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📆 Managing Your Monthly Finances



What you'll learn:


  • Learn what specific taxes we need to be concerned about.

  • Understand how to choose between two methods of recording transactions: Cash and Accrual accounting.

  • Go through the process of capturing all of our startup activity for the month, recording the transactions, and analyzing what worked and what didn’t.


Now that we know how to set up our income statement and what the major moving

pieces are, let’s take a look at how to manage the income statement every month.

Yes…this is accounting! But guess what? It’s actually not nearly as complicated as

people make it out to be. That’s because startup accounting is like trying to manage our

expenses when we’re a freshman in college – we don’t really have that many to

manage!


Before we get into the process, let’s just make sure we cover a few caveats

and concerns:


“What Taxes do I need to be Concerned About?”


While we can’t cover the ins and outs of every tax issue, it’s worth making a note of

which taxes we’re going to be liable for so we don’t make the cardinal mistake of not

filing taxes. The IRS and other taxing authorities get upset if we mess up how much we

paid them.


  • Employer Payroll Taxes. Employers (in the U.S.) are subject to a separate tax on their payroll in addition to what employees pay and what is withheld. This is very important to note.

  • Employee Payroll Withholding Taxes. Employers withhold a certain amount of taxes on behalf of employees that are then paid directly to the Federal, State and Local taxing authorities. It’s our job to make sure we are properly withholding and paying these taxes at each level.

  • Corporate Taxes. Whether we made or lost money the IRS and local tax authorities want to know where the company stands. We need to file corporate tax returns annually, and if we made a profit (😀!) pay the requisite taxes (😢).

  • Sales Taxes. Depending on our business we may be required to collect and remit sales tax.


* A Word of Caution: The IRS and other taxing authorities aren’t responsible for “sending us a bill”. The only bill they are likely to send us is one that reads “You forgot to pay your taxes for the last 3 years – here’s what you owed with a ridiculously-high set of penalties and interest as well.” We’d recommend at least making sure these 4 categories are considered if nothing else.


Disclaimer: This is not professional counsel. We are NOT Tax Accountants, for more information and advice seek professional counsel.


Cash or Accrual – That is the Question


When managing our finances we have to choose between two methods of recording transactions: Cash and Accrual accounting. This is just a decision as to when we determine a transaction should be recorded in a particular month. It’s a small nuance, but an important one.


Let’s assume we hired a designer to work on our StitchCrew logo. She performed $500 worth of work in January then sent us a bill that we paid in February. Do we record the transaction in January when we incurred (Accrued) the expense, or February when we paid it (in Cash)?


For this we must make a choice – but it’s an important one because however we choose to record this transaction should work the same for all of our transactions. There’s no wrong or right here, it’s more a matter of how we would prefer to manage our finances.


Here are our two choices:


  1. Cash Accounting. We only record the transaction once we’ve paid for it in cash. In this example, we would have posted the transaction in February when the money left our account.

  2. Accrual Accounting. We record the transaction when we incur it, even if we pay for it in cash later. The benefit here is that we have a monthly statement that more accurately reflects the decisions we made in this specific month versus when those decisions happened to be paid for in cash.


If we’re totally lost on which one to pick – choose Cash Accounting simply because no matter what we can always defer to the timestamps of what is posted to our bank account, even if they don’t directly reflect when and how we made those decisions.


3 Steps to Monthly Accounting


Every month we will enjoy the ritual that is Monthly Close. Here we will tally up all of our activity, drop it into our Income Statement, and analyze the hell out of the results. Here’s an overview of what we’re about to do:


Step 1: Capture. We will download and retrieve all of our income and expense activity for the month including credit card processing statements, bank statements, credit card bills and paper invoices.


Step 2: Process. With all of our info in hand, we’ll begin recording these transactions in the appropriate spots of our income statement.


Step 3: Analyze. We’ll double-check that our math is right and then do a little bit of analysis to figure out what worked, what didn’t, and how to revise our assumptions and forecasts for the future.


So long as we follow the steps in order, we shouldn’t have a very difficult time accounting just like the big companies. Now for a bit more detail….


Step 1: Capture.


