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Small Biz Accounting Tips, May 2015
May 06, 2015
Good Morning!

Welcome to your May newsletter on Small Biz Accounting Tips!

Well, the warm breezes are blowing, the sun feels warm on my face, and the grass needs mowed, so it must be Spring!

Actually, by the time I get my whole yard mowed, I have to start all over again! LOL But it's all good. I enjoy it.

Just a quick note - you may have noticed that this newsletter has become more of a bimonthly newsletter instead of monthly. I apologize for that. There's been a lot going on in my life lately, and I just got drained and pressed for time and I couldn't get to everything. Maybe some of you are in that middle-aged part of life where things get difficult, with aging parents and children and jobs and physical changes and sometimes you just don't have enough energy to go around. Well, that's where I am. It's just me here at this website. No staff. No writers. The good thing about that is you know that everything that goes on this site is from my experience and knowledge from being an accountant day after day.

I know a lot of small business owners are what we call Solopreneurs, running a business by themselves, with no assistants or staff. So we have a lot in common. When you run a small business, you try to do everything, and that's where my website comes in handy, trying to help you keep your own books.

So...

Let's talk about Cost of Goods Sold, shall we?

-Kathy


Cost of Goods Sold

How's your small biz doing? Are your sales covering your costs?

One part of that answer is sales - are your sales increasing or decreasing...

And the other part of that answer is your costs.

That's why it's important to keep track of your Cost of Goods Sold (or Cost of Sales if you are a retailer or service provider - I'll continue to use the term Cost of Goods Sold here for continuity). Cost of Goods Sold isn’t an account, per se, although it can be...it’s more a section in your Income Statement, sitting there between your Sales and your Expenses.

It’s a calculation of the direct costs of making your products (manufacturer)– or providing your services (service business) – or selling someone else’s products (retailer). For the service provider, the term is Cost of Sales, as there is no “goods” being sold.

So what is a direct cost?

It depends on what your business does, but here’s some examples.

Direct Costs for a Manufacturer:

*materials purchased to make products (including the cost to get it to you)
*wages paid for anyone who makes the products
*subcontracted services – having someone else do part of the process
*freight paid to get the product to the customer

Direct Costs for a Retailer:

*cost of products purchased for resale, including freight to get them to you
*wages for employees on the shop floor selling the goods
*freight charges if you deliver the goods or ship them to a customer

Direct Costs of a Service Provider:

*costs to get to the client – airfare, car rental
*hotel and meal costs if away from your home when providing services
*costs of presentation materials, copier costs, office supplies used, etc.
*wages of employees included in presentations or those providing the service (auditors, attorneys, laborers, etc.)

What kind of Journal Entries would you make for these kinds of costs?


Accounting for Cost of Goods Sold

First of all, Cost of Goods Sold is not usually used as an account in your Chart of Accounts. Usually you will find certain accounts listed as “Cost of Goods Sold accounts”, just like you’ll see certain accounts listed as “Sales accounts” or “Expense accounts” or “Asset accounts”, well, you get the idea.

Usually we use the following accounts in the Cost of Goods Sold section:

Materials
Products for Resale
Direct Labor
Subcontracted Services
Freight
Billable Expenses (travel, meals, office expenses, etc )

Here’s some sample Journal Entries:

Let’s say you manufacturer those shepherd hooks that you see in yards, holding flower pots or little garden flags.

You have to purchase steel rods.
Materials……………………….$5,000
Cash-Checking……………………………$5,000

Then, after you cut and bend them, you need someone to powder-coat them for you.
Subcontracted Services………$2,500
Cash-Checking……………………………………..$2,500

When they’re done, you have to ship them to the store that sells them for you.
Freight……………………..$500
Cash-Checking…………………………$500

Cost of Goods Sold on your Income Statement

Let’s continue with the example above, and say you sold the products for $10,000.

Here’s what you’d see on your Income Statement:
Sales…………………………………………………………………..$10,000

Cost of Goods Sold
-Materials……………………….$5,000
-Subcontract……………………$2,500
-Freight……………………………$..500
Total COGS………………………………………………………….$ 8,000

Operating Profit (aka Gross Margin)…………………….$ 2,000

--after this section, you’d list out your Expenses, and then calculate your Net Profit.

Operating Profit is what you’ve made from selling your product. Net Profit is the amount left after deducting all your other Expenses, like rent, utilities, advertising, phone, etc. Talking about Cost of Goods Sold and Income Statements, I’m reminded that many small business owners don’t look at their Income Statement until the end of the year, when they’re doing their tax returns.

Really, you should at least prepare an Income Statement once a quarter. If you’re not earning enough Operating Profit to cover your Expenses, you need time to make adjustments.

You could either have a sale to boost Sales, or you could increase prices, or you could bump up your advertising to bring in more customers. But, if you don’t look at your Income Statement til the end of the year, how are you going to know?

Yes, your cash balance should be shrinking. You should have trouble paying your bills. But will you attribute that to low Profit Margin or will you just think it’s the ‘off season’ or the economy?

For more information on Income Statements, click the link here.





Looking for a better way to keep your books?

Is your checkbook your accounting system?

If you use QuickBooks, preparing an Income Statement is as easy as a couple of clicks.

But if you’re just using your checkbook, it's a little harder. You may want to consider upgrading to a system I’ve created. It uses a simple Cash Receipts Journal and Cash Disbursements Journal to record your business activity each month.

These journals can be created on paper or in Microsoft Excel (or the free version), whatever works best for you. They need not be complicated or fussy.

But you can pack a lot of info into these journals, and get a lot more information that just a checkbook entry. And, from these journals it’s an easy couple of steps to an Income Statement.

Check out my navigation panel on the left of the screen and click on 'Cash Management' for more information on these journals.

Or, for a more in-depth discussion of this system, check out my ebook here. _______________________________________________________________ NOTE:

I'm in the process of writing an ecourse on setting up and using a manual accounting system. The course will walk you through each step - with examples and exercises for you to complete in each section. It will be a 10 day course and each day your new section will drop into your email inbox each morning. I'll keep you up to date on my progress here in the newsletter and in my blog.

If you're interested, drop me an email. I plan on offering a discount for my newsletter readers!

_______________________________________________________________

Or maybe you're looking to venture into computerized accounting for your small biz.

There are a few free options that are pretty good, but most small business owners choose QuickBooks.

QuickBooks is a full accounting software system, and it's the #1 small business accounting software package on the market. I use it, so I know it has a lot of great qualities. You can invoice customers, pay bills, pay your employees, track your jobs or projects, and prepare all manner of reports. So if your business has outgrown your manual system, check it out.


A New Option for Small Business Loans




You hear all the time how hard it is to get a small business loan. Well, there's a new option. I found it for a personal loan, and they're expanding into small business loans, so I thought I'd let you all know about this.

If you're looking for some funds for your small business, look into Lending Club.
They have investors, who will contribute to your loan request. They earn interest, you get a loan. The rate starts at 5.9% and you can choose a term up to 5 years. They report your payments to the credit bureau, which helps you earn a good credit rating for your business, too.

To qualify, you need to have been in business at least 2 years, have annual sales of at least $75,000, and have some business credit (a credit card or some vendor credit).

As I said, I'm using them personally, and it was a quick, easy process. Check it out, and see if it makes sense for your business.




Well, that's it for this months newsletter.

I'll be back next month with more news and tips to help you with your small business bookkeeping.

Take care!

Kathy http://www.small-business-accounting-info.com

PS: Please feel free to let your fellow small biz owners know about this newsletter! Send them to my sign up page - the last button on my navigation panel.

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