Keeping Financial Records: Expenditure

Last week, we looked at how to keep records of income; now we’re going to look at recording our expenditure. Then we’ve got the two sides of the equation: we need to know what money came in (our income) and what money went out (our expenditure). The difference between the two is our profit or loss. If our income is greater than our expenditure, we have made a profit. However, if our expenditure is greater than our income, we have made a loss.

So let’s think about how our expenditure is recorded.

As writers, our expenditure can go in lots of different directions. Here are a few I thought of and there will be others you can list too:

·       The cost of printing our books, if we publish independently; I’m not just thinking about the costs of the physical books, but the cover design, services of an editor or proofreader; the purchase of a block of ISBN numbers etc.;

·       The purchase of books or magazines relating to our business and bought for the purposes of research;

·       Competition entry fees;

·       Train fares or mileage for travelling to courses or workshops, whether as the teacher or as the student;

·       The money we pay ourselves (whether that’s a PAYE-managed salary within a limited company or personal drawings if we are self-employed);

·       Bank charges and accounting/book-keeping fees;

·       The costs of running an office (and as business people, we do have an office, whether it’s part of a serviced building; the back bedroom; or a corner of the kitchen table): paper for the printer; postage for sending out copies of our books, competition entries or submissions to agents; charges for our website; fee for renewing our antivirus software etc.;

·      Capital purchases such as our laptop, printer, desk and filing cabinet.

Many of these payments will be made by cheque, internet payment or credit card and will be accompanied by an invoice or a receipt from the seller, so there is an immediate paper trail. Others will tend to be cash payments, especially if it’s for a small amount. All businesses should be able to provide a receipt on request; we need to get into the habit of always asking for one, even when it’s just a short taxi ride from the station to a conference location, or a quick sandwich grabbed during the lunch break on a course.

We looked at invoices and receipts in last week’s article. The only difference between income and expenditure is that in the first, we issue the documents, whereas in the second, the documents are issued to us. The documents themselves will be the same. And remember they will range from a formal invoice from a printer to a scrappy till receipt from a coffee bar. So once again, when it comes to sorting out our total expenditure for the business, we will be faced with a complete mix of different types of record.

As with income, all the bits of paper need to be collated in order to calculate total expenditure. It is also useful at this stage to group expenses together under different headings: direct expenses; wages; office expenses; professional fees etc. Our options were spelled out last time, but bear repeating: we can give the job to the accountant to do for us at the end of the year, which is effective but costly. We can give it to a book-keeper, either monthly or at the end of the year; again, this is effective and less costly than an accountant, but still means paying out money. Or we can do it ourselves, either monthly or at the end of the year. This option may be effective, depending on our abilities with numbers, and is the least costly in terms of actual expenditure, but it is costly in terms of our time.

Once again, I’m going to assume we decide to do it ourselves on a monthly basis, while the task is smaller and our memory is fresher. We will be listing all items of expenditure in one place. Let’s look at what that might look like for our three types of financial system:

·       Paper-based: a simple cash book with appropriate layout can be bought from any stationers. An A4 hard backed notebook will do the job just as well, but the columns will have to be drawn in. Start each month on a new page. List the expense items in date order (which helps when reconciling the bank statement) and put a total at the bottom. If you are grouping expenses as this stage, have a separate column for each category of expense and total each column separately as well In theory, you can use the same page as the income record, but it’s probably simpler and neater to use a different book, or a different section of the same book.

·       Spreadsheet: Use one spreadsheet for all the accounts, but use a separate worksheet for each type of transaction (income, expenditure etc). List the expenses in date order and use the software to calculate a total at the bottom. As above, use separate columns for different categories of expense.

·       Commercial software: Each transaction will need to be converted to an expense payment to enter it into the system. If the supplier has issued an invoice, this needs to be entered and then the payment is accounted against it. If there are a lot of small cash transactions, it can be time-consuming and unnecessary to enter each one separately. My solution is to pull these all together on a monthly basis as a single invoice, itemised line by line within the document. The software has the provision for allocating a category to each expense and the facility for producing reports on each category as required.

Using any of the above systems on a monthly basis means that at the end of the year, there will be just twelve figures per category of expenditure to collate in order to identify total expenditure.

For non-receipted expenses, such as mileage, it is important to keep a written record. Every year I promise myself I will put a book in the glove-compartment and record every journey at the time it occurs; and every year the system collaspes quickly or never gets started. Luckily, I keep a detailed appointment diary and have a reasonably good memory. At the end of each year, I list all my journeys and calcualte the mileage using Bing Maps, but it takes me ages. Doing it on a monthly basis (or better still, journey by journey) would be a much more effective approach.

