Why is good Bookkeeping so important?
Recently, a successful doctor—we’ll call her Kelly– called us up to inquire about our tax services. We scheduled a discovery chat with her to review her business and all of her processes. Doing so helps us to get a “forest from the trees” perspective as to where the client is with their business in general, and their accounting in particular. After all, if the client wants to know how I can help with her taxes, we need to be sure the rest of her financial portfolio is shored up. So she said, “I really don’t have any accounting or bookkeeping to speak of. I just want to know about taxes. Someone told me that at my income level, I had better start making quarterly estimated payments (whatever that is), so that’s what I want to know about. How can you help me with that?”
This is a very common question. And, unfortunately, the answer is never that simple. We answered, “well, in order to know how much you need to be paying, we need to know how much you’re making. What are your revenues like? What is your net income? Are you in any debt?”
There was a pause.
A long pause.
“Well, I have $179,000 in my account, so I guess my net income (revenues less expenses) is $18K”.
Unfortunately, that’s not the answer. While it could be that they have $18K in the account (and even that might not be true), your balance in the bank does not necessarily determine your profit. If someone received a grant or a loan, those funds are not considered revenue. And they would not work into your Income Statement in determining your profits. Be careful about this. Many things that you think are expenses and deductions are in fact neither. A proper set of books, and an outsourced bookkeeper that can properly classify those transactions, will help you identify what your business is really making.
Let’s review some additional reasons why it’s so important to have at least a basic bookkeeping file for your company:
Whether you like it or not, Uncle Sam will come breathing down your neck. Every. Single. Year. And whether you like it or not, you will need to declare every penny you made, and every penny you spent. It gets tricky when these figures are not readily available. The only way you’ll be able to accurately report your earnings is if you have some sort of accounting for them. Otherwise, it’s a guessing game. And taxes are not something you wish to be guessing on. The IRS is explicit that your books and records must support the income, expenses, and credits you report on your return. No guesstimates allowed!
Monitor The Progress of Your Business –
Without knowing what you’ve made and what you’ve spent, you’ll have no sense of how this year faired against last, what you need to do next year that you didn’t do this year, and what specific expenses or revenue centers you should be focusing on. Having a good, clear set of books will help you more easily and readily identify areas of your business that need attention.
Just about any financial advisor and business consultant will tell you, that if you want to grow your business, you need to have a plan. And plans start with the numbers. You can’t know where to go if you don’t know where you’re starting from. And you can’t know how much you want to make, if you don’t know how much you’re currently making. The key financial decisions you make for your business will hinge upon where your business is currently at. A good set of books will help with that.
OK, so you’re convinced that you need to have good bookkeeping. So now the question is, do I do it myself, or do I outsource it to a bookkeeper or accounting firm? Some of the questions you want to be asking yourself are:
- Do I have the time to do it myself
- Do I have the patience to sit in front of a bookkeeping software and do it correctly
- Do I have any interest in doing it myself
Do-It-Yourself vs. Outsourcing
Generally speaking, we encourage clients to grab a copy of Quickbooks (they offer their software in Desktop and Online versions) and see how they fare on their own. It’s not for everyone, and some of our clients have seen great success using it, while others have failed miserably. And it has nothing to do with what industry you’re in- we’ve seen clients in blue collar fields and are wizzes with it, and we’ve had clients in white collar, professional industries that swear to us they will never touch Quickbooks again. But go ahead and give it a try. There’s always option 2, which is…
When you don’t feel like you can do it yourself, you will need to outsource your accounting. But if you were entrusting your books to an outsourced accounting firm, you’ll want to be sure they are doing a good job. Of course, for a business owner who does not know what a proper accounting file should look like, it’s awfully hard to know whether or not they’re getting a quality service. This is where asking questions becomes critical. You should be setting up regular meetings with your accountant to discuss the books, what you should be looking at, and what the figures mean. You should be able to tell after just a few meetings if the accountant is answering your questions to your satisfaction. After a few months of these meetings, you should have a sense of confidence that the accountant knows his craft and is explaining things clearly. But if you don’t have that sense, or if you’re still left with questions, that’s an indication that the accountant might not be for you. Be sure you get all your questions answered, and be sure you understand what the numbers mean. Your accounting is not a necessary evil; its a necessary good!