What you need to know about managing the finances for your growing real estate investments.
Purchasing multiple properties can be an excellent investment path, allowing you to grow your assets while potentially making some extra income at the same time through leasing. However, owning and managing multiple properties can become a pain point for you and your CPA when it comes to bookkeeping, particularly when tax season rolls around each year.
It can become complex and confusing to track income and expenses for individual properties when they are all kept under one Quickbooks file, making filing taxes a nightmare.
At System Six, we believe you can achieve accounting success by understanding the proper tax structure for multiple properties, keeping your individual properties’ bookkeeping separately organized, and utilizing available up-to-date technology to keep your bookkeeping balanced and easy to track.
As an owner of multiple properties, one roadblock that may surprise you when tax season arrives is realizing too late the headache that filing all your properties on one tax file can bring you and your CPA. Whether or not multiple properties are LLC’s, filing each entity individually will make the accounting process much less confusing. Setting yourself up for success starts with making sure you are structuring your bookkeeping correctly.
How to Structure Your Property Accounts
Each of your properties should ideally have its own Quickbooks file and profit/loss/balance sheet. Trying to keep track of each property’s expenses and income streams under one personal bookkeeping file is potentially a costly discrepancy just waiting to happen. You can safeguard your assets and investments by organizing your properties’ bookkeeping individually (not to mention your CPA will thank you for making their job much more time-efficient)!
If you use your multiple properties as a source of income by leasing them out, it will serve you well to open individual banking accounts for your properties. Separate lines of credit and bill pay systems for your properties will make expected costs such as utility and cable bills easily trackable and accounted for.
Sometimes owning multiple properties becomes even more complicated – what about situations where you have multiple properties under individual entities that income from your properties has to be regularly allocated to?
Utilizing class and location tracking will give you another valuable layer of data to help you precisely track how much revenue from your properties needs to be allocated to an overhead entity. Class and location tracking is an opt-in feature on accounting software, like Quickbooks, allowing users to group expenses or invoices by location and department.
Even though structuring your accounts and bookkeeping individually will undoubtedly keep your accounts safer, more organized, and trackable, we understand that it can be overwhelming for property owners to tackle that front-end work of setting up individual bookkeeping, tax files and lines of credit for their multiple properties. This is especially true for property owners who have been keeping their properties’ accounts on one Quickbooks and tax file and want to restructure their bookkeeping to keep their properties’ individual bookkeeping and tax work separate from each other.
You don’t have to tackle this alone! Here at System Six, we are passionate about utilizing the latest technology and tools available to help our clients with multiple properties keep their bookkeeping organized and balanced. Let’s chat.
At Systems Six, we recognize that feelings of stress and being overwhelmed are commonplace for many small business owners during tax season, which is why we want to equip you with principles to simplify your tax prep. On a micro level, your taxes are impacted by daily transactions: running payroll, writing invoices, paying vendors — each of which look back upon actions previously done. Zooming out to a macro level, the same data needed to execute your taxes will also be needed in the future if your business gets audited, you need financing, or are looking to sell. When new seasons of business or big decisions come knocking, we want you to be prepared. Here are three tips our expert bookkeepers recommend to simplify your tax prep and serve your goals on micro and macro levels:
1. Use proper digital record keeping systems
The foundation of your tax prep is the same systems you use to accomplish tasks like payroll and paying bills; they must be organized and accessible. We recommend using online, cloud-based tools. Our team advocates for Quickbooks to be your central online hub through which all other platforms connect. Using other platforms like Bill.com for bills, Ally for receipts, and Sharefile for shared documents will complement Quickbooks and assist in managing an efficient and accurate paperless accounting system. Finally, Gusto, a time-tracking and payroll system, is recommended by our team. At the end of the year, Gusto will send W-2’s to each of your employees digitally. By using these systems, your books will be ready for a tax preparing CPA to effortlessly step in and carry out your taxes without needing to spend hours digging for correct information.
