Business Accounting 101 with Danielle Brooks

Welcome to another episode of Launched & Legal with Dayna Thomas, Esq., entrepreneurship attorney and law firm coach. Launched & Legal is an Atlanta Small Business Network original series dedicated to bringing entrepreneurs and business owners the best practices and tips for strategizing, legalizing, and monetizing their ventures. Today, Dayna is joined by Danielle Brooks, CEO and owner of Pearl Business Consulting.

If you have questions or comments about today’s show, send Dayna a message or comment on Instagram @daynathomaslaw.

Transcription: 

Dayna Thomas, Esq.:
Hi everyone. I’m Dayna Thomas Esquire and welcome to Launched & Legal, where it’s my mission to help you strategize, legalize and monetize your business. I’m so excited that you’re watching because today, and in every show, I’ll be sharing the best practices and tips to take your business and brand to the next level.

You don’t know what you don’t know until you do. That phrase couldn’t be more true than when it comes to your business’s financials. Accounting is the language of business and today we’ll be talking to Danielle Brooks. Danielle has made a career of working with small businesses, entrepreneurs and high-profile clients for over a decade. As the CEO and owner of Pearl Business Consulting, she doesn’t shy away from what makes most business owners sweat, money. She’s experienced firsthand how much financial clarity can make or break a business, especially when she overhauled her mother’s company and increased the annual revenue by 500%. Now today, Danielle will be talking to us about the importance of knowing your numbers and introduce us to accounting 101. Danielle, thank you so much for being here.

Danielle Brooks:
I’m so excited to be here.

Dayna Thomas, Esq.:
So this episode is going to be about accounting 101, so the super basics for people who know nothing and have not paid attention to accounting at all. So what is business accounting and what is the role of an accountant?

Danielle Brooks:
Okay, well, I’m glad you asked. I think it’s important for business owners to understand the roles of accountant, a bookkeeper and a tax preparer, because people will ask, they’ll come to me and assume because I’m an accountant, I’ll do their taxes and with our company… So we are now a virtual CFO firm and so we help some businesses on their accounting, bookkeeping and payroll, and then the strategy consulting based on what those numbers are actually telling us. And so the accountant typically will oversee the bookkeeper. And so I just like to kind of offer… So bookkeeping I think is essential with like… not even, I know bookkeeping has to be in place and you can have a bookkeeper not necessarily have an accountant, and the accountant can be a bookkeeper. So the bookkeeper is going to ensure that every transaction’s recorded properly inside your book. So all your income, all your expenses, they’re going to ensure that everything from every place, whether it be your credit cards or your debit card, cash, everything is accounted for properly. And so the bookkeeper is ensuring day-to-day transactions are accounted for properly.

Dayna Thomas, Esq.:
Got it. And categorizes them.

Danielle Brooks:
Categorizes them, keeps them clean. So the accountant typically will oversee that. There’s possible, just depending on the size of the business, the accountant can also be the bookkeeper. But accountant typically has the accounting background and they will oversee and they will actually review the bookkeeping transactions, ensure that everything now in the books matches the bank.

Dayna Thomas, Esq.:
Makes sense.

Danielle Brooks:
And then they will provide additional insight. They’ll run those different reports that you need as a business owner and then they’ll provide that analysis to say, “Hey, what does this number mean?” And like I said, how I was able to help my mom, the bookkeeping had be in place for me to then-

Dayna Thomas, Esq.:
Make decisions Yep.

Danielle Brooks:
… understand and see which was bringing in more money and where the money was going. But so the accountant typically reviews and analyzes the work the bookkeeper actually does.

Dayna Thomas, Esq.:
Which is separate from the tax preparer.

Danielle Brooks:
Right. And I honestly recommend for those to be three different people. And so some people like a tax… this is just my opinion, a tax preparer, they might offer this all in house and they may have one person doing it all. But in the example that I had, the person that my mom was working with, they also were doing the taxes and it’s-

Dayna Thomas, Esq.:
Dropped the ball.

Danielle Brooks:
It’s easy to entrust someone to take care of it all cause you want to not have to think about it, but I want to ensure that business owners have what they need, but each person can hold each other accountable. So with my company, we don’t touch taxes, we take care of all the accounting, bookkeeping, we work alongside with tax accountants, but I’m right there. So if I see something on the tax side or if I see something in the day to day books that, “Hey, this is a tax deduction here, or this gifts that you’re buying ensure that your business owner knows this, this piece of equipment will probably be appreciated, but talk to your tax accountant.” There’s certain things on the tax side in tax strategy, the tax accountant needs proper books to provide that guidance.

