What is bookkeeping and why do I need it?

Bookkeeping is the organizing of all of your company’s revenue and expenses.

GAAP – generally accepted accounting principles gives the rules to follow.  Most people think it is mainly to help prepare for taxes but it is so much more than that if you are trying to grow your business.

facebook live video of why bookkeeping is important

Bookkeeping is like organizing your fridge. It's a lot easier when things are in the correct place.

When things are organized they are easier to find for you and other people. Usually the milk is on fridge door, cheese in the drawers, and when things expire you throw them out. Imagine if every time your spouse or kids put away the milk they put it in the back of the fridge behind all of the leftovers. It would be hard to get to, you may have to move other stuff out of the way and each day you would be grumpy when you had to get your milk.

Or how would you feel if you were my sister in law when I was visiting her house. I made a bowl of cereal and was relaxing on the couch when she came down and asked concerned – did you use some milk? I said yes and then she explained that the milk was expired and she had been meaning to throw it out for a while. She felt horrible 😊

The same is true for bookkeeping.  When a CPA firm, banker or investor looks at your financial statements they expect to see certain things in the correct spot.  Non w2 Payments to the owner classified as owner draw and not an expense.  Meals and entertainment separated since these expenses are taxed differently.  The end of year bank statement should match the books.  And when some of these basic things are not done in the correct way it makes them wonder what else is not correct and hurts your reputation as a business owner.

Why is bookkeeping important?

You need bookkeeping to do taxes and know how your business is doing.  Taxes require you to do some form of bookkeeping but the real value is knowing how your business is doing so you can make smart strategic and financial decisions. 

If your business is very simple and you have a ton of cash in the bank then you might be able to wait until the end of the year to do your bookkeeping all at once and do your taxes. 

However if you are hiring new employees or spending more on marketing or doing anything in your business that is changing month to month then you really need to track your performance monthly.  The main reason you do this is your are measuring how all of your different initiatives are doing and if you are not measuring it then you won’t be able to see how they are doing and make changes. 

Its kind of like trying to lose weight - imagine if you only checked the scales once a year!

IF you only checked your weight once a year then you wouldn’t be able to see the negative impact of never working out, drinking beer and eating cupcakes every day.  You would gain weight for an entire year and then when you finally checked the scale you would realize all of the mistakes you have been making and wished you corrected them earlier.  

And the same thing is true for your business.  If you are not checking the revenue and expenses each month then you won’t know that you are spending too much on marketing or employee lunches.  You won’t know that certain customers are not paying their invoices or that the bank is charging you all kinds of fees.

  1. The first thing you should do is setup a business bank account. It will be much easier to track your revenue and expenses if they are separate from your personal expenses.
  2. Try out different accounting software. Quickbooks is the most common but xero and freshbooks are a little cheaper and may work great for you. If you don’t like any of the software then each month and your business is small then download all of your transactions each month into excel or google sheets and group them into revenue and different expense categories and start from there.
  3. Ask for help when you need it. We offer Free 30 minute phone consultations where you can get any pressing questions answered. Have us or someone else look over your financial statements to see if you are passing the basic sniff test or if there are major things you should change.

OK great you had me at spoiled milk – how do I get started?

If you need help or have questions then Finance Pals would love to give you some free tips over a 30 minute phone call.  We love bookkeeping and want to share our knowledge with you!

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