Closing notes: This article is about recording expenditure. Some of that expenditure will be tax-deductable, some may not be. No distinction is made here between the two. At this point, we are only looking at what records we need to keep. What we do with them later is a whole different subject.

As always, note that I am not an accountant or a lawyer, just a long-term business owner, talking about my own experience. If you are unsure about anything, always take advice from an appropriate professional.

 

Keeping Financial Records: Income

Back in January, we looked at the common types of financial system used by small businesses, whether paper-based; a simple spreadsheet; or commercial software. Now we are moving on to think about the data we will keep within those systems. Let’s start by asking the question: what records do we need to keep?

Well, at its simplest, we need to know what money came in (our income) and what money went out (our expenditure). The difference between the two is our profit or loss. If our income is greater than our expenditure, we have made a profit. However, if our expenditure is greater than our income, we have made a loss.

We’re going to start by looking at keeping records of income.

As writers, our income can come from lots of different source. Here are a few I thought of and there will be others you can think of too:

·       Sales of our books, either to bookshops or direct to readers;

·       Sales of articles or short stories to magazines, journals or websites;

·       Prizes from writing competitions;

·       Fees for running workshops or courses on writing;

·       Advance payments and royalties from publishers;

·       Payments through PLR (Public Lending Rights, relating to books borrowed from libraries);

·       Payments through ALCS (Authors’ Licensing and Collecting Society, relating to photocopying).

Most of these payments will come in as cheques or direct payments into the bank, so there is an immediate paper trail. Others will tend to come as cash, especially the direct sales of books. Some, particularly the bottom three on the list, will come with full statements.

The two classic ways to document income are by issuing an invoice, which is a demand for payment; or by issuing a receipt, which is a record of payment made. Some companies issue both for the same transaction, although this is not necessary.

There is no standard format for an invoice, but some pieces of information must be present:

·       Date of the transaction;

·       Invoice number;

·       The Sellers’s name, contact details and VAT number (if applicable);

·       The Customer’s name and contact details;

·       Description of the goods or services being sold;

·       The net price, any discounts applied, rate of VAT and amount of VAT (if applicable), and the final gross amount to be paid.

Some invoices also carry details of: customer account numbers; order number; payment terms and instructions on how to pay (who to make the cheque out to; bank details for direct transfers). The back of the invoice can be a useful space for advertising or getting other messages directly to our customers; for example, these days our utility bills and credit card statements come stuffed with additional information. 

If we have a system for issuing invoices, we also need a way of recording when those invoices are paid. However, from the point of view of the buyer, the invoice is sufficient record, so there is no need to issue a receipt against payment of an invoice unless we want to.

Receipts are generally issued against smaller payments, received by cash or cheque. Once again, there is no standard format. Think of a simple receipt issued when we buy something at a craft fair; or the till receipts issued by a larger retailer or petrol station. There is a world of difference between the levels of detail in the two. However, as a minimum, they need to show the date, customer’s name, description of the goods or services; and amount paid. If the seller is VAT registered, the VAT number should also be shown.

Invoices and receipts are ways of issuing documents to our customers; as mentioned earlier, some customers will issue documentation to us, in the form of payment statements. So it is likely we will end up with a complete mix of different types of income record.

At some point, all the documentation needs to be collated in order to calculate total income. We can give this to the accountant to do for us at the end of the year, which is effective but costly. We can give this to a book-keeper to do, either monthly or at the end of the year; again, this is effective and less costly than an accountant, but still means paying out money. Or we can do it ourselves, either monthly or at the end of the year. This option may be effective, depending on our abilities with numbers, and is the least costly in terms of actual expenditure, but it is costly in terms of our time.

There really is no right answer on this one. It depends on individual circumstances, resources and preferences. However, let’s assume we decide to do it ourselves on a monthly basis. The benefits are that the task is smaller and our memory will be fresher. Basically, all we are doing is listing all the sources of income in one place. Let’s look at what that might look like for our three types of financial system:

·       Paper-based: a simple cash book with appropriate layout can be bought from any stationers. An A4 hard backed notebook will do the job just as well, but the columns will have to be drawn in. Start each month on a new page. List the income-generating transactions in date order (which helps when reconciling the bank statement) and put a total at the bottom.

·       Spreadsheet: Use one spreadsheet for all the accounts, but use a separate worksheet for each type of transaction (income, expenditure etc). List the income-generating transactions in date order and use the software to calculate a total at the bottom.

·       Commercial software: Each transaction will need to be converted to an invoice to enter it into the system. However, these invoices do not necessarily have to be issued to the customer. For example, PLR and ALCS do not need an invoice as they generate the appropriate documentation themselves. If there are a lot of small cash transactions, it can be time-consuming and unnecessary to issue an invoice for each one. My solution is to list all the books sold, and the prices on a single invoice issued to myself, then accounted against the cash receipts.

