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Microbakery Bookkeeping: How to Keep Your Books in Order | Episode 17

  • Nov 12, 2024
  • 7 min read

Updated: 4 days ago

Listen on Apple Podcasts or watch on YouTube


Most of us run our bakeries by checking one number. How much is in the bank today, and can I go buy flour with it? That works right up until January, when you sit down with a shoebox of receipts and try to remember what happened in December.


I know, because I was doing it myself. Bookkeeping felt intimidating to me, and I always had the sense that I was a little behind.


So I sat down with Megan Morales of Purple Elephant Bookkeeping, who owned a bakery herself from 2019 to 2022 and now specializes in bakery books. She has been in the food industry about fifteen years, starting in her mom's bakery, so she knows what it is like to face the finances after a full bake day.


What follows is the system she teaches, and none of it is complicated. It is small habits, done consistently, so your numbers are ready when you need them.


The mistake that costs bakers the most

Megan's number one mistake is not having a separate personal and business bank account, or having both and still running personal spending through the business card.


This is not just messy. If you have gone to the trouble of forming an LLC and then you buy groceries and coffee on the business card, you lose the legal protection you set the LLC up for in the first place. You also pay your bookkeeper or accountant more, because now somebody has to untangle which charges were yours and which were the bakery's.


The fix is boring and it works. Open the business account the day your paperwork clears, then use it only for the bakery.


The other common mistake is not reconciling every month. Reconciling means matching what is on your bank statement to what is in your bookkeeping software or your spreadsheet, line by line. That is how you catch a double charge, an overcharge, or a fee the bank slipped in, while you still have time to call them about it.


Your bookkeeping rhythm, daily to quarterly

Megan says every business should spend a minimum of two hours a week on its finances. That sounds like a lot until you break it into pieces.

  • Daily, five to ten minutes. Check that your transactions are syncing from your bank into your software and that they are landing in the right category. If Sunday and Monday are your big spending days, check in Monday night and Tuesday.

  • Weekly. Make sure your bills are paid on time so you are not collecting late fees, and confirm your software balance matches your bank balance.

  • Monthly. Reconcile.

  • Quarterly. Review your profit and loss statement and your balance sheet. These are the two reports that tell you the financial strength of your business.

Use some of that time on the housekeeping most of us skip. Go through your subscriptions and ask whether you are really using the website, the app, the plan you pay for every month. Megan moved one client off an expensive WordPress plan she was barely using, and that money went straight back in her pocket!


Set up your chart of accounts once, use it forever

Your chart of accounts is the list of categories every transaction gets sorted into, whether you are in software or in a spreadsheet. QuickBooks and Xero start you with something like forty five categories, and most microbakeries will never use all of them.


The ones that matter for a bakery:

  • Cost of goods sold. Your flour, butter, milk and other ingredients. You can add subcategories underneath if it helps you, for example splitting food ingredients from packaging and stickers, which are part of how the product goes out the door rather than office supplies.

  • Labor. Including your own pay. More on that below.

  • Assets. Big equipment like a mixer or an oven. Above a certain dollar threshold these stop being an expense and become an asset that depreciates over one, three or five years. Your accountant will tell you which.

  • Rent and utilities. Set this up even though you bake at home. When you eventually move into a commercial space, the category is already there, and in the meantime you can forecast what those costs will look like.

  • Food waste. If you take a hundred dollars of product to a market and sell fifty, put the rest in the food waste category so your accountant can see what to take out of cost of goods sold and labor.

If you are just starting and transactions are still thin, a spreadsheet is genuinely fine. Keep track of your startup costs from day one, including equipment you bought on a personal card before you had a business account, because those are a write off at the end of the year.


Pay yourself on paper, even when the money goes back in

This is the part I hear bakers resist the hardest, and it is the part that changes your pricing.


Pay yourself a livable hourly wage for your hands-on time. Time the dough spends in the fridge or proofing is not hands-on time, that lives under your utilities. So count the hours you are actually working, and figure out how many doughs you can produce in those hours.


If you are reinvesting that money back into the business right now, that is fine. Track it anyway. Once you know what your labor really costs, you can check whether your product pricing covers the wage you need to be making, which is the whole point.


While we are here, understand the owner's draw, because it trips up almost everyone. An owner's draw is when you move money from your business account to your personal account and then spend it on your personal card. It is not swiping the business card at the coffee shop and calling it a draw. And a draw does not show up on your profit and loss statement, because it is equity, so it comes off your balance sheet instead. That is why your profit number and your bank account never seem to agree.


I go deeper on the mechanics of paying yourself in How to Pay Yourself $1K a Month From Your Micro Bakery, and on setting prices that can carry a wage in Maximize Your Bakery Profits with Strategic Pricing.


Making it official, and what that costs

If you are a sole proprietor, filing a DBA is enough to be official and enough to open a business bank account. You go to your city or county courthouse, file, get it notarized, and pay a fee that runs somewhere between seven and thirty dollars depending on your county.


An LLC is the next step up and the one most people end up with. File it yourself with your secretary of state, which runs roughly a hundred and fifty to three hundred dollars, and every state has a video showing you exactly how. Megan is firmly against third party filing services, because they charge more than the filing itself and that space attracts scams.


Some states also require a separate business license on top of a DBA or LLC, so check your own state's rules.


For the baker a year or two in

Two things change once you have real revenue coming through.


First, stop doing your own taxes. Megan's line on this is that if you file yourself you are missing deductions, and the preparer usually pays for themselves in what they find.


Second, start reading your balance sheet like it matters, because it is what other people will read when you want something. If you want to open a commercial bakery in a year and you walk into a bank for a loan, the balance sheet is what shows them your equity, your assets, your loans and what you have taken in owner's draws. Clean books are what make that conversation short.


When you are ready to hire, look through the QuickBooks ProAdvisor directory or search for bookkeepers in your area. Do not lean on reviews, because almost nobody thinks to review their bookkeeper. Ask how often they will talk with you, what reports you get for the price, and whether they will send your profit and loss and balance sheet every month. If you end up waiting weeks on reports you asked for, it is completely fine to find someone else.


Final thoughts

Megan's closing advice was don't overthink it, and I keep coming back to that. Start categorizing now, while your business is small enough that catching up takes an afternoon instead of a lost weekend.


She is asking us to stop looking only at what is in the bank today and start looking at where we want these bakeries to be, and whether our numbers are carrying us there. You can start answering that this week with ten minutes and a coffee.


Cheering you on,


Caroline


Keep going

More on the money side of running a microbakery.


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