2. Maintain bookkeeping hygiene
Using a simplified, cloud-based system for the foundation of your tax prep is essential; however, it can be easy for your books to become messy without upkeeping these systems. We recommend performing weekly and monthly upkeep tasks to ensure that your files stay organized, your receipts are all accounted for, and your books remain clean. Staying on top of these day-to-day tasks will aid in preparing your business for tax season. Ignoring the stack of receipts throughout the year will only lead to panic when your CPA comes knocking.
3. Reconcile your Quickbooks account
Reconciling your books is an easy task, yet it makes a profound impact when it comes to having truthful and accurate books. Comparing your books with your bank statement brings accountability to your work. Quickbooks is a phenomenal online tool, but the IRS begins with your source documents and builds from the ground up to validate your books. Therefore, reconciliation is essential to the promotion of transparency and accuracy with your bookkeeping.
Tax prep doesn’t have to be overwhelming, but it requires organized, daily bookkeeping practices to ensure accurate data. By using digital platforms, maintaining the hygiene of those platforms, and reconciling those platforms with source documents, your company will have significantly simplified the preparation process.
It’s storytime on the blog this week! Do either of these tales sound familiar to you?
Flash Drives and Checkbooks
The advisors at Neighborhood Financial were losing their minds and perhaps more alarmingly, their valuable time.
It was the last Friday of the business month and, as was becoming far too common, financial advisors/business partners Jake and Lisa were scrambling to make sure their individual income accounts and their joint business account were correctly balanced.
As with most financial firms, bookkeeping needs at Neighborhood Financial were complicated. Along with individual income streams and expenses, the business partners’ joint venture account had to be regularly contributed to by both team members. They had hired an independent accountant to handle their books long ago – so why were they still not 100% sure of where their accounts stood and who owed how much to their joint account every month?
With the chime of the office doorbell, the answer to that question walked in the door with a flash drive in one hand and a stack of unsigned checks in the other.
Fred the accountant had years of experience and a winsome personality that built loyalty and trust with his customers. Unfortunately, he was falling farther and farther behind on the latest banking and bookkeeping systems and tools that make modern bookkeeping organized and efficient.
Fred the accountant still kept Jake’s and Lisa’s individual books on a flash drive that Jake and Lisa only had up-to-date access to whenever Fred was able to stop by. Fred still handled expenses and payments with paper checks, reports and receipts. It was simply the way he had always done things.
It took up quite a lot of their valuable time for Fred to help Jake and Lisa figure out how much each of them needed to contribute to their joint account each month, and the sums varied so wildly month to month that neither of them were ever sure if they were over or under contributing.
“There’s got to be a simpler, more dependable way to do this,” sighed Jake, rubbing his forehead after Fred left with the stack of freshly signed checks.
“This is becoming too stressful for us individually, and for our partnership,” agreed Lisa. “I think we need to make a change.”
How much of a difference can expert help and up-to-date tools make for financial businesses?
It may surprise you that the answer is more than you might think.
Staying two steps ahead of the latest tools, systems and technologies for financial business bookkeeping is becoming a necessity for those who want to stay ahead in today’s quickly evolving world. More than ever, today’s financial businesses need expert help with a deep understanding of the most accurate and efficient bookkeeping tools on the market so that they can focus on what they value most: serving their customers.
Something we have noticed among our clients is that some businesses are leery of switching from old, manual ways of accounting because they are afraid they will lose the personal touch that comes with the long standing relationships that develop over years working with a single accountant. The learning curve of newer systems and technology seem overwhelming and businesses worry it will take too much of their time.
At System Six we work hard to stay ahead of the curve when it comes to the best, up to date systems and tools available for bookkeeping so you don’t have to. We are also just as committed to building long lasting relationships with our clients – relationships built on great communication and personal attention to the details that matter for your business.
21st Century Solutions to 21st Century Challenges
Jake and Lisa made the decision to change how they were handling their business’ bookkeeping.
By outsourcing their bookkeeping needs to a company that was up to date with today’s best technology, Jake and Lisa began to see immediate improvements in the areas that previously caused so much frustration and stress.
The new bookkeeping team used tools to analyze past years’ spending to project more accurately how much Jake and Lisa needed to be contributing to their joint account each month. Their payments became more consistent so there were no longer last minute surprises at the end of every month.
