Jim Tolpin’s Guide to Becoming a Professional Cabinetmaker

Set Up and Keep the Books
You cannot successfully run a business of any kind, size or structure without accurately keeping track of what is coming into it and what is going out. Actually, there is no choice: The federal government requires that books be kept for any operating business. Once properly set up, however, the books for a one-person shop are not that difficult or time consuming (perhaps six hours a month) to keep. Well-maintained books are a good barometer of just how well business is doing.

It’s a good idea to have professional help for setting up the record-keeping system and even maintaining it. An experienced bookkeeper can generally do as good a job at the books as a CPA and be less expensive. Get recommendations from owners of small businesses in your area: The more an accountant knows about small business, the more he or she can do for you.

Even with the help of a good accountant, the cabinetmaker will still be involved in the day-to-day bookkeeping. Since few accountants enjoy visits from clients bearing a shoe box full of receipts and check stubs, you should find a good way to keep track of daily business. Standard procedure is to post income on an income ledger and outgo on an expenditure ledger. Summarize the entries each month and at year-end simply enter the sum of the monthly subtotals on your tax returns. While standardized ledger forms are available at any office supply store, my versions shown on pages 100 and 101 are specifically tailored for the independent cabinetmaking shop. When using these ledgers, post entries on a regular basis as receipts won’t pile up and cause confusion.

The system of bookkeeping I use is single entry cash-basis accounting. Single entry means that income and expenditures are recorded without consideration of other assets or liabilities. Cash-basis accounting is simply recording income when it is received and expenses when they are paid; no provision is made to account for money owed to suppliers or due from customers. To make entries easier, use a checking ledger that lists the same distribution columns that appear in your bookkeeping system. Although these simple accounting practices limit the extent to which the overall health of the business may be assessed at any given point in time, they are sufficient for businesses with a low sales volume, a minimum of uncommitted inventory and a low credit load: a good description of a one-person cabinetmaking shop.

If, however, you plan to hire personnel, prepare to deal with considerably more paperwork and the more complex accounting methods of double entry and accrual basis. As an employer, you will also need payroll ledgers and the complete set of federal and state tax forms.

Finally, two other important aspects of record keeping are equipment depreciation and inventory control. Work with your accountant to design the depreciation schedule and inventory control list most suitable to your specific needs.

Banking
Before you pay a single bill or a single check is accepted, open a separate bank account specifically for business use. The only nonbusiness use of this account may be the occasional withdrawal of cash for personal use (listed in accounting records as a nondeductible expense).

Many banks charge considerably higher service fees for business accounts than for personal accounts, but you don’t need to open a business account unless you work under an assumed name (the dba designation). Just open another personal checking account and use it strictly for the shop. If the local commercial banks won’t go for that, try a savings bank or a credit union. These customer-owned institutions usually don’t charge extra for business accounts, and many don’t charge for checks at all.

Immediately deposit all received income in the shop account. When writing checks, always write in the check register and on the check itself the category from the expenditure ledger to which the check’s recipient belongs. At least weekly, transfer the numbers from the check register to the monthly expenditure ledger. In this simple system of cash-basis accounting, the income and expenditure ledgers should reconcile exactly with the check register. Any error is usually due to a slip in the recording of entries (or to faulty arithmetic). An hour or two at the end of each month should allow you to keep everything up to date and your accountant underemployed.

A word about collected sales tax: Bank it, don’t spend it! I have a separate savings account (under the same number as my business checking account) that I use solely to park collected sales tax. This way, it doesn’t show up as “income” in my regular account and risk being inadvertently (or not so inadvertently) spent. When it’s time to pay the tax man, it’s always a relief to know that the money is sitting in the account ready to go.