Our first step will be to capture all of the activity that has transpired for the month – ideally as close to the end of the month (and the start of a new month) as possible so that the activity is fresh in our heads.


Capturing this activity usually means downloading statements from our credit card companies, bank accounts and various other providers. For those generation X founders, by all means feel free to grab paper receipts, mailed invoices and even cash receipts if available.


We’re going to separate our efforts into two distinct categories: Revenue and Expenses. Right now we’re just going to capture the expenses – we won’t process any of them until later.


Revenue

Our revenue typically comes from three primary forms: credit cards, checks, and cash. Depending on which of these methods applies, we’re going to make sure we track and tally each source appropriately.


Not all revenue is captured via credit cards, checks and cash. Sometimes items will be offered in “trade” for example, whereby a credit will exist that doesn’t have a typical transaction associated with it. Other forms of income could be things like rewards points from a credit card. If those cases exist, no problem - just add an additional line item within the Revenue tab and make sure that the total includes those fields as well.


Expenses

While revenue comes from a few specific sources, expenses come from all over the place. We’re going to need to be thorough about where we capture our expenses on a monthly basis and how to process them accordingly. For now, let’s just focus on making sure we capture every possible transaction.


What sources do we use to capture expenses?

1. Bank Statements

2. Credit Card Statements

3. Loans/Lines of Credit

4. Receipts

5. Invoices

6. Payroll


There are many ways the business may capture activity, but these are the usual suspects. If we have some additional methods by which we’re tracking activity, such as trade credit or deferred costs, by all means, add them to the mix. The point is just to make sure we capture every last item we can think of so we can take it to the next step – processing it all!


“I’ve got a lot of stuff here – now what?”


Yes, it’s a lot! Capturing every transaction is a bit of effort the first time but once we’ve bookmarked every site and gone through the process a few times, most startups can finish the process in less than an hour.


So now that we have our data, let’s figure out what to do with it.


Step 2: Process

*Reminder: The below process is all taking place inside the StitchCrew Income Statement Template


Overview Tab. The overview tab is going to automatically calculate all the activity from the other tabs. We should never type anything directly into this tab as it doesn’t contain any input boxes. Please note that changes we make to the other tabs may “break” the calculations in the overview tab so let’s make sure to double-check our calculations as we modify the template.


On the other hand, this is the tab where all the magic happens, so as we populate each

of the other tabs, we’re going to start seeing our entire financial picture come into focus.


Revenue. The revenue section will have its own tab in our profit and loss statement. In the revenue tab there will be areas for individual product revenue, refunds, and chargebacks.


Credit Card Revenue

In the revenue tab we will keep separate sections for each product. For example, if our business has three products we will have line items for Product 1 revenue, refunds, and chargebacks, and the same for Product 2 and Product 3. These designations are important because we want to see how each individual product is performing and have granular information in understanding the overall picture.


Invoices/Checks

Some clients may not want or be able to pay us via credit card so it is crucial to properly track and record. If we send a client an invoice for $15,000 and the mail us a check for the amount - when we receive that check we need to record the $15,000 of revenue in our income statement. This would go in the revenue tab under checks received.


Likewise, if a client requests a refund and we send them a check for that amount - we would record the refund under the checks received section of the revenue tab. Sometimes during the chaos of the month these transactions can be lost in the shuffle, so we need to make special note of them!


Cash

It may be rare in this day and age, but a customer may pay with cash. All cash transactions can be added to the revenue tab under “other sources.” If a client hands us $50 physical cash for a service - we can record that transaction there. Conversely, if we need to refund a client $100 with physical cash for a service - we can subtract -100 from the other sources section as contra revenue.


COGS (Cost of Goods Sold). As stated in the COGS section of forecasting - COGS entail direct and variable costs of physical goods. At the end of the month we will want to ascertain these final values and assign them to the appropriate sections of the COGS tab. These final costs will appear in month end bank and credit card statements. For example, if our monthly rent was $1,000 for a production facility we would record this cost under variable costs. Likewise, if we sell 100 units and our direct cost is $180 per unit then under direct costs we would record 100 and $180 - which would generate total direct unit costs of $18,000.


