Larry Kopsa, CPA, owns Kpopsa Otte + Associates in York, Nebraska, and specializes in the salon/spa and the salon distributor industry. Kopsa and his firm provide consulting, tax accounting, and speaking services for clients nationwide. 

“I just don’t know what I’m doing wrong,” she said to me. “I’ve been in business for more than three years, and it seems like every month I’m getting farther behind.”

I could see tears welling up in Susan’s eyes as she talked to me. As a certified public accountant who works extensively with clients in the beauty industry, I have heard this same statement time and time again. Most owners of small businesses are too busy working hard to work smart. Susan was a prime example.

Susan told me that she was extremely excited when she first started her business. She knew she would have to work hard, but she felt that eventually the hard work would pay off. She had a vision of what she wanted her nail salon to become, but now, three years later, she is farther behind than ever. Her vision was now just a fantasy. She told me her salon was just a stress factory.

“I used to love my work but now I hate it. What am I doing wrong?” she asked me. “Before I answer your question,” I said, “I want to ask you a question. I have heard that you are a very good nail tech. Could you do a set of French nails blindfolded?”

She looked at me as if I was asking her the stupidest question she had ever heard. After a long moment of silence, she knew I was waiting for an answer so she responded, “You’ve got to be kidding. Nobody could apply a set of nails blindfolded without doing a terrible job!”

“You’re right,” I said, “but that’s really what you are doing with your business. You have told me you do not keep records. You said you do not have time, and I believe you said, ‘What difference would it make anyway?” I will tell you this, you can no more run a successful business without records than you can apply a set of French nails blindfolded. In essence, you are running your business blindfolded.”

Susan, like many other in the industry, did not realize that good records are necessary for a number of reasons. She thought that since she was a small business that records were not necessary. “That’s just for the big guys,” she told me. But every business must have good information to make good decisions. Whether you are big or small, records are important.

First, you need to keep good records for income tax purposes. Not only are records important so that you can properly prepare your tax returns, they are also very important in case Uncle Sam (the IRS) ever wants to audit your returns. Keeping good records will help you in case that ever happens.

Second, records are important for breaking purposes. Many times I have had salon clients tell me they had tried to get financing for an automobile, a house, or for business remodeling or expansion, but could not get the financing. This was because they could not provide documentation to the bank to verify their ability to make the loan payments. Keeping good records will solve this problem.

Next good records are very important if you want to sell your business. A prospective buyer will want to know how the business is doing. As an accountant, I am asked quite often to analyze a business to determine its worth. Without a good set of books, it is impossible to do the analysis. Keeping good records will solve this problem.

Most important, good financial data is important for you as the owner and manager of the business. To use a sports metaphor, your financial statements are your scorecard. They tell if you are winning or losing. They tell you if you should make adjustments and if the adjustments you are making are working. Keeping good records will take off the blindfold.

Analyzing the Numbers

With good records there are several things you can look for to help manage your business. First of all, you can compare your income and expenses to prior years and months. This comparison will help determine if you are actually doing better or worse than in the past. Also, there are industry averages that can be used for comparison. For example, if the industry average for labor is normally 45% of sales and your percentage is higher than that, you will know that you might want to adjust your compensation package. With records you can compare all of your costs from “A,” accounting, to “Z,” utilities (I can’t think of a “Z” expense). This is a valuable management tool.

Once you have a good record-keeping system set up, you will be able to easily create an operating budget that will help you make business decisions and manage your cash flow. A budget will also be useful as you make decisions on remodeling, expanding, hiring new help, and all of those other decisions you are currently making blindfolded without good records.

There are several ways to keep records. The cheapest is to simply use a pad of paper with columns. You list all of your income and expenses (see Record Retention on p.106) and then total the columns by month. This will give you monthly totals you can tabulate into cumulative and annual amounts. You can then use this information to create your own reports.

A better method is to purchase a small business bookkeeping by journal at an office supply store. These journals not only give you “normal” account classifications, they also provide you with summaries you can easily follow to provide you with better financial information.

A better method yet is to use small business software. Currently we are seeing many small business clients use personal computer small business accounting packages such as Quickbooks. This type of software is inexpensive and is very user-friendly. You don’t have to have a degree in accounting to enter information. Also, this type of software will automatically prepare various financial statements and reports along the way. But remember the old axiom, “garbage in, garbage out” – you need to input accurate information in the first place.

Another option would be to hire an accounting firm to prepare your financial firm to prepare your financial statements. Using an outside service would, in most case, give you the best information, but this option tends to be more expensive. If you are using and accounting firm, make sure they are giving you more than just numbers on paper. They should be providing you with advice and information to assist you in interpreting the results of your operation.

In our accounting office, we have been combining client small business software with our professional review and advice. We have numerous clients who simply send our accounting firm their files, which lets us look at all of their activity and input. After reviewing their entries, we make the necessary adjustments. Working with small business software such as Quickbooks not only lets our clients input their own checks and deposits, which saves them accounting fees, but it also gives them immediate information and advice from an experienced accountant.

No matter what system you use, it is important you understand exactly how your business is doing so you can “work smart.”

To have a successful business you must be able to measure how your business is performing. The only way to effectively do this is to have a good record keeping system that you can understand. You cannot run a successful business blindfolded. Your system does not have to be sophisticated; it just needs to provide you with information you can understand. And most important, to borrow from another sports metaphor, “Just do it!”

Sample Income and Expense Chart

Consider all areas of income and expense for through record keeping.

INCOME  Sales – services sales – retail sales - other OTHER income COST OF SALES Cost of back bar supplies Cost of items for resale Wages to technicians Payroll taxes on technician wages FIXED EXPENSES Accounting Advertising and promotions Auto Credit card fees Cleaning Computer Dues Education and seminars Entertainment Employee fringe benefits Insurance – workman’s compensation Insurance – health Insurance – other Interest Laundry Licenses and permits Meals Miscellaneous Office supplies Payroll taxes – management, clerical, and receptionists Pension plan Postage Rent Repairs and maintenance Subscriptions Telephone Travel Utilities Wages – management, clerical, and receptionists

Record Retention

What records does your business need to keep, and how long do you need to keep them? There are several categories of records that are important to a business, some for internal purposes and some for tax returns and other government requirements.

Generally, the Internal Revenue Service can audit a tax return for three years after the date it was due or the date the tax was paid, whichever is later. However, if there is a major understatement of income, they can audit for six years after the due date (or almost seven years after the tax year). For that reason, you should keep most income tax records for seven years.