Save Your Receipts!

I have operated a specialty shop for several years, manufacturing one-off tooling for gunsmiths, shooters, reloaders and craftspeople. My operation has not yet outgrown a single room shop, a small office and a storage shed. I think myself justified in calling my enterprise a "small business" but it has started to turn a profit. Just as important to me is the fact that I enjoy the work, which has allowed me to meet many talented people.

My business has not required a heavy investment of money but it has definitely required a serious investment of time. Experience has taught me that we will pay with one or the other. If we want to conserve money, we will probably find ourselves hard at work on Saturday night, salvaging a worn machine, scouting for materials or otherwise making shift with what we have.

In my case, making shift has included acting as my own business planner and bookkeeper, doing my best to measure the profitability of my work and pay my taxes in a timely way. This article describes a system I have set up to keep my records, using a combination of freeware computer programs and forms I created to track my transactions.

While I do not claim to have a one-size-fits-all system that you can simply pick up and run with, I am confident that many readers will find my way of doing things helpful and that many features will be adaptable to your operations. I have no intention of criticizing the skilled accountants and bookkeepers who can handle our money for us, nor do I find any fault with the accounting and bookkeeping programs we can purchase from software vendors.

I consult professionals on issues I cannot resolve myself but I do it with the attitude that I am paying tuition. I try to learn as much as I can about their approach to the questions I bring to them. I am aware of the assistance I can purchase but I have been obliged to rely heavily on things I can get for free. Contrary to the adage that we get what we pay for, I find that there are free and low-cost things worth having.

Among them I have identified some as especially valuable, such as free software, business forms I create myself, publications given away by the IRS, no cost and low cost courses sponsored by SCORE (Service Corps Of Retired Executives) and document tracking systems I have copied from prior employers. I strongly recommend that you visit and bookmark the websites of the IRS (irs.gov) and SCORE (score.org).

The IRS provides many sources of information for those who wish to educate themselves in the matter of taxes and SCORE offers a wide range of advice from retired executives, much of it available in online courses. Countless conversations with customers has taught me that skilled gunsmiths practice their profession for the love of their craft. For this reason, they sometimes fail to see that excellence in gunsmithing is not the same thing as excellence in the business of gunsmithing.

They may be distinctly disinterested in tracking expenses, learning how to depreciate expensive machinery or determining the true cost to themselves of the products and services they provide. The end result of this neglect can sometimes be a financial disappointment. To avoid this, we need to have systems in place, so keeping good records is, as much as possible, reduced to a routine.

Before opening my own shop, I discussed my plans with all the successful entrepreneurs I knew and came away with three basic requirements for any system that all agreed. First, identifying all expenses I meet in the process of delivering my goods and services, second, taking all legitimate tax deductions and, thirdly, recording transactions as part of a routine, clear enough that, if the need arises, I can delegate recording activities to another.

Meeting the first objective allows me to set fair prices for my work, meeting the second lowers my tax bill and the third will allow me to transition my tasks to a professional bookkeeper or accountant, when my time becomes so valuable that I can no longer afford to supervise this part of my business. This last objective shows how optimistic I am. If we want to have a business we must first determine the true cost of the goods and services we sell.

I find I must take a careful look at everything I do, to reveal expenses that might otherwise escape my attention. There are expenses we incur without knowing it, because it is not always obvious to us that we consume things such as the buildings in which we work and the machine tools we use to cut metal. The real cost of these things is only revealed to us when the shop roof must be

Here is a simplified example of how this might be done, by taking the primary categories from federal Schedule Cand creating corresponding subcategories appropriate to your own shop. repaired or the lathe needs anew change gear. If we have anticipated these expenses and made some provision for them in the price of our products, we will be in a much safer long term position. Ferret out all the hidden costs of your shop, to make sure that your prices are sustainable.

The next phase of this project is setting up a system for recording income and expenses. Because I am a sole proprietor, and have not set up a corporation, I started by reviewing the federal Schedule C, which lists the classes of deductions a sole proprietor is allowed to take. I then set about listing, under each scheduled category, the corresponding costs I knew I would incur when manufacturing specialty tools for others.

I was helped out in this by the fact that I completed a machinist apprenticeship program and had a good handle on the sorts of expenses that arise when running a shop. For example, I knew that I would have to find a suitable category for the tool handles and wood I purchase when a customer orders a special screwdriver (Cost Of Goods Sold) and the pay I give to workers who occasionally come in to help me move machinery, clean the shop or do take-home deburring work on the small parts I machine (Contract Labor).

Several of the categories are vague and it can be hard to determine what expenses are included in them. For example, the "Office Expenses" category (line 18) is intended to cover office supplies and postage. To discover this fact, I had to go to the instructions for Schedule C, and to IRS Publication 334, Tax Guide For Small Business.