While trying to understand and manage the various streams of revenue and expenses at their firm had been a nightmare before, now Jake and Lisa received monthly, detailed reports broken down in a clear, concise way. Jake and Lisa finally had vital account information at their fingertips, up to date within ten days of the end of the month. No more waiting for and fussing with flash drives!
Moving their banking and bill pay systems online alleviated the need for paper checks and reports, which made Neighborhood Financial more organized and efficient than ever before.
All this led to surprisingly big benefits for Jake, Lisa and Neighborhood Financial: more peace of mind, better control of their account information, and best of all, more time to devote to their clients.
Does this story sound familiar to you? Have you been wondering how updating the way your business handles partnership accounting would improve your work? If so, we’d love to connect with you!
For churches, the calendar year closes with exciting and reflective celebrations of Advent and Christmas. Church staff focuses on providing reflective, engaging opportunities to connect with one of the most meaningful seasons in the liturgical calendar. In the wake of the tinsel and pageants, advent calendars and carols is another milestone in the annual calendar: donor giving statements. Rather than inciting enthusiasm and joy, most church administrators and accounting volunteers cringe at the thought. These staff members could share stories of fighting with printers, chasing down missing data, and mail merging statements through all hours of the night.
At System Six, we understand how complicated it can be to provide accurate, accessible donor information to your congregants. Every year you may find yourself thinking, “There has got to be a better way…” – there is! We have put together this comprehensive guide to help you streamline your giving throughout the year so that statements can be processed, sent, and reconciled in moments – rather than weeks.
Four components affect church donor giving statements:
1. How you collect donations
2. How you track your spending
3. How you store donor giving data
4. How you send donor statements
A crucial recommendation: the least number of tools needed to complete these steps, the better! Throughout this guide, we will highlight several of our favorite tools. Be sure to evaluate the tools you currently use to see if they can meet any of these needs throughout the year.
At System Six, we believe in the power of trustworthy, high-tech tools to build financial security, transparency, and control. We have been in the cloud since the beginning. Over the years, we have transitioned hundreds of businesses, families, non-profits, and firms to cloud-based tools and seen the impact of reliability and simplicity. Paper and pen systems are notoriously clunky, unreliable, and insecure.
We understand it can be overwhelming to sift through the myriad of available software and applications to help streamline your processes – even more so if you’re doing it for your personal finances. Accounts payable at your company probably do not pay the internet bill at your rental property or handle the landscaping company’s monthly fee. As your personal wealth, properties, and real estate grows, how do you handle the influx of papers and filing?
Our advice? Set yourself up with reliable, trustworthy cloud-based tools. Our team has helped countless families transition away from paper tools. If you’re looking to make the jump, here are four tools we recommend adding to your personal toolbox:
1. An accurate time tracker
If you have employees who work on behalf of your family or are working in your home, they must have the ability to track their time accurately. It’s easy for timecards to be lost or misreported when using paper and pencil. To increase accuracy, we recommend using online software to track your employees’ time. Companies like Gusto, Quickbooks Time, and Toggl have created systems that benefit households by eliminating errors with timecards. In addition, these systems will save you time by syncing to your household’s central accounting software. Several of these tools have mobile apps for quick and easy access and can differentiate between projects, so you know where your staff invests most of their time.
2. Bill pay software
Writing checks, creating invoices, and processing payments can be very time-consuming. A bill pay software helps streamline these practices through technology. Bill.com is the platform our Systems Six bookkeepers recommend. Not only will this software help make your accounts receivable and accounts payable more efficient, but it will also connect to Quickbooks, our suggested central office for your paperless accounting system. Bill pay software keeps your bank credentials safe by operating as a separate platform, increasing convenience and security. This way, your bills and cards can sync directly with your bank account without giving away your login credentials.
3. A shared space for files
When making the transition to paperless accounting, it can be challenging to resist the urge to keep all your paper bills, invoices, and receipts. We recommend using a shared space to upload pictures of your files to keep them digitally. Google Drive, Dropbox, and Sharefile are all platforms that provide the necessary storage you need to go paperless. These files can be shared and accessed from any device with a login, making it easy for your bookkeeper or accountant to find pertinent files without needing to dig through a filing cabinet.