Dayna Thomas, Esq.:
Absolutely. Yep So that makes sense, that checks and balances because you don’t want to just leave it to one person, that’s one mind when this other team or the other teammates can find other deductions or expenses that you weren’t tracking for. Especially with growing businesses, because over time you’re looking for more deductions and more ways to have less tax taxable income. So just do it right. So for that entrepreneur that’s just starting out and they say, “You know what? I’m ready to take it seriously in terms of my accounting, my bookkeeping,” what is the very first thing they should do to get on the right track?

Danielle Brooks:
I’d say get an accounting system. I love QuickBooks online. There’s a lot of other ones out there. I love QuickBooks online because it provides a great solid foundation that you can build on. If you want then add employees and add on all these other, like the time tracking system that they have. I feel like they have all in one package that as you grow, you can stay inside QuickBooks online. And not… I have not found any other system that has everything that they provide. And so-

Dayna Thomas, Esq.:
Awesome.

Danielle Brooks:
Accounting system in order for you to be able to properly track all of your income and all your expenses.

Dayna Thomas, Esq.:
And so let’s talk about financial statements because QuickBooks or an online software helps you to generate financial statements easily. So what are the different financial statements and what information does each provide?

Danielle Brooks:
So a P&L statement, profit and loss, is something that most business owners have heard of and or if you’re going to go get funding, they want to see your profit and loss statement, and so profit and law statement will tell you what’s happened. You can run that report over different time periods, depending on what you’re looking for. It can be a profit and loss statement from the previous month. I recommend for every business owner to actually look at their profit and loss statement at least once a month.

Dayna Thomas, Esq.:
At least.

Danielle Brooks:
And some people like quarterly, annually, and they don’t find out how much they made or didn’t make until the end of the year comes tax time.

Dayna Thomas, Esq.:
I think it might be a little bit of fear in that, like, “I don’t want to look. I’m just going to hope that I’m doing well.” But you have to look because you have to constantly make decisions for your business. You don’t want to not catch that until three months later or six months later. Those are important decisions. So the P&L statement.

Danielle Brooks:
Yes, P&L statement, it’s going to show you the certain trends. If you look at it, I say still look at it quarterly. You might notice in January… if at the end of Q1 you might notice in January something that you see different in March and then if you see your sales were lower or higher and you look at it P&L for… you can, and this is why I like P&L, if you have an actual accounting system, you can let it tell you whatever you want. You can have your Q1 total, or we can have break it out by month. And I always like to break it out by month so then we can now see trends that may have changed from month to month all in front of us. And so if you’re looking at it in one year, you forgot what number, what made this change in January I’m looking at in November.

Dayna Thomas, Esq.:
Absolutely. Yep.

Danielle Brooks:
And so I’d say look at it closer because there’s plenty of things you can catch as far as fraud. If you’re certain… the bookkeeper, typically bookkeepers, they are there to track income and expenses. If they aren’t talking to the business owner, they don’t know that all these gas purchases or these clothes could be fraud. And I’ve definitely caught fraud in-

Dayna Thomas, Esq.:
They’re just assuming that just because it’s there, then, “I’ll just categorize it.”

Danielle Brooks:
Yeah, I mean that’s typically what happens and most business owners aren’t talking to the bookkeeper because the bookkeeper’s there to do their job and tracking. They’re tracking properly, but if you aren’t talking to business owner, you don’t know that I wasn’t even in Florida on this day and it turns out, oh my card stuff like information was stolen, but sometimes people don’t find that out till the end of the year-

Dayna Thomas, Esq.:
That’s what makes a difference.

Danielle Brooks:
… And they’ve got certain banks that have certain stipulations on, “Oh, well we aren’t giving your money back if it’s longer than 60 or 90 days and stuff.” And now you’re just out.

Dayna Thomas, Esq.:
That’s what makes a difference about choosing the right bookkeeper because not one that’s just looking to get it done, but one that really is vested in your business growing and making sure that everything is correct.

Danielle Brooks:
And I’d say that’s usually where the accountants come in because I mean, there’s definitely great bookkeepers that will bring those things to your attention for sure, but there’s some people just want to do great bookkeeping like, “Hey, I’ve got great recordkeeping,” that’s what they love to do and they may not even be thinking about what these records actually mean and that’s where an accountant or someone still just second set of eyes to oversee those. And if the second set of eyes is the business owner until you have the accountant, that’s great. Some second set of eyes somewhere needs to happen. So then you notice I didn’t spend that much money. I didn’t even go to that clothing store.
I think a balance sheet is another thing for business owners to take a look at. And that should tell you everything that’s going on in every account in your business. So you can run a balance sheet report just like you run a P&L report, so all of your credit cards, your checking accounts, your savings accounts, any sort of loans you have, the balance sheet will show you exactly how much money the company actually has in the time period that you’re actually looking at. So that’s important.

