me) without questioning whether the bills were right. The owner pressed us. “Why do I need a better accounting system? I pay my taxes. I don’t need to pay them better.” He had a point. Now if he was looking for better financing that “better” accounting system might be useful. However I have gone to the bank for financing and they have not asked for audited or certified financials. I gave them my schedule C (taxes) and they gave me a line of credit based on that. Funny thing is that I could have been lying. (I wasn’t) I gave them the schedule C before I had filed them. I could have filed something completely different. Now they did not give me as much as I wanted, but that is for another post.

So in conclusion I like numbers. They give me comfort (or distress if they are bad). In order to really use analytics there has to be a business decision dependent on the numbers. That is not easy. Hopefully I can come up with a scenario where analytics will be critical.