Developing a Bookkeeping System

Once you have your business account in hand, you can start to think about a basic system for bookkeeping. Bookkeeping is very important because it is going to help you understand where your money is coming from as it flows into your business (tracking revenues) and where it's going to (monitoring expenses), and how much profit you're making (managing cash flow). Profit is just a fancy way of saying how much money is left after you pay all your bills.

Step 1 - Determine how you will account for funds coming in and going out:

There are two basic methods in accounting, one is an accrual method, which is more complex and is based on when an expense or a revenue is taken on. So, for example, in the accrual method, the moment you get your credit card bill, that would be something that would be taken off your assets versus when you actually pay the bill. If using the cash method, it would be taken off your assets when the bill is paid. The cash method is less difficult as it is based on when things are paid or received.

Now let’s look at revenues, for example, when a child is in your care for a week, and you say to the parent, they owe you $300, under the accrual method, that would be considered income at that time. Under the cash method, it wouldn't be considered income until the parent gave you the check and you deposited it. For the overwhelming majority of small childcare businesses, the cash method is going to be a lot simpler and a lot more helpful because it's going to let you know when money is coming in and out of your account. This method is more comfortable because it will match in many ways, the act of balancing your check book, just in a bigger sense, and in a bigger way.

Step 2 – Determine how you will record your transactions:

Now that you've determined how you will account for funds, you need to determine how you're going to record your transactions. For many small childcare businesses, it will be easy to record transactions on a sheet of paper or on a spreadsheet, such as Microsoft Excel or Google Sheets. You want to set up just some simple categories to start.

You want to first start with your income and determine what are the key revenue streams for your business, that is, the sources that you primarily get your money. Likely, parent fees will be one of them, another might be a child care subsidy or payments from the food service program. Perhaps there are additional funds that you receive for after school students, or grant funds.Each one of these will be a separate revenue stream to account for.

Next, list out your expenses. This may include items like payroll, cleaning, rent, repairs, supplies, and other categories that match your business. The important thing about categories is to try to limit them, you don't need to detail every category that might occur, but just to focus on the categories you have right now. You could always add categories along the way, but if you have too many categories it could become overwhelming and very difficult to account for spending or revenue as you spend time figuring out which category does this belong to. You can use this example list to categorize your income sources:

Revenue Categories

• Tuition
• Subsidy
• Fees
• Food program
• Grants
• Other

You can use this example list to categorize your expenses:

Expenses Categories

• Personnel
• Taxes
• Rent
• Utilities
• Phone
• Food/snacks
• PPE
• Cleaning
• Loan payments
• Bank fees
• Other

Step 3 – Set a schedule to record and review your transactions:

You should set a time to update your books, at least, every month. You may choose to update more frequently, but at minimum, do it once a month. To update your books, start by looking at all your revenue sources: cash, credit card and app payment systems like Venmo or Zelle, and checks written to you, and enter each one of them into your income on your spreadsheet. Next, you will record your expenses. You can look through your receipts, look at a bank or credit card statement, and invoices that you've had from people who you had to pay. Any of these proofs of payment can help you to not only record these costs, but also more importantly, to make sure that you're recording the right amount for each one.

Though it may seem tedious to record each transaction, it does become important in terms of understanding your profitability by tracking exactly where your money is coming from and where it's going to. Once you have recorded all your revenue and expenses for the month, you will then add each category up. When you subtract revenue from your expenses, this will give you an idea of how much profit you made that month. You may want to consider taking some of that profit out or leaving it in the business for a rainy day or to help with paying your bills that may be coming up.

You can use this helpful template to record and track your monthly revenue:

What Revenue Did I Receive?

You can use this helpful template to record and track your monthly expenses:

What Did I Pay For?