One of the essential factors of small business success is keeping meticulous financial records. Having a solid record of profits, losses, and a collection of necessary metadata—like how long it takes invoices to be paid-is critical for assessing your business’s health and planning for future growth.
Many small business owners don’t take the time to understand bookkeeping basics. They are too quick to leave it to the software (which is an important tool). However, this ‘set it and forget it’ mentality means business owners are not actively engaging with their financial data.
It’s like buying a new laptop and using it as a paperweight.
You have to understand the reasoning behind the data to benefit from the technology fully. This post will go over bookkeeping basics so you can get the most out of your financial recordkeeping-whether it’s done by hand or by byte (or both).
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Bookkeeping refers to keeping track of all of a business’s financial transactions, data, and metadata and storing that information in an easily retrievable way. It is part data science, part library science, and 100% essential to a business’s financial health.
It is related to accounting, but the practice of bookkeeping focuses on a slightly different scale of a business’s finances. Generally speaking, an accountant is more concerned with the big picture of a business’s finances. Their primary focus is preparing a business for tax season.
However, to do this effectively, accountants rely on the meticulously organized efforts of the bookkeeper. If accountants are focused on the big picture, then bookkeepers are focused on the individual pixels that make up that big picture.
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Whether you rely on an in-house employee, an outsourced company, or entrust your bookkeeping to software, the result is the same. Effective bookkeeping will be essential to addressing the following issues facing every business.
Excellent bookkeeping is imperative for keeping track of expenses, monitoring profits and losses, and determining your business’s overall revenue. There are also not-so-obvious ways bookkeeping par excellence will help your taxes.
If you are using your bookkeeper (or bookkeeping software) correctly, you are accounting for every expense. The IRS requires extensive documentation for businesses claiming deductions.
You want to be able to deduct every pen, every work-related commute, every office stapler from your annual taxes. It’s only likely to pass the IRS’s scrutiny if you have kept impeccable financial records.
This is where the data science part of bookkeeping comes into play. A good bookkeeper will compile extensive financial records and provide helpful analysis for making better business decisions.
Is one product or service you offer no longer profitable? Do you know why this may be the case? A good bookkeeper will analyze the data and provide the why. It could be that there are too many unpaid invoices, and you need to rewrite your business contracts to ensure prompt payment from customers. Or, it could be the cost to ship a certain raw material has gone up and is making one of your products less profitable.
Good bookkeeping helps business owners make informed, data-driven decisions. It provides a window into hidden insights that may have gone unnoticed if poorer financial records were kept.
One of the most challenging tasks facing small businesses is managing cash flow. Many small businesses struggle with having enough cash on-hand to deal with unexpected challenges and expenses. A good bookkeeper keeps track of all accounts payable and receivable so that you know exactly how much money is coming in and going out.
Being meticulous about accounts payable and receivable means you’ll never be caught cashing a bounced check. You’ll know exactly how much cash you have to work with at present, as well as projected outward.
If you need to secure a loan, new lines of credit, or attract new investors, you’ll need to be able to prove that your business is standing on solid financial ground. Lenders and creditors require an exhaustive account of your business’s finances.
The more accurate and meticulous your records are, the less perceived risk there will be. This means that impeccable financial records quite literally increase your business’s capital reach.
As a small business owner, you are looking at three potential options for implementing excellent bookkeeping practices into your business’s operations. Ultimately, all three options will utilize bookkeeping software, data analysis, and other fintech solutions.
The main question you need to ask yourself is how hands-on do you want to be in managing your business’s bookkeeping. Keep that in mind when exploring your options:
1. Be Your Own Bookkeeper
This option affords you the most control but requires the most focus and attention. There is plenty of bookkeeping software that can help you solely manage your business’s financial records. The only catch is that you need to be tech-literate enough to understand and interpret the data.
Additionally, you may not have the time to manage this aspect of your business, despite wanting to have a firmer hand in the matter. If this is the case, you may wish to consider the other options.
2. Hire a Dedicated Bookkeeper
Hiring an in-house bookkeeper will relieve some of the strain of managing your financial records but will still keep the bookkeeping process directly in your orbit. This option is a bit more costly in the sense that retaining a full-time bookkeeper usually costs more than doing it yourself or relying on a third party. Additionally, certain industries have peculiar idiosyncrasies that require the attention of a more specialized, dedicated bookkeeper, while others simply do not.
Hiring a part-time bookkeeper to save on costs or outsourcing your bookkeeping entirely is a potential workaround.
3. Outsource Your Bookkeeping to a Third Party
This option affords you the least amount of control and oversight, but the flip side is that you effectively cut the costs of retaining a bookkeeper and save time by not having to do the process yourself. Many bookkeeping platforms provide excellent analysis and handle many aspects of bookkeeping that are often overlooked-like payroll.
This option works well enough for many businesses and provides the necessary data and analysis to help business owners make excellent decisions. However, it may not be specialized enough for your particular business.
If you’ve recently started a small business, you are very familiar with the Herculean task of getting off the ground. Getting the gears of business turning is the first step of being a successful business owner, but the true challenge is keeping that machine running smoothly and profitably.
One of the key ingredients to your business’s success is meticulously maintained financial records. Bookkeeping par excellence is essential for operating a healthy, profitable business. Now that you know more about the process, what option is right for your business?
Roni Davis is a writer, blogger, and legal assistant operating out of the greater Philadelphia area. She also manages the books for Villari Law, a premier Philadelphia premises liability lawyer.