Would you watch a hockey or a football game if they didn’t keep the score? Of course not! So why wouldn’t you keep score of your business results to see whether you are making or losing money? Businesses keep score by setting up a proper accounting systems. People tend to ignore accounting and bookkeeping, because many think this area is not as important as the core business of making music or selling products. Unfortunately, this type of thinking is not restricted to the music industry; many people who get into business think this way. The focus of this article is to provide some insight as to why having a proper accounting system is a vital part of your business, whether the business is music or not.
As of the writing of this article, I’m dealing with at least a handful of businesses that are facing extreme financial duress, because they never set up a proper accounting system or never took it seriously. Here are some signs that you have a poor accounting system:
The Canada Revenue Agency (“CRA”) has frozen all your assets due to non-compliance with payroll tax, GST/HST or income tax.
The CRA has assessed or re-assessed you an unreasonable amount of money.
You are earning good revenue, but you’re getting further into debt.
The bank won’t take you seriously.
Your accountant has advised you that you have a large tax bill, but you don’t understand why since your bank account is negative.
You’re being audited.
Your grant applications are repeatedly rejected.
You can’t sell your business, because no will give you a good price.
Investors are not taking your business seriously.
You keep spending the money as soon as it comes in and you don’t know why or what’s going on.
You’re probably saying, “Well I have a good accounting system, because I keep all my receipts in this box or envelope.” Sorry to break it you, but that’s not an accounting system. That’s you keeping your receipts in a box or envelope. What is an accounting system you ask? An accounting system is the mechanism of recording business transactions with proper support, which is then transformed into meaningful information.
Luckily we live in a great age, so there are many accounting programs out that make the process less cumbersome. In the past, bookkeepers would spend hours upon hours recording transactions manually and then accountants would spend hours turning the data into meaningful information.
There is still plenty of work that has to go into setting up a proper accounting system, which includes the following:
Selecting an accounting program or tool that works for you is essential to having a strong accounting system. I strongly recommend a cloud based software such as:
QuickBooks Online - Powerful and versatile (requires a monthly charge).
Wave - Powerful and versatile (free, but requires time to learn the system). This is the tool I recommend the most, because it’s free.
FreshBooks - Good for keeping track your expenses and revenues, but has some limitations for a nerdy accountant like myself.
If you have a small business and don’t have many transactions or resources to invest in an accounting software, spreadsheets work, but it’s very important to make sure you are tracking them correctly. Just like throwing your receipts and your invoices in a box, people tend to throw all their transactions in a spread sheet and think that is sufficient. See the attached link to a template that I created.
If you are going with a spreadsheet, ideally you should separate the bank transactions from expenses paid in credit and those paid in cash. Also, it would be ideal to keep personal expenses out of this all together.
Developing an organized record keeping system
Organized record keeping is essential, as it is key in providing proof for your transactions. This is important to support your position in an audit, CRA query, as well as disputes with service providers. Good record keeping also serves to support grant applications and potential sale of the business.
See the following link that gives you more details of how to organize your records
Develop a chart of accounts that is relevant to your business
A chart of accounts is comprised of the categories of assets, liabilities, and revenues and expenses that are specific to your business, as well as the categories that will enable you to analyze your business in making decisions. Your chart of accounts will be the driver for your information system. Do you want to know how much you've earned from digital sales or how much you've spent on musicians? Having a chart of accounts that is relevant to your business is key.
The following link provides you with an example for a chart of accounts for a recording artist.
One of the most important processes in your system should be the regular reconciliation of your bank accounts, credit cards, loans and accounts receivables, and payables and sales taxes. This is important, but many businesses don’t do this properly causing missed transactions, double count revenues, or expenses that skew the information system. These could potentially lead to over or under payment in taxes or poor decision making due to incorrect information.
It’s ideal to have a bookkeeper in place to do this, as it can be a cumbersome process. Ideally you should have someone examining your books from time to time to ensure that you are on the right track.
Keeping relevant reports
You should set up reports that are going to be relevant to you in the business decision making process. Most accounting systems provide you with the following:
A profit or loss statement is your score sheet over a certain period. It should provide you detail on how much revenue and expenses you’ve incurred and whether you made or lost money. In addition, this will provide you information on how much you’ve spent in a certain category. As a captain of any ship you need to stay on top of this or things could get out of hand.
A balance sheet (aka statement of financial position) is a snap shot at a point in time that provides you with the assets and liabilities. This is essentially your fuel gauge. If you have more current assets than current liabilities, you still have fuel in the tank; how much more fuel will depend. If you’re current liabilities are more than your current assets, then you’re insolvent and are most likely in trouble (i.e. running or fumes or have stalled in the middle of the highway). In addition, this should give you a sense of how much wealth you have built or expended in the venture (the equity or deficit position).
Accounts receivable reports provide you with a detailed report of who owes you money and how long have they owed, so you could send in the muscle to collect.
Accounts payable reports provide you with a detailed report of who you owe money to, these tell you who to avoid.
Other reports that are based on your accounting information but require judgement and detailed thought:
Cash flow projection allows you to see how much fuel you need to accomplish your objectives. This will depend on what you have planned.
Budgets are essential to ensure that things don’t get out of control and that you are reaching your goals.
This subject is highly detailed and meticulous, so I would suggest checking out the many books and courses available if you want to get in more detail. The object of this overview was to get you to take this area of your business a little more seriously. If you would like to discuss more in detail, send me a shout out on twitter @sam_arraj.