Accurate data is your roadmap to success. And accurate data begins with good record keeping. Tom shares 5 tips you can use today to gain and maintain accurate data.
02:28 – What Happens When Businesses Rely On Bad Data?
04:46 – How To Hire A Bookkeeper.
07:17 – How To Set Up A Chart Of Accounts.
13:41 – How To Communicate With Your Bookkeeper.
15:41 – How To Review Your Books With Your CPA.
16:03 – What Are The 3 Items You Must Regularly Review With Your CPA?
Announcer: This is The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes.
Tom Wheelwright: Welcome to The WealthAbility™ Show, where we're always learning how to make way more money while paying way less taxes. Hi, this is Tom Wheelwright, your host, founder and CEO of WealthAbility™. How would you like to avoid the number one mistake made by entrepreneurs and investors? What we're going to talk about today, not really sexy, it's just successful. In fact, it is the core of every good business decision. Just imagine that you get in your car and you set your GPS to a store location that you're trying to get to. New town, don't know the town, so you just put in the store, right? It brings up the store location, you get in your car, you start driving, you follow the map, follow the directions. When you get there, you're in a residential neighborhood. No stores within a mile.
Tom Wheelwright: This actually happened to me. Luan and I are up in Park City, Utah. I grew up in Utah, but I grew up Mormon, so I did not know where a liquor store was, and Luan and I wanted to get a bottle of wine we punch in the Utah state liquor store into our GPS, and we drive over there and literally we end up in the middle of a residential neighborhood. I'm going, “Wait a minute. This makes no sense.” I'm going, “I know that there's a shopping center not too far from here. Let's go see if we can just find it.” We did. It was right there. But this is what happens when we have inaccurate data. The GPS had inaccurate data.
Tom Wheelwright: I know for a fact we have all been in that situation. Right? We get in the GPS and we're going, “Where are you taking me?” It's a block away or a mile away or we're five miles away from where we wanted to go. The challenge we have in business and investing is if we don't have accurate data, we end up a block, a mile, or five miles away from where we want to go. In business and investing, that can mean the difference between making a good decision where we have a terrific investment, or we make a bad decision where we're losing money.
Tom Wheelwright: It all starts with bookkeeping. I told you this was not going to be a sexy subject. Okay? I'm thinking about this actually as I'm preparing for this podcast, I'm going, “All right, bookkeeping, not really the most exciting topic in the world.” It's only the most important topic in the world. If you're a business owner, you're an investor, then pay attention, because the biggest mistake I see, and I have literally seen thousands and thousands of business owners and investors make this mistake, and that is they don't pay attention to their bookkeeping. They think, “Well, my bookkeeper is handling that,” or, “That's not important,” or, “I'll get to it.”
Tom Wheelwright: The problem with that is all of your decision making, all of your data points come from that data. If that data's not accurate, it's worse to have bad data than no data. It's worse to have bad data that no data. When you've got poor bookkeeping, you have bad data. Okay? You're literally going to the wrong place. You may be going fast and you may be excited about your journey, but when you get there, it's not where you wanted to go. It all was because you started with bad data, bad information to begin with. Here's the thing. It's not that hard. It is so easy to have good bookkeeping if you just pay a little bit of attention to it. Okay?
Tom Wheelwright: I'm going to give you five steps, five simple steps to better information, better data, and making it be accurate. The first one, you've heard me say before. That is to hire a bookkeeper. I don't mean just any bookkeeper, by the way. I want you to hire a bookkeeper that is A, not a relative. I'm serious. Not a relative. I want that bookkeeper to be somebody A, you could fire, and second of all, I want that bookkeeper to be somebody who can push can on you. I get that we all have family members who push back on us, but I want them pushing back on us because of data and because of information, not because of emotion or past history or anything like that, or because they care about us. No. Bookkeeping should be very factual. It's a very factual practice and very factual activity. It should stay with that. It doesn't have to be that hard.
Tom Wheelwright: You find a bookkeeper, and I would get a referral. First place I'd go to get a referral for a bookkeeper would be your CPA. Right? The CPA is the person who's going to review that bookkeeping, so it's preferable if the CPA and the bookkeeper get along. I'm not kidding about this. I can't tell you how many times I've run into challenges with a client because the bookkeeper was pushing back. The bookkeeper was offended because I wanted information or they thought I was trying to take over the job. I do not want to do bookkeeping. For all bookkeepers out there, CPAs do not want your job. We appreciate what you do. We appreciate your job. We don't want your job. Okay?
Tom Wheelwright: This is a team effort. You want to have players on your team that get along, that work well together. I would suggest go to your CPA. That's the first place I would go for a referral. Okay? I would not go to your neighbor, I would not go to your relative, I would go to your CPA, actually. Go to an attorney, go to a financial advisor. Go to one of your advisors that you trust, but your first one hopefully is your CPA. You hire a bookkeeper. Then what you have to do is you actually have to spend a little bit of time, it doesn't take a lot of time. I'm talking maybe an hour or two to help the bookkeeper set up a chart of accounts.
