Episode 5

full
Published on:

22nd Nov 2021

Tips vs. Strategy

There are a million tips out there, like: Save your receipts. Contribute to retirement. Be an S-corp!

The problem is there's no "why" behind those. If you don't know why you're doing those things, you're going to miss out on a lot of tax deductions. You can go through the motions, but you aren't making money moves that support your life goals. Blanket advice is one-size-fits-all and everybody's goals, business, household, goals, and priorities are different.

Once you have some things documented and categorized, the first report you'll need to understand is your income statement, or your profit-and-loss report. Income, minus expenses, equals profit. Seeing what goes on from month to month will allow you to see patterns and plan accordingly. Now, you will be taxed on that profit line, even if you didn't pay yourself that much.

Another report you need to understand is your balance sheet. Assets and liabilities, what do you have and what do you owe? This report is where your owner's draw, or owner's pay, will show up. So you can do all the things, but if you don't understand the strategy behind it you won't be able to make the moves that will move you forward.

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DISCLAIMER: I am not a financial advisor and this is not financial advice. My podcast is for educational purposes and is my personal opinion only. To make the best financial decision for your situation, please do your own research and if needed, seek the advice of a fee-based, fiduciary.

Music credit: Neon Fairies by Wolves 

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Transcript
Katelyn Magnuson:

okay.

Katelyn Magnuson:

So today we're going to be talking about strategy versus tips and understanding

Katelyn Magnuson:

the big picture behind all of this and how it plays into your business success.

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So let's just hold for a minute and let's talk about some things

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that are tips versus strategy.

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So a tip might be, Hey, you need to keep receipts for everything, a

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strategy, or like something that you can implement would be, Hey, we have

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a system that we're keeping receipts.

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And the reason that we need to keep them is because we have to be

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able to prove what we purchased was necessary for business expenses.

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Therefore, we now have a system in place that makes this really easy and

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straightforward so that we know that that area of our business is taken care of.

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Should we ever be audited?

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So again, one really, really small example, but tips, you should

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be contributing for retirement.

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You should be an LLC.

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You should be an S Corp.

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You should be a sole proprietor.

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You don't need to have your business.

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Finances separated.

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You do need to have your business.

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Finances separated.

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It's painful.

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How many different tips you'll get and in the online space, you know, Facebook,

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Instagram, podcasts, Googling things.

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You're going to find 17 different pieces of information that may

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potentially conflict with one another.

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So tips versus strategy, understanding why you should contribute to retirement.

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What it does for you, how you in particular should be contributing

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to retirement depending on your personal or household financial goals.

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So that segues really nicely into why we're going to talk about the

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reason that you need a strategy.

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So this whole business finance thing, this whole money thing, all of this.

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It's important for you to understand the bigger reason,

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the bigger goal behind it all.

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And it's not one size fits all because everyone's goals.

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Dreams businesses and households are different and priorities.

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What I'm prioritizing may not be something that you want to prioritize.

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And I see that a lot with my clients.

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You know, I have some clients that are prioritizing being debt-free

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before they, you know, make their next move or buy a house.

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I have some clients that are absolutely all about.

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Investing every single dime that they have and having a little in there,

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you know, available cash as possible because that's, what's important to them.

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They want to make sure that they are making the most of inflation

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and you know, their, their money is working for them in that way.

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So by understanding the strategy behind what you want in your business, in your

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financial goals, You are then able to implement the information that we talked

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about here that we talk about as a client that you learned from somewhere else.

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And you're able to understand why you should be an LLC with an S-corp.

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If that's the right with an S Corp election, if that's the

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right fit for you, why you should have certain types of retirement.

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Why, if you hire employees, you're going to need to change your retirement

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account, depending on how you're set up.

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Every single thing that you can do in your business and your personal

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finances, all connects, it, connects to your household, needs, it connects

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to why you're doing what you're doing.

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It connects to increasing your business, growth, your efficiencies, giving you a

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reason for why you choose to hire or why you choose to rearrange your offerings.

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So understanding the driving factor behind.

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All of the money, understanding, like we said before, why you need

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to keep receipts instead of just keeping receipts, why you need to do

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your bookkeeping versus understanding your reports and your numbers.

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So it's so important to understand the why behind all of this, because yeah, you

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can totally just go through the motions.

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You can do the bookkeeping.

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You can categorize the things, you can keep the receipts, but if you don't

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know why you're doing those things, you're going to lose out on a massive

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amount of potential tax deductions.

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So yeah, you may be fine.

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Come audit time because you've done the transactional items that

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are required and kudos, like.

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That is literally such a huge part of the battle as a business owner to have

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been able to tackle whether you're outsourcing it, whether you're doing

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it yourself, whether you're having a VA, do it, keeping receipts, digital

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copies, all that jazz, doing your book, keeping a is going to keep you from

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missing out on a lot of tax, deductible expenses come the end of the year.

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Which we love B is going to make it so that if you're audited, you

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have all the information that you need to be able to show to the IRS.