After spending considerable time in this exercise, I had created categories for every type of expense I anticipated I would incur in the course of my work and listed them in groups, under the principal heading of one of the categories appearing on Schedule C. By adding up the numbers in each category at the end of the year, and adding up the money I took in as payment for my work, I could calculate the taxable income from my little business and enter that on my tax return, Form 1040.

Of course, I did not want to sit at a desk on April 14, entering in a calculator the amount appearing on every receipt for all purchases made throughout the preceding year. This is where open source software comes into the picture, in the form of a program called Gnu Cash. I consider Gnu Cash to be one of the greatest bargains I have ever found, because it is free and it works.

It is a versatile small business and financial accounting program available for GNU/Linux, BSD, Solaris, Mac OS Xand Microsoft Windows operating systems. Download the latest version, visit the Gnu Cash (gnucash. org) website. Gnu Cash is a useful program that provides rapid, practical education in handling business finances. You will find the user’s manual (which downloads with the program) to be a useful and concise tutorial in the basic principles of small business accounting.

If you need extra help in understanding the program, or you believe you have uncovered a bug in it, the site also gives instructions on contacting members of the Gnu Cash development team. I have not contacted them frequently but the team members have been responsive to my questions. Once you have the program installed on your computer, you have come to the heart of the matter.

Gnu Cash, like similar commercial programs, permits the user to set up accounts to track income and expenses and to create a report that will take all income received during a given period, subtract all expenses incurred during that time and report profit or loss.

As I use the program, I have an account called "Income", and as I am paid for my work, I record the money received under that heading, while simultaneously posting it to the places I will ultimately deposit it, either in my business checking account (an account called "Checking") or in a cash account ("Petty Cash".) As I write checks and spend cash for business purposes, I record each payment under one of my expense headings.

For example, the payment of my water bill would be recorded in the expense category of "Utilities"

(Schedule C, line 25). You can use the Gnu Cash program to move the payments around and to edit and add categories if you find it necessary. The essential thing is recording all business transactions. The end result is a complete record of all my income and all my expenses, a record I can analyze for any time period I choose.

In effect, I record the profitability of my shop and do my taxes as I go along, rather then saving these tasks for tax season, when I still see a few of my customers struggling through shoe boxes filled with receipts. After I adopted this system, I came up with an addition that has helped me greatly, a standardized "traveler" document, which accompanies each receipt and stays with the hard copy after it has been filed away.

The receipt traveler is a small form document generated by my word processing program listing everything I must do with each receipt in order to keep my system working. This is an idea I borrowed from the US Department Of Energy, where I worked as a prototype machinist and inspector.

Believe it or not, the managers of the laboratory where I worked actually helped us with these bits of extra government paperwork because we had a ready checklist of the numerous things we were required to do with documents such as receipts, quality control reports, and material certificates.

My receipt traveler provides a blank space for the date payment was made, how it was made (by cash, check or business credit card), the goods and services purchased, the identity of the payee and the business purpose served by that purchase. After using this form for awhile, I added a space for recording the business use of my personal automobile. This is a deductible expense that I confidently predict all of us will incur, whether we are gunsmiths, gun dealers or, like myself, tool makers for the gun trade.

I noticed that almost all of my mileage accrued because I used my car to go out and buy something needed for my shop, so it was logical to tie my mileage to the purchase receipts generated during those trips. The IRS requires a written record of deductions for mileage and I cannot think of an easier way to keep track of it. Moreover, if my deductions should be questioned, a receipt from a local supplier is powerful proof that I really did visit his store.

The IRS changes the mileage allowance from time to time, so it is a good idea to consult their publications to verify what it is at any given time. Other small business owners have adapted my system in various ways. A friend who owns a fastener company has made my traveler into a chart and reviews it when entering business expenses into his computerized books. This insures that he records all necessary information about a given expense, but without a document that follows the receipts.

Another, a stock maker who orders blanks online, modified the traveler by adding a space for tracking and delivery information. He posts any pending order on a cork board near his desk until the shipment arrives and has at his fingertips all the information he needs if he needs complain about a delayed or noncompliant shipment. The foregoing is a brief summary of the system I have in place, deleting many of the details specific to my operation.

I believe that anyone starting out on a shoestring is bound to find some of its features useful. If you cannot afford to have the services of an accountant to set up a system for you, it is not important that you adopt the details of my method, however, it is very important that you set up some logical, orderly system. Even if your plan contains a few flaws, those errors are much more easily corrected by a professional if they are organized, rather than coming to him or her concealed in a jumble of paper.

If you area gunsmith, gun dealer, or apart-time craftsman catering to gunsmiths, you are also a business proprietor. Being the proprietor of a business, however small, is an occupation separate from gunsmithing work. It behooves all of us to learn as much as we can about every aspect of our trade, including the subjects of accounting, taxes and the setting of prices for our work. Diligent attention to these matters will greatly assist in making your business sustainable, profitable and enjoyable. AG