Staffing. One of the more dynamic costs of our business will be staffing costs. Staffing costs includes: the gross pay to the employee – for instance $4,000/month if the employee is salaried at $48,000 per year. Don't forget our silent partner, the government, gets their cut on the federal, state, and local level through payroll taxes. Finally, we want to be mindful of benefits cost. With all that being said, it is important to note the cost of an employee goes beyond stated salary and can be inflated by a number of additional costs.


  • W2 Staff: Each individual employee will appear in our payroll processor’s monthly report. From this report, we can pull the stated final amount for each individual and add it to the staffing tab for their specific name or role.

  • 1099 Staff: Each 1099 we contract during the month will also show up in our payroll processor’s monthly report. The difference with these employees is that we will not have benefits or payroll tax costs attributed to them.


Payroll Taxes. This part is important, and we need to make sure we are accounting for payroll taxes! As stated above, the government is our silent partner.


Luckily, payroll administrators like Intuit, Gusto, and others pay the government for us and make note of these payments in our month-end payroll reports. This most likely will come under a field called “Employer Taxes.” Typically, employer taxes come out to 7% to 8% of gross payroll expense.


That is, if our monthly payroll expense is $25,000 for 5 employees, then we can expect to pay approximately $1,750 to $2,000 in payroll taxes. This payment will be its own monthly line item in our staffing tab.


Benefits. Health benefits are worthy of a track within itself, but long story short, we need to track and record this cost if we offer it to our employees. Our payroll processor will integrate our health benefits cost into our payroll report for us.


Miscellaneous Expenses. Perhaps one of the more overlooked, but still an extremely important part of expenditure recognition is the miscellaneous section. In our profit and loss statement our miscellaneous tab will include the following sections: site support, office support, card processing fees, SaaS, and miscellaneous.


These expenditures will be sourced from our month-end credit card and bank statements.


Office Services. Our business will have monthly office expenditures, even if we operate from home! This could include things like a lease, insurance, coffee for the staff, cleaning services, and office supplies, among others.


SaaS Vendors. Our monthly software subscriptions are important to track because they can add up quickly and represent the tools needed to operate our business. For example, this section could include things like a LinkedIn subscription, Microsoft Office tools, Payroll Processor service payments, or even something as simple as an office Spotify account.


Step 3: Analyze


The nice thing about our handy Income Statement is that once we plug in all the values, the story from there is essentially told. All of our columns add up and ultimately tell us the honest truth – “did we make any money?”


The Income Statement is our scoreboard toward making every possible adjustment in the business. It’s not just about whether we made money. It’s about how all of the decisions we made, from staffing to marketing to how much we spent at the company party – need to be adjusted.


Check the Math


Before we respond to the data – let’s make sure it’s correct! A general rule of thumb once we’ve finished entering all of the financial data is that, if we do at least one pass at making sure all the entries are correct, we’re going to find at least one error! This could be as simple as double counting an expense line or realizing that the SUM total in our spreadsheet isn’t including one extra cell or row. It happens a lot.


A good way to keep track of our math is look for a figure like “net income” and see how it fluctuates as we begin to enter more data. If going into the month it looked like we would break even, and now it looks like we’re making $50,000 – our math is broken somewhere! (or just had a crazy good month – but probably not).


Revisit those Assumptions


As part of “closing out the month” on finances it’s also the time to look back on the actual performance of the assumptions and KPIs (Key Performance Indicators) that got us there.


This is also when we compare what we thought our assumptions might be around things like Cost per Acquisition and Average Order Value and compare them to actuals.


Summary


So that’s it! That’s pretty much the shortest version of a crash course in Startup Finance that we can possibly get through.


Going forward, the only way for this to really make sense is to just run through the numbers over and over. This isn’t like submitting our taxes where it has to be 100% right the first time. This is about just laying down a foundation and then constantly tweaking it as we learn more and become more familiar with the process.


If you’re not 100% sure about some of the values you’ve inputted (like LTV, CAC or anything else) - don’t worry. They are going to change anyway, so it’s OK to just get some values in there to get started and adjust as we go forward. The same goes for our month end accounting. If we get something wrong the first couple times we can always go back and fix it

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