Using any of the above systems on a monthly basis means that at the end of the year, there will be just twelve figures to collate in order to identify total income. Next time, we will look at recording business expenditure.

Closing notes: This article is about recording income. Some of that income will be taxable, some may not be. No distinction is made here between the two. At this point, we are only looking at what records we need to keep. What we do with them later is a whole different subject.

As always, note that I am not an accountant or a lawyer, just a long-term business owner, talking about my own experience. If you are unsure about anything, always take advice from an appropriate professional.

Finanical Systems: Keeping it Appropriate

A belated Happy New Year to you all. It's been a while since I've written one of these Business of Writing articles. A lot has happened in the meantime, not all of it good, but it's time to stop sulking and move on. In the first few articles of 2013, we're going to look at the systems we need to run our writing business. If we can deal with the stuff we have to simply and easily, then we can spend as much time as possible doing what we want to, namely the writing. We're going to start by taking a look at finanical systems.

Every business needs to keep finanical records and our writing business is no different to any other in that respect. It’s not very creative and, for most people, it’s not much fun — although there are some of us who find numbers fascinating and enjoy playing with columns of figures — but it has to be done. So the trick is to have a good system and keep it up to date. That way it takes minimal time and leaves us free o get on with what we really want to be doing — writing.

For a system to be good, it needs to be appropriate. In other words, it needs to have the right level of complexity and no more. The three main options are a paper system based on hand-written ledgers; a simple electronic system based on a spreadsheet; and a purpose-built system based on commercial software. Let’s look at the pros and cons of each one.

When we started our own company, back in the 1990s, we used the paper system. It had been in use for several centuries by that point, and we hadn’t quite reached the stage where computerisation was the first choice for everything. It was simple to keep but became laborious when the number of transactions increased. The books needed to be completed in ink, as they were legal documents and hence it was impossible to correct mistakes neatly. I recognise this would not be a problem for everyone, but the sight of crossings-out on an otherwise neat page of figures offended the Virgo in me. For anyone with just a small number of transactions and a dislike of computers, a paper system is a perfectly acceptable option. But the chief disadvantage is the necessity to do all the sums manually. Even Apple has yet to invent a physical book that can add and subtract on its own.

At the other end of the scale, there is the system based on commercial software. Once a business reaches any level of complexity, I believe this is a necessity. By complexity, I mean for example, any of the following:

• VAT registration (and back in October 2012, I talked about why this might be an advantage, even for those of us with low levels of income).
• PAYE, either for ourselves or an employee (also in October 2012, I discussed the different business structures on offer and the pros and cons of each one)
• Stock-holding including copies of our books (the costs of printing cannot be claimed against tax until a book is sold)

In my company, we moved to a computerised commercial package towards the end of the 1990s, going with the best known company at the time, which is still one of the major players. They have upgraded their software every year since; we have upgraded ours every few years. There is a huge level of functionality in the latest version that is not relevant to our business, so I just ignore that and use the bits I need. This option is not a low-cost one but it certainly makes a potentially complex life simpler.

 

I’ve left the mid-range option until last, as this is probably the one most start-up businesses would go with. Anyone with a reasonable knowledge of spreadsheets (whether Excel, Works Spreadsheet, or Open Office) can set up simple records. They are really an extension of the paper system with the advantage that the sums are done for us. For the past couple of years, I have had a couple of additional business activities that have been outside the remit of the main company. I kept a set of spreadsheets for each, recording income and expenses. At the end of the year, I was able to develop a profit and loss statement in preparation for my tax return. At the time, it was a perfectly adequate system for these fledgling activities.

 

Whichever system is most appropriate, it helps no end to keep it up to date and I would suggest at least a monthly session. Memory is a tricky thing, whatever our age, and trying to remember why we took a taxi on a particular day nine or ten months ago or whether someone paid cash for a copy of our book we sold last year is time-consuming and not always successful. If we fill in the records at the time, it is quicker, easier — and we are then free to forget the details.

 

Of course, there is a fourth option used by some people: throw everything into a carrier bag or shoe-box and then hand it to the accountant at the end of the year with a winsome smile. But that’s an expensive option (the clue is in the word accountant) and will still involve time spent trying to answer questions and dredge the memory for missing information. It’s not an option I would ever recommend.

 

Next time, I’ll look at what records need to be kept and the basic financial concepts of profit and loss versus cash-flow. In the meantime, I’d love to hear what systems you use and the pros and cons you’ve experienced with them.

Giving It Away: Should We Write For Free?