Tom Wheelwright: Now, a chart of accounts is really just what it's going to give you. An account is the name of that accumulation of data. For example, office supplies. That's an account. Okay? Office supplies, then you have to decide what's going to go in there. This is a part that most people don't do with their bookkeeper. They don't say, “What do I want to see in office supplies?” They assume that the bookkeeper can take care of that. No. You might ask the bookkeeper, “What do you think should go in office supplies?” Then you go, “Okay, well is there anything else that we should go in office supplies? Should there be office supplies that is different than office expense? Are there office expenses that aren't supplies? Do I want to keep track of my supplies? I don't want to keep track of how many paperclips I have. I don't want a paperclip account, because I don't care how many paperclips I have. What I want is I want to know how much I'm spending on office supplies.”
Tom Wheelwright: Now, I might want to have another category that is other office expense, or I might want to be more specific, but you're the only one who can decide what information is important to you. Now, some of you are going to say, “Well, none of it is really important to me.” But yes it is, because remember that the purpose … I mean, let's look at what the different accounts are. Okay? You basically have five different accounts. That's it. Five groups of accounts. You have income, expense, assets, liabilities, and equity. Those are your five groups of accounts. Every one of your accounts in your chart of accounts falls into income expense, assets, liabilities or equity. Remember that the purpose of income is to create cash.
Tom Wheelwright: When we're looking at that income account, we're going, “Okay, we need to categorize what types of income we have.” Now, our primary income is going to be our income from customers. Right? Sales. But we might have investment income in our business. We might have interest income. We might have something else. We might need to keep it categorized differently because of tax purposes, so this is where your CPA might need to review the chart of accounts. What I would do is I would set up the chart of accounts with your bookkeeper. All right? You just start with a standard chart of accounts.
Tom Wheelwright: Set up a chart of accounts with your bookkeeper, go through what you want to go into each of those accounts. Then have your CPA review it and give you additional suggestions. The reason I'm going this granular on bookkeeping is because this is where all of your data comes from. All of it. All of it's coming from your books and records. Right? Your books, which is bookkeeping. Purpose of income is to create cashflow, so you look at, “All right, what types of income do I have?” Then the purpose of an expense is to create income. All right, so now I want to break down, “All right, how do I want to look at those expenses?” Because when I look at that expense, I want to be able to measure that expense and say, “How am I doing in that expense? Is that expense creating income? Is that expense a reasonable expense for the amount of income that's being created?”
Tom Wheelwright: Remember all of your accounting softwares QuickBooks, Xero, whatever. They're all going to be able to do percentages. Right? They can do comparisons, etc, etc. That's not where we're at right now. Right now we're just setting up the chart of accounts. We get those accounts set up. Remember, income, purpose is to create cashflow. Expense, purpose is to create income. Assets, purpose of an asset is to create income. Right? You want to be able to set up those assets. You have different types of assets. You have those assets that are really current assets. That means that they're happening right away. Okay? They're short term like cash, like accounts receivable, securities if you're an investor, your securities, like rent deposits if you're in residential/rental. Okay, those would all be current assets because you're going to basically deal with them within a year.
Tom Wheelwright: Then you have fixed assets, and those are your equipment, property, etc. Then you have investments and other assets. Right? Those are subcategories. But really look at each category, because you want to be able to look at that asset and say, “Is that asset, is it producing cashflow?” Then the purpose of a liability, remember, is to either acquire an asset or to reduce an expense. Right? Again, break down those liabilities. Current liabilities, long-term liabilities. Then your equity. Equity you actually want to break into contributions, distributions and the term of art is retained earnings. Okay? The term we use in accounting is retained earnings. That's basically your accumulation of income over the years. That's what that is.
Tom Wheelwright: Your contributions means money you put into the company, distributions means money you took out of the company, and then retained earnings is the money that is in the company that was from earnings that's been earned over the years. All right, so you set up that chart of accounts. You have your CPA review that chart of accounts, and walk through it with your CPA. If you get a good handle on your books at the beginning, and that make take you … I don't know, five or 10 hours to get a good handle on it, but once you get a good handle on it, it will pretty much handle itself. Right? You're going to get questions from time to time from your bookkeeper and questions from time to time from your CPA, but most of the time it's your CPA and bookkeeper who are going to be speaking to each other, and what you're going to be doing is just using the information.
Tom Wheelwright: But that brings us to number three. Number one was hire a bookkeeper, number two, set up a chart of accounts. Number three is we want to set up a system for communicating with the bookkeeper. Remember, the bookkeeper doesn't know what an expense is unless you tell them what it is. They'll get to know it, but this is where what I would do is I would take basically a month of your expenses and say, okay, where do you spend money in your business, your investing, whatever set of books we're talking about. Where is it that you spend money? “Okay, this I'd like to have classified here. This I'd like to have classified there.” You can take a first run through that with the bookkeeper when you set up that chart of accounts, but then the bookkeeper is going to ask questions. “Is that going to be through emails? Do you want those emails on a regular basis? Do you want them once a month? Do you want them once a week?” How do you want that information to come to you?
