An Introduction

A lot of folks think of bookkeeping and number management as solely a compliance task, something you gotta do just to get the taxes filed.

Which explains why so many people wait until March to haphazardly throw it all together, a sure fire recipe to miss out on key deductions.

To encourage you not to do that. Here's 5 reasons to stay on top of your numbers.

1. They can help you budget for next steps

On my regular podcast profit reports, I've been sharing this concept of "baseline revenue." It's the amount I can almost guarantee I'll make each month with just my standard, default activities. You might look at my books (here's a screenshot), and assume that number is maybe around $10,000.

But nope. It's really closer to $8,000 at this point in the year. I find that by looking at

• my recurring revenue,
• plus the average sales I get on top of that outside of my promotional periods.

That's why it's key to account for income by offer or thing you sell.

For example,

I count my baseline revenue as $7,000 in membership income (the recurring revenue) plus $1,000 in Contract Vault sales. That's what I can expect with minimal efforts. All the other stuff is a bonus.

Therefore, the baseline of $8,000 is what I can comfortably spend each month including my salary . So, ideally, my salary + business expenses will stay under $8,000. I won't take on any recurring expenses to put me over that amount.

If I wanted to join a monthly program or hire a PR person for $1,000 a month, I know I need to increase my baseline revenue by $1,000 or cut my current expenses by $1,000.

You can do this do. If your baseline is less consistent, then it's even more of an incentive to build a business emergency saves and a slush fund savings.

2. It helps you manage expenses

In addition to tracking my deductible expenses, by category, I also track the percentage of revenue for each expense category.

If you get really savvy with your books, you can create profit margins by category. I recently hired my first employee, a fabulous bookkeeper to work with Profit Rx members. She will also do done-for-you bookkeeping for our full-service clients.

I will have her track her time per client, so I can multiply that by her hourly rate and determine what my service cost is per client. After a few months, we will have great data to determine if our monthly rates are priced correctly for solid margins.

You can do this too! Start tracking your time per service offering.

Or, if you sell products, this is even easier. For example, I can look at my expenses and see what it costs me print and ship each copy of my book. $18.50 on the low end. $19.30 on the high end.

I sell the book for $30, so my hard cost margin is roughly $11. We also have a bit of labor costs. My VA puts in the book orders and manages customer support. I could maybe count that as $1-$2 per copy. The is a very simple example.

But you can easily see that if I wanted to simply sell the books at cost, I'd want to do $21-$22 to breakeven and treat it like an audience builder. But a bit of profit is nice too.

3. It helps you determine when an S Corp is the right move

S Corps help you save self-employment tax, but only on your profit. Specifically, the profit you make after you pay yourself a "reasonable salary." This is one of the reasons, I separate what I call "owner profit" from "business profit." Let's take a look.

The "owner profit" is simply revenue minus costs of goods and expenses. Easy peasy. I then pay myself a reasonable salary. You can see it's $36,183 (YTD). On that amount, I pay income taxes and self-employment taxes.

The "business profit" is the owner profit minus the salary. On this amount, I only pay income taxes. So I save roughly 15.3% self-employment taxes. My S Corp is saving me about $2,700 this year thus far.

Typically, you want business profit at year-end to be at least $20,000 for an S Corp to make sense . That's when the amount of tax saved will offset the associated costs enough to justify the slight increase in admin.

Tracking these number makes you astutely aware of when the right time will be.

4. It helps you determine when to spend more on deductions

The rush of people trying to blow money every December to "maximize their deductions" baffles me to no end. Or, I should say, hearing people tell other people to spend money as a sales tactic baffles me.

Here's why.

Assume you're in the 22% tax bracket. You save 22% of the cost on every item purchased (that will be deducted) in taxes. A $1,000 computer would be equal $222 in tax savings until the deductions drop you to the lower bracket. Then, you save that amount.

So here's the problem. Take a look at our tax brackets. Where do you see the biggest percentage jump?

It's the 12%-22% jump. That's big.

Ignoring other possible income sources, most of us live in these first two tax brackets for the first one to three(ish) years of business, or maybe longer.

Here's the key question . If you're buying the $1,000 computer, would you rather buy it in the 12% bracket or in the 22% bracket?

Answer...

The 22% bracket. You will save an extra 10% in taxes. That's $100!

Sooooo, if you are in the 12% bracket this year, but expect to be in the 22% bracket next year, would you want to buy the computer in December?

Nope! At least not if you can help it. You'd want to wait until January.

If you track your numbers, you'll know by Q4 what your trajectory is, and if making investments makes tax sense. Also, you should be tracking your quarterly taxes paid and balance owed to help make these decisions even clearer.

5. It helps you look at the big picture

I love pie. Like, I'm already excited to make my Thanksgiving pumpkin pie.

But I may love pie charts even more. They're so simple yet show so much. For example, here's my expense, salary, profit pie.

This is the North Star of my business. It's the number one indicator. It gives the big picture.

I can look at this pie chart and I immediately know, "oh yikes, my expenses are 7% above target. Salary is close. And those extra expenses are eating into my target profit."

So what do I need to do? Get the expenses down. Then, I could go to the more detailed indicators, in this case, the expenses.

I can see expenses are way up in June through August, July specifically. So I can zoom in further and look at July.

A few things jump out to me:

• I put all routine contractor expenses in "team contractors." Those are the folks that work with me every month. Those numbers look normal.
• The "contractors" column is for one-off projects. While it's $0 in some months, I have about $4,500 in expenses this month. That's huge and about 1/2 of the total expenses for the month.
• I also have three "wage" expenses. Typically, I have two per month. So one payroll probably processed a day or two late and dipped into July when it should have been in June.
• I also have that $700 program expense for a course I bought.
• And $400 for an office expense. That's a painting I bought for my backdrop. You can see it on the right (shoutout to my cousin Grace, the artist)

Basically, Braden went on a spending spree in July. There are a few of these expenses I'd take back now, but I thought about them all before I made them with the expectation that I'd see the ROI of these costs between November 2022 and end of 2023.

Looking at these numbers reminds me that I sacrificed the health of my pie chart in the summer months to reap the rewards in the winter months. 🤞 I'm not upset about that.

The pie can also tell you

• When your salary is too low. If you have an S Corp, and salary dips below 30%, we probably need to increase it to keep it "reasonable." If you're not a an S Corp, we can do faux salary payments. If those are too low, you need to get your profit up.
• When you're not spending enough money. Yes. Truly. Would you rather have $50,000 in revenue at 90% profit or $100,000 with 70% profit. $70,000 is more than $45,000. Your pie might be telling you to spend some cash to grow the business.

Wrapping up

Hopefully, you now see the value in tracking your numbers. I gave you 5 reasons. I could probably come up with 5 more.

This is where I'd normally have a smooth segue into my sales pitch, but I'm tired of typing, and you're probably tired of reading, so let's just do a hard cut.

Profit Rx VIP

All those screenshots I shared are from my actual books. And I provide the same templates in Profit Rx. Even if you use Quickbooks, we recommend, summarizing the numbers in the templates.

You can join any tier of the membership to get access to them. But with the VIP tier you'll get:

• Access to the full Profit Rx 
• Access to the Tax Season Playbook
• Access to the Client Cure
• Access to the Resource Roundup
• Bookkeeping office hours
• A 1-on-1 with Braden
• Regular co-working and Q&A support;
• Intermittent guest experts and/or bonus trainings.

Sign up for a one month free trial of Profit Rx VIP here.