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Short episodes about money management for coaches running simple service businesses. I'm Mark Butler. My goal with this show is to convince you of one thing: for most coaching practices, bookkeeping isn't strategic, it's hygiene. You don't need to become your own CFO. You need your numbers to be current and accurate so you're not scrambling at tax time, and you need to be able to answer one or two simple questions about your money. That's it. I've been running a bookkeeping firm for coaches for over a decade, and this is the conversation I have with my clients all the time.
Hey this is Mark Butler and you're
listening to Money for Coaches I suppose
this could be the first uh episode in
the series that we're calling Bookkeeping
101 and I'll start with the thing that
confuses my clients the most Every month
I send my clients a transaction review
which is my way of trying to make my
clients part of the bookkeeping experience
as simple and easy as possible So
somewhere near the beginning of the month
my team and I will go into my clients
business bank accounts we'll import all
the transactions we'll apply the best
possible category to those transactions
and then we send the clients a review
where they can review our work and it
takes about two minutes and they can
give us notes about any transactions
whose category they either disagree
with or confuses them Well there are
really three kinds of transactions that
consistently confuse my clients The
three types of transactions are owner
contributions or capital contributions
those are the same thing owner draws or
owner distributions which are not exactly
the same thing but for our purposes we're
going to treat them as though they're
the same thing and then we have transfers
What all three of these transaction types
have in common is none of them affect
the profit and loss statement If the
profit and loss statement is a measure
of the amount of money the business
has earned minus the amount of money
the business has spent which results in
the profit or loss of the business then
contributions distributions and transfers
all stay off of that report because
none of them are revenue or expenses So
let's start with capital contributions
or owner contributions If I'm running my
coaching practice and as we talked about
in previous episode let's say I wanna
sign up for a training and the training
costs $1,000 but the $1,000 is not in my
business checking account I can transfer
$1,000 from my personal checking account
to my business checking account and
that's called a capital contribution or
an owner contribution It is what happens
when a business owner puts some of their
own money into the business in order to
fund its operation Now even though money
is arriving in the practice it's not
revenue because the practice didn't sell
anything in order to receive that money
It's just the owner taking some of their
money and putting it into the business to
help the business run It's called an owner
contribution and since it isn't money
that resulted from the sale of product
or services it does not go on the profit
and loss statement but it will be in my
client's transaction review because I want
them to see Hey this $1,000 that landed
in your business checking account just
confirmed for me that that's you funding
the operations of the business and it's
not some miscellaneous client payment that
I don't recognize Once they confirm Yes
that's me moving money into the business
to fund its operation then I can say
Okay great That's a capital contribution
Over the long run that number becomes a
measure of how much money the owner you
have put into the practice to support it
And that's a very good thing to know
Owner distributions are the mirror image
of owner contributions If I have $1,000
in my practice checking account and I
withdraw those funds over to a personal
checking account that is called an owner
distribution Now it's not a business
expense because the business did not
spend that money in pursuit of growth
or profit in the practice It's just the
owner reaching into the business account
grabbing the money and pulling that money
back out To use however you want Use to
pay personal bills whatever Now where my
clients get confused is they will often
want to call an owner distribution either
payroll or salary But it is not payroll
or salary Payroll and salary would only
be the appropriate label if the money had
gone through an official payroll service
where you are essentially registered as
an employee of your own business and then
you process a payroll for yourself as an
employee and then that money goes to say
direct deposit tax withholding happens
Social Security and FICA and all of that
is taken out of those funds And in that
case it is called payroll or wages But
when you just reach into the business
checking account grab a thousand dollars
and put it into your personal account
if it didn't run through an official
payroll service then we just call it
owner distribution Now it's a conversation
for another day whether it should run
through an official payroll service and
that's a function of how big your practice
is and how much money it generates and
whether there are tax advantages to
incorporating your practice in a certain
way and using a payroll service That's
all a conversation for another day and I'm
not a tax professional anyway so I will
tell you what I have been taught by tax
professionals when we get there But for
today all you need to know is when you
reach into the practice checking account
you grab a thousand dollars and you put
it in your personal checking account
that is not a business expense It's just
essentially a cash withdrawal by the
owner That covers owner distributions or
owner draws When I have my clients review
those transactions I'm just asking them
to confirm that that money is actually
going to them personally as opposed to
them paying a contractor or for some other
business expense and me mislabeling it
as an owner distribution So that's why my
clients will see it in the monthly review
Last transaction type we'll talk about
today is transfers If I have two accounts
that are both part of my business
financials let's say I have a PayPal
account and a business checking account
I have a client who pays me through the
PayPal account and then I want to access
those funds so I transfer them from PayPal
to business checking That is what we call
a transfer transaction and it doesn't
impact profit or loss because it is
neither revenue nor expense It is just the
money changing location The money resided
in PayPal and then it transferred over
to business checking and the money just
changed location No consequence to profit
no consequence to taxes just the money
was over there now the money is over here
We call it a transfer A lot of times when
my clients see those they'll get confused
because they'll say Why is this even here
You can delete this is something they will
often tell me You can delete this from my
financials But I'm not going to delete it
because part of good financial tracking
in a coaching practice or any other
business is knowing where the money is at
any given moment If it was in PayPal and
now it's in checking we want to know that
the money made that move and the transfer
transaction is how we keep track of it
Very simple The transfer transactions have
been so confusing to my clients over the
years and there's no need for me to get
their clarification or confirmation on
those So if you become my client you now
won't even see transfers in those monthly
reviews However sometimes the monthly
review happens right in the moment where
the money is between accounts So let's
say that you have a Stripe account and
you take client payments in that Stripe
account Stripe creates a payout each
day where they say Okay these are the
transactions you had today We're gonna
take our fees from those transactions and
then we're going to transfer the remainder
into your checking account While the money
is in between places when it has left
Stripe but it may not have ar-arrived in
your business checking account yet we'll
often call that money in transit or we'll
call it transfer clearing which means the
money's kind of in limbo In those cases my
clients will maybe have an opportunity to
see that there's a few transfer clearing
transactions on their transaction review
And in that case I just have to educate
you my clients and my prospective clients
here's what that means You can ignore
it because sometime in the next one to
three business days the money will land
in its destination then it officially
becomes a transfer where we're aware of
both sides of the transfer meaning we know
where the money came from we know where
the money landed it's all settled and
done good to go That's the only kind of
transaction my clients might see on their
transaction review and say What is this
What do I need to do with this So there
you have it We have owner contributions
where the owner puts money into their
practice checking account to fund
operations We have owner distributions
where the owner reaches into the practice
checking account and withdraws funds
to their personal account for whatever
use want And then we have transfers All
three of these transaction types are
happening all the time in my clients
accounts None of them affect profitability
None of them affect taxes directly
And they do very often cause my clients
confusion we'll leave it there for now If
you'd like me to be your bookkeeper so I
can do those two-minute monthly reviews
with you something my clients have thanked
me for over and over because it takes
their bookkeeping processes down to two
to five minutes per month and they get
that peace of mind Go to getplucky.io
sign up for the service and we'll take
great care of you Talk to you next time