4. A receipt management system
If you have employees working on behalf of your family who have the authority to use credit cards linked to your bank account, you must set clear boundaries. We recommend establishing spending limits for each employee and linking your bank account to Ally. This software organizes your receipts from multiple members of your staff without sacrificing your time and energy. These receipts can easily align with other management software like Quickbooks to provide checks and balances for those with authority to spend on your behalf.
We believe you started your business out of a place of passion and to meet a need in your community. As a small business owner, you likely wear many hats, juggling your time between owner, human resources director, marketing manager, and accountant, to name a few. Your time is valuable, but in light of all of your job titles, time never seems to be in abundance. Due dates loom, tasks pile up, details are overlooked, and stress begins to consume you. The solution? Delegate. Here are five signs it’s time to look for an outsourced bookkeeper so you can get back to dreaming and growing your business.
1. Receipts and bills are stacking up
Is your desk becoming overgrown with bills and receipts? Does the paperwork feel like it never ends? Organizing your books can be discouraging when you are drowning in financial data. It becomes even more difficult if your business did not set up a proper system for bookkeeping from the beginning. Without a standardized approach, maintaining your books can be burdensome. Your employees rely on you for accurate and timely payroll and budgeting.
Organized books are critical for profit-loss statements, financial planning, and budgeting. Cloud-based tools like Quickbooks will make it easy to keep tabs on your finances without the mountain of papers on your desk. Don’t let those receipts get the best of you; hiring a professional bookkeeper can help.
2. Tax-prep is stressful and overwhelming
Does tax season stimulate anxiety? You took the right step in hiring a Certified Public Accountant to file your taxes, but tax preparation is still required. Someone needs to run reports, apply updated tax codes, and categorize paperwork. Doing this on your own can be intimidating. While financially savvy and experienced, your CPA is not involved in the ins and outs of daily business and doesn’t know what papers you filed where or how your business runs cash-flow through the weeks and years.
CPAs don’t typically do tax preparation, and it will require much more time, money, and communication to find all of the documents and data they need. Outsourcing all your business’s tax prep to a bookkeeper can alleviate the oppressiveness of tax season by streamlining communication with your CPA and increasing your confidence that your taxes will be filed correctly.
3. Financing is necessary for growth
Is your company looking to grow? Do you need additional financing options? For more financing, you must have organized and accurate financial data. Banks will evaluate your business on the organization of its financial records, debt repayment history, and reputation. By hiring a bookkeeper to execute financial tasks, your business will have a greater opportunity for increased lending. In doing so, you can know your profit and loss statements will be timely and accurate when submitting paperwork to a bank. If you need additional documentation, your bookkeeper is a call away. Don’t let approvals get in the way of your organization’s growth.
4. Every penny counts
If you’re a small business owner, you know that every penny matters. Unanticipated fees and additional expenses are simply not an option. Avoiding unwanted costs is a must, and cash flow management is essential to running a successful business. By hiring a bookkeeper, your company avoids the risk of audits and late fees. In addition, bookkeepers can facilitate a more efficient business on your behalf by appropriately entering all information for your taxes, which saves money in the long run. Get back to looking at the big financial picture, let the bookkeepers handle the pennies.
5. Dreaming for your business has become stagnant
You didn’t go into business for the endless bills, crinkled receipts, and math homework. You became a business owner because you had a dream: a desire to change and serve your community and to build time and financial freedom. We believe you deserve to have the time and energy to focus on your goals and see them come to fruition. A professional bookkeeper grants you the mental space to be inspired again by maintaining the areas of your business that drag you down. Get back to dreaming, hire a bookkeeper.
By delegating the bookkeeping to a professional team like System Six, you regain time, energy, money, and most importantly, the space to grow your business. Are you interested in taking the next step to finding a trustworthy and dependable bookkeeper? Let’s chat. At System Six, we help business owners get back to what’s important, one line item at a time.