[By pure co-incidence, fellow-writer Patsy Collins has also been blogging about the same topic this week, although she is talking about the provision of free books for Kindle. Read her article here.]

If there is one subject that seems to cause more conflict among writers than any other, it's the question of giving our writing away for free. I've seen some quite vicious arguments break out on some of the forums (and as writers, we all know how to use our words as weapons, don’t we?) each time the question is raised. At the one extreme, there are some people who believe that we should never write anything for nothing; we may be craftspeople, but we still have to pay the bills; publishers and printers all get paid, so why should writers be any different? At the other extreme, there is a view that the words are more important than the money and that we should use any and all opportunities to get our writing published — even if we have to pay for the privilege rather than the other way around.

Personally, I sit somewhere in the middle — and as always, I am looking at it from the point of view of a business-woman as well as a writer. We should never be ashamed to expect payment for our writing. It may take thirty minutes, an hour or a day to write something; but it has taken twenty, thirty or more years to learn how to write that something.

However, very few of us only do one type of writing all the time. We tend to write in different ways for different purposes. For example, here are some of the ways in which we might write. Most, but not all, further our businesses, although not all of them do so with direct financial returns. The key thing is to understand which is which and to decide whether each individual piece of writing is worth it or not.   

·       Articles for newspapers and journals are generally written on commission. Hence we have a formal or informal contract and an expectation of payment on delivery or on publication. (Don’t forget to send an invoice with the piece.)

·       Non-fiction books and fiction books by established authors are generally written on commission. We would expect a formal contract and, if we are lucky, an advance paid at time of contract and/or delivery of the manuscript. Further payment will depend on sales of the book, although we will not be asked to pay back the advance if the book bombs.

·       Fiction books, for first-timers, are generally written on spec. We are continually being told that this is not the way to a fortune, unless we are very good and very lucky. Hence this would come under the heading of potential financial returns.

·       To succeed as a writer these days, we all need to develop our ‘platform’. Increasingly this implies engagement with social media plus blogging.  No-one is going to pay me for writing this column (and nor would I expect them to) but if it brings my name to the attention of more potential readers, it is beneficial for my business.

·       Like musicians, writers get better with practice. When I first started writing creatively, I spent some time working on articles for one of the dreaded content sites. I never expected to make much money from those articles (and my expectations were not exceeded) but working out how I could improve my writing and watching my ratings to see what worked and what didn’t was a valuable exercise.

·       All businesses need planning and development. We covered planning in an earlier article. Development might include writing proposals for articles or books. Not all of those pitches will be successful, but the more we do, the ‘luckier’ we become. We would never expect to get paid for these proposals (I’m always suspicious of anyone who offers me a ‘free quotation’ — what else should it be but free?) but they are an important part of growing our business.

·       Writers get all sorts of requests to provide their work for free. And we always have the option of saying no. But sometimes we might want to say yes. I write for and publish Chudleigh Phoenix, a small local community magazine. It has no funding, so my co-editor and I don’t get paid. But that’s our choice — and I make sure it doesn’t eat into too much of the time that I need to devote to my business. (I also make sure that the readers of the magazine know about my books and short stories as well, so even my ‘donated’ writing can benefit the business in some way.)      

Business Start-Up: Getting Paid

We’ve talked about finding the customers; we’ve looked at getting the work (i.e. the writing) done. Now we’re going to focus on the third element: getting paid. Talking about money is something which new business owners often find very difficult.  However, no-one will think badly of you for charging a fair rate for your work.  After all, that's what they are doing, whether they are running businesses themselves or working for someone else.  So here are my tips for how to get paid:

 

·       Do make sure you have a system in place to collect money, which means keeping a record of what you’ve done, invoicing at an appropriate time-period (weekly, monthly or at the end of the job), and chasing invoices if they are not paid on time. Otherwise not everyone will be honest enough to pay up — and that will be very bad for cash-flow.

·      Try to negotiate at least some percentage of the money in advance.  This is especially important if you have to buy materials or incur travel or other expenditures in order to do the work.  However, it is also a way to reduce the risk that you will not get paid.  Unfortunately, there are people out there who will take your work and then refuse to pay.

·        If you suspect that there is going to be a problem with payment, then cut your losses and walk away.  A customer that doesn't pay is not a customer that you need (or can afford) to keep.

·       At the end of the financial year, many organizations, particularly public ones, are looking to spend excess budget money, on the "use it or lose" basis.  So the last couple of months of the financial year could be a good time to prospect for work.  Even if they don't need the work done until the next budget cycle, they may be willing to make an advance payment for services to be supplied later.  Now that's a really good way to "borrow" money without incurring interest payments.