Why quality bookkeeping is critical for a successful business & 6 steps To get started
Proper bookkeeping & recordkeeping are essential parts of running your own business. A little continuous effort can save a lot of frustration later. The biggest hurdle that the business owners I talk to run into is that they don’t know how or where to start. Below, I will explain what bookkeeping is and why it is an essential part of owning a business. I’ll also provide some tips to get started.
WHAT:
Essentially, bookkeeping is the day-to-day process of recording daily financial transactions in a consistent way, categorizing those transactions, and reconciling the bank statements. The complexity of a bookkeeping system depends on the nature of the business and the number of transactions completed in a period. All sales and purchases made by your business need to be recorded and backed-up by supporting documents. Supporting documents should be stored in a safe, accessible place.
WHY:
Keeping a quality set of books increases the value of your business. Having quality books means the numbers are accurate and classified correctly. It means the information is complete, clearly presented and kept timely. With proper recordkeeping, supporting documents are organized & readily available. Knowing & understanding the numbers should be a priority because it allows you to assess the health & viability of your company and make the best management decisions. Clean financial statements allow you to be more marketable in terms of a potential sale down the road, as well as bankable, in terms of access to capital/securing financing. Lenders will generally want to see three to five years of quality financial statements.
Having accurate and detailed records makes tax time a breeze. By keeping track of financial data and documents, you’ll have what you need to hand to your CPA come tax time. It can be costly and time consuming to wait and catch up with your bookkeeping at the end of the year. By keeping an eye on your financials, working with your CPA on a tax plan and making estimated payments throughout the year, you can avoid unexpected tax bills or underpayment penalties from the IRS.
Lazy/unkempt bookkeeping can cost you in many ways. With proper bookkeeping & recordkeeping, you can ensure customers are billed & collected on time which protects your cash flow. Having a healthy cashflow in your business will help to make sure you are paying your own bills on time and that you are not borrowing more than you can repay. Regular review of your bookkeeping & processes can help guard your business from loss through fraud or embezzlement and catch any overpayments that may have gone unnoticed. Inconsistent bookkeeping often leads to missing out on legitimate tax deductions. If not recorded timely, expenses can be forgotten, and paperwork/docs can go missing as well.
Quality bookkeeping allows for enhanced reporting, analysis & decision making. After business transactions have been properly recorded over time, financial statements such as the profit and loss statement and the balance sheet can be prepared. These statements will allow you to review trends, compare the year over year success of your business and identify areas of concern and of opportunity. Below are a few examples of the analysis & management decision making you can begin to do once you have information available.
A profit & loss statement simply summarizes your revenues & expenses over a period. This report will help you identify which of the goods and/or services that you offer are most profitable, if at all. Then you can think about whether you need to increase prices or more closely examine costs, or both. A profit & loss report will allow you to examine your expenses on a regular basis and make sure they are in line with your expectations. If you have launched any new initiatives, projects or operational changes, you’ll be able to notice any impact to your sales and/or expenses.
A balance sheet summarizes the assets, liabilities and owner’s equity at a point in time. This report will show you if debts are significantly more than assets, and you might contemplate more aggressively paying down liabilities and other debts or reinvesting profits back into the business to increase your working capital. A balance sheet will also show you if accounts receivable is increasing significantly, allowing you to decide whether you need to step up collection activities or limit credit extensions to clients or customers.
HOW:
Now you know bookkeeping is essential, but where do you start?
Step 1 // First rule: Do not commingle personal and business funds - open a separate bank account for the business. After you have set up your business entity to best serve you, head to the bank.
Step 2 // Choose a platform to track your receipts and invoices. Whether you DIY or decide to hire a professional, cloud-based software services like Quickbooks online or Xero can link directly to your bank and increase efficiency. Being in the cloud allows you to easily access your secure financial information from anywhere. It also allows your CPA to share access so they can work behind the scenes while you focus on other aspects of running and growing your business. Other options include Wave software or if your business is very basic, simply an excel spreadsheet to track your income & expenses. The key is that accurate & complete data is captured on a regular schedule. At the very least, balance your books every quarter.
Need an idea of what expenses are tax deductible for your business? Click here.
Step 3 // After your business bank account is set up to link with your accounting software, you can set up your chart of accounts and begin categorizing your transactions. A chart of accounts is a list of all accounts used in the general ledger of an organization. To get an idea of commonly used expense accounts that might work for you, click here.
Step 4 // After transactions are recorded over a period, most bookkeeping software allows you to run your profit & loss statement and balance sheet at the end of the month/quarter/year for your review. If your business has assets & liabilities to set up or is a little more complex and you’re unsure where to turn, your CPA can help. Quality bookkeeping can be time consuming and there is a learning curve with most software programs so be sure to reach out if you need assistance. Your CPA can also periodically review the data with you to help the numbers make more sense if you’re not familiar.
Step 5 // Store business records securely and in an organized fashion. This is an important responsibility, especially for compliance reasons. If you have a large amount of transactions, it might benefit you to use a system like Hubdoc for document collection & management. If your document load is lighter, you can save invoices & receipts on a basic & free platform such as Dropbox or merely as a paper copy in a physical file folder, separated by month or year.
Step 6 // After you have a system in place, schedule a little time at least monthly for review so you know what’s happening in your business and with your cash flow. That way you can make smart decisions about spending or other areas of focus as they arise in your day-to-day operations.
In Summary
Now that you know why bookkeeping is so important, you can consider these basic tips and ideas to better manage your business finances. Whether you DIY or seek advice & services from an expert like a CPA, being financially organized is key in a successful business. You’ll save time, effort, resources, and gain valuable insights to help you thrive.
Katie Hardie, CPA is the owner of Hardie CPA and a member of the American Institute of Certified Public Accountants. She has a full range of experience as a CPA - including tax, bookkeeping & audit. Her experience spans both public and private accounting. Her passion is helping small businesses & individuals with tax & accounting needs. Katie seeks to empower small-business owners in the area of bookkeeping & tax so that they can stay on track, focus on their bottom line and grow their business. She works virtually and can be reached at katie@hardiecpa.com or click here to fill out a contact form.
Hardie CPA provides the information in this article for general guidance only. It is not intended to nor does it constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.