Welcome to the final part of our three part series on bookkeeping and finance specific to churches. This third part of the series covers budgeting. Just like I mentioned in part two, I recommend reading the previous parts (on Helpful Tools and Program Spending) of the series since this final edition of the series builds on what was previously covered.
In part three we will be discussing budgeting and the various aspects of the process to consider while walking your clients through building a budget.
The biggest challenge to budgeting is making sure that the appropriate people are involved in the process. Usually the primary champion of the budgeting process is whoever is sitting in the board treasurer or church operations role. Unfortunately, this most often ends up as the only person that cares about having a budget.
It may seem simplistic, but it’s important to start with the basics: “What is a budget?” Throughout my years of helping with budgets, and even working on my own household budget, I have learned that a budget is a plan for how to spend money. With a church, that money belongs to the churchgoers who donated those funds. In a church, a budget is a plan for how to spend other people’s money and that plan should support the ministry goals and objectives of the church.
Who Should Make the Budget?
Since these ministry goals and objectives are often discussed and set by church leadership, a budget should support those goals. Because of this it is vitally important that other members of leadership contribute to, or assist with budgeting. In most cases, pastors and lay leaders are not financially minded so their natural inclination is to avoid the budgeting process altogether. In their minds that is the reason they hired or appointed an operations or finance director.
As outsourced bookkeepers and consultants, the goal here is to advise our church clients that the budget committee should consist of ministry leaders, operations staff, and ministers. During the process the question of “Does this budget support the ministry goals and objectives of our church?” should be at the forefront of everyone’s minds, and the committee consists of all the right people that can answer that question.
The Mechanics of a Balanced Budget
Now that all the right people are at the table, it’s okay for the operations and financially minded leaders to lead the process. The best place to start is with income.
Income for a church can be a challenge due to the following:
How many church attenders are giving?
Will those church attenders continue to give at the rate they are giving?
If the church is growing, how much will the revenue grow?
If the church is getting smaller, are the people leaving regular givers?
Of the people leaving, how much are they giving?
Is there a plan to encourage increased giving in the upcoming period?
In part two of this series some of the donor management and church management tools that I listed can help to answer these questions. Other questions are better answered by pastors and ministry leaders, which is why it’s important that they are involved in the process.
Once all these questions are answered it’s important that the revenue budget is set based on practical expectations and not on the amount that is desired. The revenue can be divided evenly across all twelve months of the year, or allocated differently to each month based on previous year giving trends. If using the latter method, make sure that the monthly cash flow can handle particular months where expenses may exceed revenue. This situation may arise since most expenses are the same month-to-month, but monthly revenue can fluctuate. Once revenue is determined, expenses naturally follow.
The first pass through expenses can be accomplished without looking at revenue, and based only on the needs of the church and ministries. It’s important that expenses are then compared to the overall projected revenue. If total expenses exceed total revenue for the year, that means the church likely can’t accomplish everything that it wants to that year. This is again why it is important to have a budget committee made up of ministry leaders and pastors because at this point, hard decisions will have to be made about where to reduce expenses. These decisions should be guided by the ministry goals of the church, and if expenses are cut in certain areas, it’s a collective decision instead of a financial director simply moving numbers around on a spreadsheet.
At the end of the process the difference between total expenses and total income ideally should be zero. If expenses exceed revenue, that means there will be an expected cash burn (disregarding any balance sheet considerations). If revenue exceeds expenses, there is the potential that the extra money can be put towards a reserve for future savings.
Bookkeeping to Serve the Church
As stated earlier, budgeting is important and because it is important, needs to involve many stakeholders. Since churches are made up of many people, many people should be involved. In our role as trusted advisors we can encourage the churches we are serving in this direction.
Since this wraps up the three part series on outsourced church bookkeeping, our hope is that we have helped to provide clarity on some of the potential pitfalls of serving churches. The intention is that this will help to increase the value that we are providing, and ensure the success of the churches and non-profit ministries we are serving.
If you are an outsourced bookkeeper looking for further ideas, or a church that is in need of outsourced bookkeeping, we are glad to serve, and we can be reached at email@example.com.