Tom Wheelwright: You don't want a bookkeeper pestering you like five times a day. “Well, what about this? What about this? What about this?” Okay? Let them save it up. The first couple of months they're going to have questions. They should be doing your bookkeeping on a weekly basis. We don't want it to be any longer than once a week. I would like a bookkeeper doing it once a week. I don't like bookkeeping done once a month. I much prefer it done once a week. It's really easy, with online banking now it's just so easy to just download it all, get it up to date once a week. Now, a lot of it you can set it up so it's downloaded automatically at least once a week.
Tom Wheelwright: Number four is sit down and review those books with your CPA. All right? The CPA should have already reviewed the books with the bookkeeper. Right? Your communicating with the bookkeeper, the bookkeeper is communicating with your CPA. Now, you need to sit down and review the books with your CPA and make sure that you understand what's going in there and the CPA understands, so that you can have that regular communication. Here's what will happen. You'll actually reduce the amount of fees your CPA charges you at the end of the year for doing your taxes because you'll have good books. I will tell you, CPAs absolutely love it when clients bring them good books, but if we can look at it on a monthly basis with you or at least on a quarterly basis, then we don't have those issues at the end of the year, and we can help you make better decisions. Take the time to do that.
Tom Wheelwright: Number five is I want you to set up three items, three important, whether they're accounts you want to look at, whether they're ratios you want to look at. There are three points of information that you want to see on a monthly basis. Those are the ones you want to review with your CPA. Okay? Three that you want to see on a monthly basis. I want you to set up two that you're going to look at on a weekly basis, and only one item that you're going to look at on a daily basis. I'm going to tell you what that one item is, and that's cash. When it comes to investing, when it comes to business, it's all about cashflow, so understanding your cash.
Tom Wheelwright: Now, you can look at cash a number of different ways. That one item could be sales. What's the cash that came in during the day? If you have fairly stable expenses, you may just want to look at sales. You may not want to look at net income every day. Right? That may be too confusing. However, if your expenses, if you have regular expenses all the time, you may want to look at the net cashflow every day. What's the addition to my bottom line every day? I prefer looking at the gross, just because I want to know what's come in. Then on a weekly basis, I want to look at, “Okay, what's come in and what's gone out?” On a monthly basis, I want to look at my overall cashflow. What's my profitability? I want to look at how assets are performing, I want to look at how liabilities are performing. Right? I basically want to look at how are my expenses performing, how are my assets performing, how are my liabilities performing on a monthly basis.
Tom Wheelwright: If you do those things, first of all you're going to have far better information to work off of. I'm giving you some very simple rules to go by. That doesn't mean you're not going to want some other information. I just want to keep it simple. I find that if we get too complex in it, we won't do it. We will just ignore it. One thing a day. You want to look at cash or cashflow once every single day. Two things once a week, not more than two, and then three things once a month. Once a month, or at least once a quarter, you sit down with your CPA and you go through it.
Tom Wheelwright: The reason you're going to go through it with your CPA is because you actually want your CPA to be able to advise you. Your CPA's job is to ask you questions. Okay? Fundamentally, your CPA's job is to ask you questions. “Okay, what about this? What about this? What about this? What are you trying to accomplish here?” When the CPA can ask you those questions, then you go, “Oh, this is what I want to do.” “All right, well then this is what you need to do. This is how we adjust that.” See, CPAs are really good with numbers. We're not the best business people in the world. We're not. But we're really good at analyzing the numbers. We can help you take those numbers and then you can translate them into business decisions that create better numbers. We're the ones that can help you understand the numbers. Once you understand those numbers, you can take those numbers and make your own business decisions, make better business decisions, make better investment decisions, and at the same time, you're going to find out that you're going to lower your taxes because you're going to have this on your mind.
Tom Wheelwright: Remember, whatever we think about, wherever our energy goes, that's what we bring in. Right? Whatever energy we put out is the energy we bring back in. If we're thinking about, that's energy we're putting out when we think, if we're putting out energy thinking about these numbers, we're also going to be thinking about, “Okay, what about from a tax standpoint?” So, if I'm thinking about my expenses, I'm thinking about, “Is this expense deductible?” Should this expense be paid for with my business credit card? Okay, then what documentation do I need?” All these other things follow this, but until we have the bookkeeping and the data right and we're thinking about this on a regular basis, and I'm not talking about all the time. Right?
Tom Wheelwright: You're going to literally … when I get up in the morning I see my cash for the previous day. That's what I see. When I get up in the morning, I see my cash for the previous day. I do it in the morning, other people like to do it in the evening because they want to see it for that day. I see my cash for the previous day. It takes me literally 15 seconds, so it's not taking a lot of time here. Once a week, “All right, a couple of things that we're looking for.” Once a month, three things we're looking for. It's not going to take a whole lot of time, but what's going to happen is you're going to make way better decisions, you're going to make way more money and pay way less taxes. See you next time.
Announcer: You've bene listening to The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes. To learn more, go to wealthability.com.