Dayna Thomas, Esq.:
Cash or asset, just money, literally cash. Okay.

Danielle Brooks:
And you can run those balance sheets via cash or… So yeah, so the balance sheet, you run it via cash, it’ll tell you, cash is on there too, whatever accounts you set up in your system and whatever system it’s running out of. If you run a P&L report via cash, there’s usually a topic that you can choose, cash versus accrual, and it’ll tell you what’s happening based on… So if you want it be a cash, it essentially tells you your income and expenses with the cash that took place over that time period.

Dayna Thomas, Esq.:
Got it.

Danielle Brooks:
And so if some businesses are invoicing out, and you run that via accrual, well then this is going to tell you what you build, but not necessarily have what you received in cash.

Dayna Thomas, Esq.:
What you have, got it.

Danielle Brooks:
And so a P&L can be misleading if the P&L over one month says you made $5,000, but you have 2000 inside your bank account, you’re like, “Where’d the rest of my money go?”

Dayna Thomas, Esq.:
Do you prefer cash or accrual? What do you normally recommend?

Danielle Brooks:
So it all just depends-

Dayna Thomas, Esq.:
Depends, okay.

Danielle Brooks:
… on what you’re looking at. And so I’d say business owners just getting started, I think cash is just more important. Because if you’re doing it versus… if you’re running a P&L on accrual, and there’s nothing wrong with accrual, but then I think you need another tool like a cash forecasting to tell you what’s happening with your cash, right? Because this P&L running on accrual is not going to tell you a cash… it’s not going to tell you what’s happening with your cash. And so I’d recommend smaller business owners to run it via cash and then also work with your tax account because your taxes can be filed via cash or accrual. And so you want your P&L and your books to be set up how you’re running… how you’re filing your taxes.

Dayna Thomas, Esq.:
Awesome. So I want to talk a little bit about employees. So if a business owner now decides that they want to hire employees what do they need to do from a aspect of payroll or IRS? I know you don’t do too much about taxes, but when you have employees, I do know that you have to follow certain rules and do things a certain way and have certain systems. So what is the basic advice for if a company is now going to be an employer and have employees?

Danielle Brooks:
Well, honestly, my basic advice, I like to back up one step is when people are saying they’re ready to hire, they’re probably past the time they should’ve been ready to hire, and then they’re usually ready just to find anybody to just kind of put some bandaids over this stuff that’s bleeding. And I’d like to just encourage a business owner to take one step back and do an assessment of where are you spending all your time? Before we figure out, just hire, let’s make sure we’re making the right hire. And so writing a list of really where are you spending your time? How much time certain things are taking you? What do you truly want to do? Where are you most valued in the company?
And then that’s where you should focus. And then we’re going to hire based off of where is it sucking the life out of you? Where is it taking you away from the most high income activities? Then that’s who we should then look to hire, and then usually you’ve already been doing this job for a while, hopefully before you go to hire, and so you now also have an idea of what you’re looking for, the act, like what you need for them to know how to do.

Dayna Thomas, Esq.:
You can train them.

Danielle Brooks:
You can probably train them. You can probably check behind them. My husband always reminds me, “You need to inspect what you expect.”

Dayna Thomas, Esq.:
Ooh, I like that.

Danielle Brooks:
And if you don’t know what to expect, you can’t inspect them.

Dayna Thomas, Esq.:
That’s right.

Danielle Brooks:
And so that’s even on the accounting bookkeeping side. Everyone wants to run out and hire first, but if you don’t understand these reports, you don’t understand what this stuff means first, then people will just take advantage of you and you don’t even know it. But on the employee side versus… I like to always hit on employees versus contractors, so understanding the difference there. And most people want to just say, “Oh, I’m hiring,” and they want to go straight to employees cause that’s all they know, but depending on.

Dayna Thomas, Esq.:
Or it sounds like your business is bigger if you have an employee, but it’s more of a headache.

Danielle Brooks:
It is. There’s definitely a lot of things that the IRS needs… You have to check their boxes when it comes to employee side of things. And as far as even employee taxes, which you have to set up in different… every state’s different worker’s comp, there’s all different things that are just requirements once you have employees that you may not necessarily need just depending on your business. But depending on what you need that person to do, then the way I always like to look at it, if you’re telling them what to do, how to do it and when to do it, then that’s an employee, that’s just…
But in a contractor, if you know, if you have an end result of what you want done and you just say, “Deliver said end result,” you don’t care how they do it, you don’t care when they do it except to just, “Meet my deadline,” then that’s a contractor. And so just depending on what you… and if also as far as if they’re showing up in your shirt, doing what you need them to do, how you need them do it, they’re an employee.