As Benjamin Franklin once said, “By failing to prepare, you are preparing to fail.” So, let’s prepare now for your future success with a strong budget.
For business owners, having a budget for the New Year is an important part of financial preparation. But for some business owners, just the thought of having to prepare a budget makes them anxious. The idea of adding another item to your to-do list might actually push you over the edge, especially this year. Or maybe you just don’t know where to start. Either way, a budget is a critical step to your success, so reach out! System Six, your current bookkeeper or your CFO can help!
The budgeting process allows business owners to think about how much they will earn and how much they will spend in the following year. It can be as detailed or as summarized as you like. The goal is that a budget will ultimately help the business owner throughout the year determine if the business is on track financially through the use of budget versus actual reporting. So you’ll know month by month when and where to make expense changes or where you may be exceeding your revenue expectations.
Where Do I Start with a Budget?
Preparing a budget may sound like an impossible task. Keep in mind that this process can be as simple as you want it to be the first year and then revised and improved upon in subsequent years.
The most effective way to build your budget is to align your data with the accounts in your financial system (i.e., QBO, Xero, Sage, etc.) and ultimately to input the budget into your system for easy reporting next year. At System Six, we are here to work with our clients and other business owners to help them through this process.
Whether you have prepared a budget before or not, one of the best places to start is by reviewing financial statements for the current and prior two years, making notes on some key pieces of information.
Do you notice any revenue trends? Are there certain months where you earn most of your revenue each year? Do you see a rather steady revenue increase each month?
Are there any atypical income sources in those years that may not recur next year?
Are your Cost of Goods typically a certain percentage of your revenue each month? Are there ever variations in certain months that need to be planned for?
Are there any atypical expenses in those years that may not recur next year?
Are there amounts you want categorized differently on your statements next year?
What’s the Point of a Budget?
Building your budget will vary some depending on your revenue model. However, in most cases, when determining your revenue budget, you will want to include realistic stretch goals. A budget needs to be achievable. There are other business growth documents you can use to evaluate and incentivize a sales team, for example, but a budget should be a realistic expectation of next year’s financial statements taking into account known external factors and changes. The expectation is that you will be able to run budget versus actual reports next year and be able to determine if your business is on track to your anticipated (budgeted) bottom line. If you are, great job! If not, you’ll be able to see where the business has gone astray and make real-time (monthly) adjustments to get back on course towards your initial plan.
How Detailed Should My Budget Be?
If this is your first time preparing a budget, our recommendation is to keep it simple! We don’t want you to feel like your budget is more trouble than it’s worth. If you are a Budgeting Pro, you can make your budget as detailed as you like. Either way, you will want to match your budget data to the Chart of Accounts inside your Financial System (i.e., QBO, Xero, etc).
You can enter your revenue to the top level called Revenue/Income or you can split it between your various sub-Revenue accounts. The same is true for all layers within your Chart of Accounts, including Cost of Goods and Expenses, being as detailed as you like or simply entering to the parent/summary/header accounts that you prefer. You can even choose to simply enter annual amounts for all accounts which will auto-split evenly across all 12 months of the year. Just a quick note that if you enter budget entries to the Summary accounts, and then next year actual expenses are entered to Sub-Accounts (more detailed), you will want to run Summarized Budget versus Actual reports in order to see the variances at the Summary level. But don’t worry, this is just fine; your budgeting efforts are still well worth the time! You may find this is all you need for several years.
At this step in the process, having reviewed both current year and prior year financial statements, it is up to you to determine next year’s annual budgeted revenue. An estimate is fine at this point based on what you know about your business. It is helpful to forecast where you think your revenue will be at the end of the current year in order to have a solid starting point for next year’s budget.
How Do I Determine Budgeted Revenue?
You may be wondering how you calculate more detailed budgeted revenue. This will differ depending on the type of business you operate.
Different Types of Businesses
Subscription or Donor/Membership-Based organizations typically track their subscribers or donors/members by level or group and price. They know how many members they anticipate for next year and what revenue that equates to.
