Books 101: The Right Way to Keep Your Small Business Bookkeeping

Posted on 09. Jul, 2008 by Elizabeth Potts Weinstein in Finance

Books refers to the financial records of your business, kept in a way such that you can generate reports for tax purposes and for you to analyze the performance of your business.  The books include information about your income & expenses and your assets & debts.  

There is no one right way to keep books — you must choose a method that makes sense for how your business works, that you understand, and that you can use to create good reports.  

You may use hand-written ledgers, but it is more difficult to create reports and you must trust your own math.  I generally recommend, at the minimum, using spreadsheet software such as Excel.  Most businesses should use bookkeeping or accounting software like QuickBooks, to take advantage of all the automatic reports that it can create.  

One place where many business owners get stuck is how to categorize their transactions, or what to name the accounts.  This is another place where there is no one right way.  You must create names that work for creating good reports, figuring your taxes, and that make sense to you.  But make sure that whoever else looks at your books, like your accountant or tax preparer, understands your account labels, especially when they are drafting your tax return. 

Don’t Do It Yourself

Bookkeeping should be the first thing you outsource.  Even if your business is not making much money, you MUST have good reports to effectively manage your business, and for most people, the books will not get done (and not get done right) if you leave it up to you.  You are too busy and will procrastinate (I know I do!).  And frankly, you need to be spending time making money, not inputting figures into a computer.  

Your bookkeeper could be a bookkeeping firm, your tax preparer, a freelance bookkeeper, a Virtual Assistant, or a CPA.  You want to select someone who has other small business clients with similar businesses as you (incorporated or not, services or products, internet or brick & mortar), and understands how your books will work.  Don’t be afraid to pay a few bucks for good bookkeeping — it will come back to you tenfold when you are taking the next step and troubleshooting your cash flow.  

Getting Help is Not Failure

It took me three years of being in business until I hired a bookkeeper.  I thought, I’m a financial planner and attorney, and am perfectly capable of inputting stuff into QuickBooks.  I can create reports and interpret them; I don’t need any help.

I also did not like the idea of someone else seeing the financials of my business.  If I did not make much money one month, I didn’t really want anyone else to know.  What would they think of me?  I’m a financial advisor — my financials should be perfect.

Then I got behind.  Months behind.  I had no idea how my business was doing, because I could not create any reports.  I was so busy growing my business; the backlog was overwhelming.

The pain was great enough that I finally hired a bookkeeper in the fall of 2006 and after a few months, finally had her start work. Now my books are in order and on time, and I always know exactly how my business is doing.  Oh, and by the way, I’m making more money.

Your bookkeeper does not need to be an accountant, financial advisor, or tax preparer — you should have other experts to fill those roles.  Don’t depend upon your bookkeeper as the source of all financial advice, but that person must be able to maintain your books and create reports that are useful in the following steps outlined in this and the following chapters in Grow Up! Strategies.  

The above article is an excerpt from Grow Up! Strategies:  The 7 Legal & Financial Strategies You Need to Up-Level Your Small Business (2008).  Reserve your copy at http://growupstrategies.com/book

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