Dayna Thomas, Esq.:
And that’s one way, employee versus independent contractor where legal and accounting definitely overlaps because I teach a lot about the difference between a contractor, independent contractor, and employee. Because we don’t get to choose. We can’t just say, “You know what, I want you to be an independent contractor and I want you to be an employee.” Or you have all these people working for you, but you don’t want to deal with payroll and don’t want to deal with taxes, so you just categorize everybody as an independent contractor. We don’t get to choose. The IRS has several factors which helps us to determine who is an employee and who is a contractor and it’s the IRS, and correct me if I’m wrong, it’s the IRS that’s really interested because the money goes to them, right?

Danielle Brooks:
Yes. Yes.

Dayna Thomas, Esq.:
And the IRS does not play about their money, that is one thing that we understand because with employees that tax is getting taken out. It’s getting taken out religiously. But with contractors, there’s some wiggle room there because there can be deductions and things like that. So it’s the IRS that we want to make sure that we are doing the right thing for as it relates to contractors and employees.
And overall, if you’re not sure, what I always say is the more control you have over that person, the more it looks like an employee. If that person already has their expertise, they know what they’re doing, maybe you have to show them how your systems work or how you tend to work with your clients, but if you don’t have to train them for real, besides on your systems, but they know how to do the work, they do it when they want to do it, they do it how they want to do it, especially… I mean, based on parameters of how you want to run your brand, it looks more like a contractor. But if you’re telling them what to do, where to be, how to do it, when to do it, “You can’t work at night, you have to work between nine and five,” it looks more like an employee, correct?

Danielle Brooks:
That’s correct. All that’s correct. And there’s been plenty of people that also want to try and hopefully to kind of go fly under the radar, they want to hire someone as a contractor, but they’re treating them like an employee. If the IRS ever finds out… and or that person, they are able to report you because they’re not getting their cut on the social security, Medicare taxes that you’re supposed to be paying on their behalf, and if the IRS finds out and if they report you, you now owe back taxes, penalties and fees for this time period you were trying to hide. And so I don’t recommend playing with the IRS, if you…

Dayna Thomas, Esq.:
Don’t mess with the IRS.

Danielle Brooks:
No. I mean, I feel like that’s… on the contractor side, there’s also the flip side of that. There are requirements on reporting the contractor, So I recommend every… not even recommend, every business is required to have a W9 on file for a contractor and then if you paid someone over $600 in a year, then you have to file 1099 for them, and if you don’t and you are also deducting them on your taxes as a business expense, because it’s a legit expense, if someone’s working for you, you can write that off in your taxes, but if you don’t have the proper documentation in place, if you’re ever audited, that amount you wrote off as… if I said I spent $10,000 in labor and I wrote that off, but I didn’t tell the IRS that I paid this person $10,000, then if they come back and we’re audited, they now give me a deduction for that $10,000. Now you actually owe me that back plus the deduction and back taxes, fees, penalties, everything.
So I just reckon people to just do the right thing from the very beginning. And it is… I mean, even though it’s on the IRS website probably section G, sub article B, whatever, they don’t care if you don’t know. Uncle Sam doesn’t know… They don’t care if you don’t know.

Dayna Thomas, Esq.:
They don’t.

Danielle Brooks:
Because you still owe them.

Dayna Thomas, Esq.:
Absolutely. So Danielle, this was so informative. Thank you so much. How can viewers stay in touch with you or learn more from you about bookkeeping and accounting strategies?

Danielle Brooks:
Well, I think the easiest way is going to website pearlbc.com and they’ll find out all the things we’re doing there. And even there’s a resource guide that I love to give small business owners, all the different tools. So what I was talking about when I helped set up my mom’s business. There’s a resource guide if people want to actually download that they can text the word profit to 33777 and that will get sent to their emails. They can have all the different tools I recommend to keep track of their time, keep track of their finances, their mileage, all different types of resources that I think all small business owners need.

Dayna Thomas, Esq.:
Well, I hope today’s show help to educate and inspire you as you pursue your business goals. Be sure to share today’s show with someone who can benefit and visit MyASBN.com and subscribe. If you have any questions or comments about today’s show, I would love to hear from you, send me a message or comment on Instagram at @daynathomaslaw. Remember to tune in next week and every week to make sure your business is launched and legal.