Whether you decide to stay inhouse or outsource, you need to know some bookkeeping basics. My goal is to give you a big picture overview of bookkeeping, so you’ll have a foundation to build your business knowledge on. The more you know. (Did anyone catch that reference?)
Bookkeeping is recording every transaction you make for your business in your books. Every cent you spend from your business account needs to be accounted for as well as every cent you earn for your business. All those reports and data your accountant provides you with are pointless if you don’t have current and accurate books.
What it comes down to is bookkeeping is critical for making good, profitable business decisions.
Before computers, businesses documented everything by hand in notebooks. Some very small businesses probably still do. Obviously digital is better.
You may have also heard about certain companies having two sets of books and then the next thing you know, their business is closed, and the CEO is in jail. You should never have one set of books that’s your accurate transaction data and then another set you have changed to either look worse for the IRS or better for investors. That will always get you in trouble.
The term books is still used today, even though they are now digital.
This is not all encompassing, but let’s begin our overview of bookkeeping basics and important considerations to keep in mind.
Spreadsheets vs. Accounting Software
I know people that seriously stress out at the thought of needing to learn a new software program. It’s just not their thing and that’s totally cool. The great thing about small businesses is that your bookkeeping doesn’t have to be complicated.
My advice? Start simple.
It can really be as simple as using an excel spreadsheet. If you’re more comfortable using excel or something similar, than start with that. Don’t use complicated software just because the business owner next door does.
There’s a lot of bookkeeping software out there, both good and bad. QuickBooks is the more popular choice among DIYers.
I’m not going to get into the intricacies of software and the various options. In the very least, you should set a goal to get to the point of using bookkeeping software, because overall it will make things simpler and running reports is much more efficient with it. This will become more evident the larger your business becomes.
Do I have to keep ALL my receipts?
Those receipts are the proof for all your financial data recorded in the books and that proof is critical should the IRS ever stop by for a visit.
Some banks provide a way to digitally store and organize your receipts through their app. Old school in a file works too.
For some, this might seem like a lot of extra work, but it’s actually not much work at all. It’s more about setting the habit. Setting up your filing system will be the most work, but that is a one-time thing. Two options I see are to either file the receipt right away when you get home that day or put them in a designated spot to be filed on your rhythm days, which we’ll get to later.
Can I talk just a second here about mixing your personal and business finances? Don’t do it… EVER!
Mistakes happen, no big deal, but do NOT purposefully make purchases for your business from your personal bank account. This is like the most basic of bookkeeping basics. It quickly leads to disorganized books and in the very least, those that are doing this are missing deductions, if not triggering the IRS to come and take more of your money. If you don’t have one, set up a separate business account. It can be the same bank or not – totally up to you.
What the heck is a Chart of Accounts?
You may hear the term chart of accounts when learning about bookkeeping.
The chart of accounts is basically the business categories you’ll use to organize your transactions… like advertising, bank charges, salaries & wages, travel, etc.
Make sure you’re consistent with how you categorize your transactions. For example, you get some product samples and put them in the supplies category and then the next time you get more product samples, you put that transaction in the advertising category.
You see how easy it can be to get disorganized.
Now when you look at a report of your spending, you might think you’re under budget on advertising, when in reality you spent over your budget because some of the product samples you used for advertising are accounted for in another category. You’re not getting the accurate story of your business.
Warning – never use the miscellaneous category… ever! Delete it if you can, but don’t put anything in there. It almost always gets the IRS’s attention. That’s never a good thing.
It doesn’t have to feel like a daunting mountain climb every time you sit down to do your books.
Rhythm days are the best stress reliever for a business owner. Once you have your system in place, you only need to think about the more mundane financial tasks twice a month. Seriously, that’s it. Some prefer once a week, which is the most you should do it all the way to once a month at the very least. I recommend twice a month.
You don’t have to worry about the bill that came in or the bookkeeping piling up, because you know you’ll get to it and it’ll get done on time. You’ve set your rhythm.
Since you’re already working in your books, it’s also the perfect opportunity to run a quick report and see how you’re doing. This way you catch issues way before you normally would, which will save you tons of money over the course of the year.
Do not be the business owner that only get’s financial reports at the end of the year in order to file taxes and nothing else.
Now you have the foundation to set up your bookkeeping system. If you decide to do it yourself, you know how to get started. If you want to hire an inhouse bookkeeper, you know how to set them up and properly manage them. If you want to outsource and have a bookkeeping business deal with all your books, then you know what your expectations are so you can hire the best one for you.
Hiring a good bookkeeping firm is the best option for your long-term success. The time you get back along with accurate financials to make profitable decisions are reason enough to use a professional bookkeeper.
For the other bookkeeping blog posts in this series…
For more general info on our Bookkeeping Services.
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