Service or Project-Based organizations typically track their services by price. They anticipate a certain number of services for next year and what revenue that equates to.
Inventory/Product sales organizations typically track their product sales by product. They anticipate a certain number of product sales for next year and what revenue that equates to.
These calculations are made with information pulled from a Point of Sale system or Membership database, which may or may not be directly integrated with the financial system.
More Complex Business Structures
What if your financial system is set up with even more detail, such as departments, locations or class structure? All of these layers can absolutely be taken into account when creating your budget. Essentially the process is the same; you will simply repeat the process for each of these layers. In the end, when the budget is entered into your financial system for each of those layers, the summarized version of your budget will “roll up” to your master budget. It is important to note that completing a budget process to this level of detail can be quite time consuming, especially if this is new to you or if you are taking on this challenge alone without any supporting departmental staff.
Special Revenue Considerations
As revenue is estimated for next year, it is important to include potential key business changes, such as new product lines/products or expanding business areas. Conversely, it’s also important to consider the discontinuation of any business lines/products or the closure of any business areas. Other key changes might include the impact of price increases, including not only the anticipated increase, but also any customer impact as a result of those increases (i.e., cancellations, etc.).
Once you have this detailed annual budgeted revenue, the next step is to determine how to spread it out monthly for next year’s budget. If you have chosen not to calculate annual revenue in such detail, simply use the annual budgeted revenue for the business as a whole you determined above.
Monthly Revenue Modeling
Once you know what you are expecting for next year’s annual revenue, it’s important to know how to spread out that revenue each month. Depending on the type of business you operate, there are several options to choose from. Please note that if your revenue is consistent month to month, you can choose to enter your annual revenue, skipping this step altogether, allowing the system to allocate revenue evenly by month (simply dividing by 12).
Cyclical Revenue Modeling
Does your business generate most of its revenue during a specific month or quarter of the year? For example, is your business dependent on New Year’s resolutions (i.e., gym memberships, etc)? Or, is your business dependent on holiday sales (busiest from Oct-Dec)? If so, then your business would be considered cyclical, with more revenue being entered to specific months during the year. For a cyclical business, it is important to budget revenue next year by looking at the historical trends for those key months, being realistic about growth, and then allocating revenue in the other months similarly.
Does your business typically grow a certain percentage each year or each month? If so, calculate the growth percentage and see if that applies consistently throughout the year or in certain quarters. Based on what you find, this percentage growth should be applied similarly to revenue amounts for next year.
Breakeven Revenue Modeling
Would you like to budget revenue based on the minimum amount needed to cover anticipated expenses for next year? This is called Breakeven Budgeting. You can apply revenue Cyclically or Incrementally, but by lower amounts or even reducing revenue from the current year. In this model, first budget expenses, budgeting revenue last, with the goal being a $0 Net Profit/Bottom Line. The purpose of this model allows business owners to know that if they do not exceed budgeted expenses and at least meet budgeted revenue, they will not lose money at year end.
The expense side of the budget model typically uses percentage growth for key accounts. Most often, business owners will review current and prior year financial statements to gauge expense levels and increases year over year to estimate next year’s budget. Key areas to consider include:
Cost of Goods Sold: Since these are industry or even business specific, you’ll want to review these in depth to determine what to expect for next year by month.
Payroll: You’ll want to consider both cost of living increases as well as any anticipated performance increases. Keep in mind that payroll accounts can be in various places within the Chart of Accounts, depending on your layout, including Costs of Goods Sold and Admin/G&A, and may also split out owner wages separately.
Employee Benefits: Benefits can unexpectedly increase, sometimes quite a bit year over year, so it can be helpful to reach out to your broker to get an idea of your increase for next year. Be sure to include any new benefits you may be implementing next. And similar to Payroll, these costs may also be found in several places on the P&L, including Cost of Goods Sold and Admin/G&A, with owner benefits oftentimes split out separately.
Utility Increases: Although often considered a “fixed expense”, utility companies do increase their rates and utility expenses can be a large expense on the books. So taking a look at prior year increases can help determine next year’s budgeted expense.
