You are your small business.
Maybe you own a small business and maybe you employ people, but let’s be clear – you are your business. You do the bulk of the work, you’re the one hunting down new clients, and you’re the one whose finances are on the line. If you want to have a chance of success, you need to know how much money you’re making and spending.
This isn’t a place where you can skirt by with no plan. Even if your plan is simple, you need to know how you’re going to keep track of your cash. Luckily, there are easy ways to do this.
Introducing the envelope method
If you pressed me, I’d say anyone can find an accounting software answer to their cash problems. But that doesn’t make it true. Sometimes, you have to just pick the system that’s going to get it done. It’s like exercise – where you do it is much less important than that you do it.
The envelope accounting method was designed as a personal accounting solution. Well, it really just came into being. This wasn’t a long-developed system pored over by accountants to make life easier. It was just a simple way to keep track of cash before we used checkbooks, ledgers, or software.
How envelope accounting works
All you have to do is get a bunch of small envelopes – like the kind you would send a letter in, if you ever sent letters – and a few big envelopes – the yellow ones with that little brass clasp thing work great.
On each small envelope, you write the name of a line in your profit and loss statement. In the personal finance world, this could be as simple as “receipts” and “paychecks” – costs and revenue. For a small business, you’ll want more granularity in your naming.
“Revenue” is a fine label, but for costs you should break out a few categories. The big ones are going to be “office” – rent, utilities, internet, basic office supplies – “marketing” – Google AdWords, print ads, business cards – “travel” – food, gas, hotels – “payroll,” and a catchall “other.”
Depending on the nature of your business, you’ll be able to pick easy additional categories. Maybe you spend a lot on meetings or consumables, like nuts, bolts, or pesticides. Whatever makes sense for your business. The key to this whole system is to make it as easy as possible to categorize your finances.
Now, each time you incur a cost, you’ll write the receipt total on the outside of the corresponding envelope, add it to the previous total, and then put the receipt for that purchase in the envelope.
On the outside of the envelope, you now have a running total of what you’ve spent on that category. Inside, you have all of your receipts, ready for review if you need them. When you’ve finished a month, quarter, or year – it all depends on what’s manageable for your business – you put the totals from all the envelopes on the outside of a big envelope, write a date range on it, and you’ve got that period sorted.
Wash, rinse, repeat.
Aside from the knowledge you gain, the envelope method gives you important practice in managing your finances. When tax time rolls around, you’ll have everything you need in one place. When your business banker asks how much net income you’ve made this year, just look at the envelopes. When you’re wondering what you spent all that cash on, you can simply check.
As your company grows, you may eventually outgrow this method. With a lot of distributed workers or recurring revenue streams or odd accounting methods, the envelopes are going to fall to the wayside.
But by that point, you’ll have a great background in tracking and learning from your finances. Getting them all into a software system – which is, let’s be honest, where we all end up – will be no problem.
Envelope accounting is a great introduction to accounting for a small business owner. It gives you control over your finances, doesn’t suck up a bunch of your valuable time, and teaches you to the basics of accounting.
As I said before, this is unlikely to be your long-term solution for accounting. If you just want to turn the envelope accounting experience into a digital experience, check out NeoBudget or Mvelopes, both offer a digital envelope accounting system. When you’re ready to move on from envelopes entirely, check out Capterra’s accounting software directory. Until then, good luck.
Looking for Accounting software? Check out Capterra's list of the best Accounting software solutions.