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Should you be audited?

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But what it's not going to do is it's not going to make sure that you are

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making money, moves to quote Cardi B that support your life goals.

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So that's what we want to make sure that we're doing here is you want to understand

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the reason behind all of it so that, you know, That you're going to contribute

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to a seth IRA for a retirement account, or you're going to open an I 401k.

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And I know we're throwing out 7 billion acronyms right now, but these are two

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different types of retirement accounts that depending on your business,

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finances, your household cash needs and the amount that you're able or

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comfortable to put in retirement.

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The two of these, I use them for very different clients, even if

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they're at the same income level.

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So understanding the reasoning behind that, understanding that, you know, a seth

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IRA is super straightforward to set up.

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It's really easy, especially if you're setting it up after the business

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year has closed and you're trying to sweep some money in there, you know,

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to make some really big tax savings.

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Bomb.

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Are you trying to absolutely maximize your retirement savings and maybe

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you don't have a super high salary.

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Okay, cool.

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And I 401k, we'll let you get there a lot sooner if you don't need all of those, but

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you have to understand the bigger picture.

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So I know if you need $120,000 or $50,000 to support your household bills and

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you're making a hundred thousand dollars.

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My recommendations will vary depending on what those goals are.

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So you need to make sure that you're not just taking blanket advice to open a

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seth IRA, to, read through your reports.

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What does reading through your reports mean?

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So if you're doing your bookkeeping again, Mm, kudos.

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I'm so fricking excited.

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Cause that is literally like the biggest barrier to getting started is

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just getting in there and doing it.

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But, and you think, you know, you've done a session with us.

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You've researched it.

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You've chatted with someone else.

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Maybe you've taken a course and.

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You're like, Hey, I know how to categorize all of these.

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I know that these are contractor expenses.

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I know that these are advertising expenses.

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I know that as a self-employed business owner, probably 20% or more of my

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expenses are going to fall under that.

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Other expenses like training and education and merchant service fees,

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like Stripe or square or PayPal like that is literally the catchall.

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It kills me how many things we have fallen there.

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So if you know, How you're doing you're categorizing and

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what those categories mean.

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Like if you know that for example, meals in 2021 are a hundred

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percent right off when normally you only get to deduct 50% of them.

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Because we're trying to incentivize the restaurant industry.

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Sweet.

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So you can prioritize accordingly, you know, maybe you were a little

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bit more frugal in the past where you didn't have team meetings.

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Maybe you're now having team meetings or you're meeting with potential clients

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and you're going out and getting a meal.

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As long as you're again, putting the proper systems

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in place systems can be sexy.

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Um, your documenting it on a calendar or with an email invite or something

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that shows like, Hey, I wasn't just stopping at Panera by myself.

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And trying to write it up.

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Then, you know, the next step is to go look at your reports.

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And then number one report that you're going to need to understand is your

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income statement or your profit and loss, depending on what you work

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in, they can be called different things, but they're the same report.

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This report takes your overall income.

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So sales at the top, it takes out your business expenses and then it leaves you

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with what the profit is at the bottom.

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So you have to understand how to read this because a, especially comparing

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it from one month to the next.

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And seeing trends can be really beneficial because you're able to look at like,

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oh, okay, well, every year in October, you know, my sales just go insane.

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But that also means that those sales are for, you know, December

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due date or delivery or whatever.

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And your expenses increase in December and January.

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Well, that would totally make sense.

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You're able to start seeing patterns and understanding so that you can be prepared.

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You're also able, depending on how you break your sales down to start seeing

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what's worth putting your time behind, is it most worth putting your time

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behind, you know, your top selling like five services or five products?

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Probably, you know, in five to just a number that I threw out there,

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but it allows you to prioritize once you understand your profitability.

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And we talked about this in one of the earlier episodes, but understanding

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your profitability and understanding what's selling well is really

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important in order for you to be able to decide like make sales decisions.

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That's the whole reason that we're looking at these reports, right?

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It's one thing you can look at them.

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Yep.

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Great.

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We made $5,000 this month after expenses.

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Thumbs up for those of you that are listening to the audio and you

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know, like big thumbs up, right.

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You made five grand.

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Fantastic.

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However, is that, does that include what you were paid?

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Because one of the big things that people don't understand is if you're

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a single member, LLC, if you're a sole proprietor, what you pay yourself is

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not a business expense, your business.

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Profit all passes through to you personally as an individual.

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So you yourself.

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So me, Katelyn, Magnuson, I get taxed on whatever that profit

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number is on that income statement.

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Whether I have paid myself that money or left it in the business account.

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So a lot of times when I have people that will, you know, they'll look at their

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income statements, they're like, yeah, I made $5,000, but like I don't have

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$5,000 more in my account this month.

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That's because owner's payments like that owner's draws owners pay, do

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not show up on that income statement because they're not a business expense.

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Again, only business deductible expenses are going to show

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up there income expenses.