Revenue-based taxes: Depending on your state, revenue-based taxes are typically percentage based. So for budget purposes, setting them as the same percentage (of next year’s estimated revenue) as current year is generally a safe bet, unless you expect major changes to your business model.
Other expenses: As the business owner it is important to look at the other expenses on your books, determine what percentage increases are appropriate for next year or if there is another methodology that makes more sense for estimating next year’s budgeted amount. You know your business best and are in the best position to make those estimates.
So Where Do YOU Want to Start?
Having reviewed more about what you already knew or learned something new, where do you want to start with this important step towards your 2022 success?
How Can We Help?
If you are interested in some help with this project, please click on this link and connect with us at System Six. It will take you to a short list of questionnaires to help us determine how we can best serve you in this process.
We’ve all had to pivot this year in order to keep ourselves and our communities safe. While some companies, like System Six, have been working remotely for years, we recognize that the shift to completely digital platforms and processes can be overwhelming and daunting. The good news is that there are so many great options for online tools that will have your team working cohesively in no time. We know that nothing can quite replace the collaborative vibes of your office or the chit chat around the water cooler, but hopefully these tools will help you get on the same page while you can’t be in the same space.
We use Teams (and have used Slack in the past) primarily as a means to field casual conversation and quick questions. In order for this to work to its full potential, though, you have to have strong buy-in from your team and commit to quick response times together so that it remains an effective means of communication. Teams can be used for questions and updates that can be handled quickly and easily; it’s not for asking particularly heavy questions that require your colleague to completely stop what they are doing to help. Make sure to ask specific questions and avoid ambiguity.
Karbon is our preferred tool for task management. It is a tool that is specifically built for accounting firms but we’d highly recommend a tool like this (see Teamwork, Clickup, or Asana) for keeping track of tasks. Email is not an ideal place to assign tasks because once the email has been sent there is no visibility of if/when the task got done and no way to see if the task is still in process.
With Karbon, you can automate reminders, setup workflows, and ensure that there is visibility on the scope of a project for each team member.
With a remote team or clients who span multiple time zones, it can be such a simplifier to use a scheduling service. Save yourself the endless “reply-alls” and mishaps over who is on what time zone and invest in a service like Calendly for booking appointments. Calendly updates your availability in real time so you can rest assured that you will never double book a meeting. It comes with features like custom reminder emails, cancellation notices, and calendar syncing. The free version works fine for most people though it is branded with “calendly” and you only have one meeting type as an option.
Google Drive | Easy & sharable access to information
We can’t stress enough the importance of real time editing and updating of shared documents. Avoid sending various versions back and forth with Google Docs robust variety of cloud-hosted documents and spreadsheets. We especially love the Google Sheets features for collaboration around ideas, updating contacts, and sharing live content. We’ve been able to connect Google Sheet directly with Quickbooks Online to automatically pull key financial metrics directly into various meeting agendas which has been extremely valuable when reviewing our company performance as leaders on a weekly basis. You can review our meeting agenda template here!
Fathom is a reporting app that is especially focused on turning complex financial reports into beautiful, easy to read trends, Fathom connects easily to QBO, and it presents financial information in an easy, understandable way. Fathom puts accounting info into a visual, easier to understand form that is especially helpful for anyone who may not be especially numbers-minded. Really, it is a communication tool as much as a financial tool.You want your numbers to communicate the story of what is happening in your business and be able to present this data to your key stakeholders (team members, investors, or your spouse).
Loom is a great tool to create a tutorial by sharing your screen and recording the session to send via URL. If you need to shoot off a quick explanation about how to use a feature, or want to show a client an element of a program or website, you can record a short video for them. This allows the information to be reviewed at someone’s convenience.. And if your client or colleague has to pause to go homeschool their third grader, then they can always come back to it later!
While the focus of this post is the tools we use while working remotely, the theme is communication. This is particularly essential when you aren’t just down the hall from someone, but you still need to be able to communicate quickly and clearly. We want to make sure that the tools we do use are easy to use, intuitive, secure, and allow for quick and helpful communication.