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So the other report that you need to know about and that you need to really

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understand is your balance sheet.

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This one isn't used quite as frequently in smaller businesses, but it should

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be something that you're looking at at least once a quarter to make sure that

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a, especially if you're doing your own accounting, that everything is up to

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par, but it's also going to be looked at, if you go to buy a home, if you

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try and get financing, or if you look to sell your business, those are all

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really common situations where someone's gonna want to see your balance sheet.

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So what a balance sheet is, think of a balance sheet as a statement.

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For what you have.

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Assets and liabilities, like what are things that you owe and

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what are things that you have?

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What cash do you have?

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So on a balance sheet, it's going to have assets such as your checking

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account, your savings account, any large equipment that you may have, all

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of that will show up there, because those are things that you could sell.

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It's cash you have on hand.

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On the flip side, you're going to see liabilities.

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If you have a balance on your credit card, if you have an existing loan, if you have.

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Bills that you owe that haven't been paid yet.

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All of those will potentially show up as liabilities.

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And then at the very bottom of all of that, you're going to see owner's

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draws and owner's investments.

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And these can be called again, several different things.

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Owners pay owner's contribution, owner's investment owners draw essentially owners

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investment and owner's contribution.

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Or if you deposit money into the business.

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So you give the business money, and owners draw or owners pay is when you

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take money from the business and you were paying yourself and again, with

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sole proprietors and single member LLCs, that's where your pay will show up.

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You don't want to categorize it as wages and salaries because that's

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incorrect, from a tax perspective.

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again why you need to understand the strategy of how you're doing

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your bookkeeping, versus just the tips of do your bookkeeping,

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categorize your information, because if you become an S Corp or an LLC

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with an S-corp election, you then actually do have payroll expenses.

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And owner's draw.

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So part of that will show up on the income and expenses sheet

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that we were talking about.

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And part of that will show up on your balance sheet.

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And so looking at both of those one gives you an idea of the

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profitability of the business.

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So you can make decisions based on income and expenses.

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And you're able to see cashflow, you're able to compare it like month to month.

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You're able to compare it year to year.

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Year to date compared to last year, year to date.

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So you can see how you're doing.

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And all of those are reports that I pull at the end of each month generally.

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And I take a look at where we're at, where we've been, and then factor into,

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you know, do we need to make changes?

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there something in here, like, do we need to be hiring?

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Is there something we need to be celebrating?

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So those are all really important to be looking at.

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And then you pair that by looking at your balance sheet.

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And when you look at your balance sheet, you want to make sure

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that you're checking again.

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Balances correct.

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Your savings account balance is correct.

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That what you've paid yourself this year looks correct.

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And if any of those numbers aren't correct on the date that you pick compared

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to the date that it was in your bank.

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So if you picked, like, let's say January 1st of 2021, What's in your checking

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account in your accounting software should match what's in your checking

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account on that same day in your bank.

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Like they're supposed to be an actual real life statement of like what's there.

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And again, these are two of the most common reports that you

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should understand in order to be able to make big growth moves.

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And it's what allows for sustainable growth, understanding these and

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understanding how they work is I mean totally cliche, but it's, it's priceless.

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Like this is, this is the sauce.

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This is exactly what we do with our clients.

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This is why we have clients that absolutely love working with us because

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they're able to come on and they're able to going to sound so cheesy.

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They're able to feel safe that they're understood that.

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Someone finally gets it and is making it digestible so that they can understand

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it enough to make the decisions that they feel really empowered making.

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So strategy versus tips, you need to understand the

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big picture with your money.

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And your business finances and your retirement and your personal finances

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and your household finances and in what sort of business entity you are, what

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ownership type you are, all of those and how you want to, you know, do you want

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to sell your business, like all of these factor together and need to be considered

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About the Podcast

Wealth Witches
Where financial empowerment meets magic!
Welcome to the Wealth Witches™ podcast, where financial empowerment meets magic! I'm Katelyn Magnuson, your guide on this enchanted journey to holistic wealth and prosperity. Here, we honor all identities and invoke our inner witches to create a community where everyone feels welcome and inspired.

Formerly known as the Confident Money podcast, we've transformed into Wealth Witches™ with Katelyn Magnuson. This change is about embracing the once-taboo topics of money and magic, blending them into a powerful mix of practical advice and mystical insights. Whether you're here for financial tips or to explore the magical side of life, this podcast is your new home.

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About your host

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Katelyn Magnuson

Katelyn, the driving force behind The Freelance CFO and creator of Wealth Witches, is revolutionizing accounting with a sprinkle of magic. With a decade of experience, she’s not your typical number cruncher. Her unique blend of expertise and approachability, infused with a touch of spiritual insight, has made her a go-to authority. Katelyn believes finance should be a stepping stone to success, not a barrier. With a judgment-free ethos, she simplifies complex financial topics, making them actionable for entrepreneurs and small businesses. Her ultimate goal? To empower you to manifest your authentic life—not a cookie-cutter one!