Simply put, if your books are garbage, then the output will be garbage. Keeping “good books” is an essential component of a successful business. Not only will it help you notice financial errors, improve your chances to receive loans, and make it easy at tax time, but it will also help you in setting up and analyzing business goals and budgeting. In this article, we will share the 7 steps to getting your books in order and improving your business.
The first step to getting your books in order is to determine who the bookkeeper is going to be. You essentially have three choices to pick from: you or your business partner (if you have one) can do it, hiring an in-house bookkeeper, or outsourcing the bookkeeping to an accounting firm.
If you are just getting started or are a relatively small business, especially if you have a limited budget, we recommend doing it yourself. Not only will this save you money, but it will also help you learn and gain an in-depth understanding of the financial side of your business.
However, if your business is growing rapidly and you aren't great with numbers, or you simply don't want to do it, hiring someone else may be the better choice.
For the sake of clarity, we are going to assume for this article that you are the one doing the bookkeeping. No matter who ends up doing it, you or they will end up completing the following steps.
If you are doing your books in-house, we highly recommend choosing a high-quality accounting system. While you may be thinking that you can do it on paper or in a spreadsheet, we promise that an accounting system will save you exponential amounts of time and money. We recommend QuickBooks, which is one of the best and most popular systems in the USA. Of course, there are others, like Xero, which is more common outside of the USA. You just need to choose one that works well and works for you. You can learn more about QuickBooks Desktop and QuickBooks Online here.
Now it is time to enter your transactions. One of the bonuses of using a high-quality accounting program, like QuickBooks, is that you can download all of the transactions from your bank accounts and credit cards. It is straightforward, easy, and you don't have to spend hours manually entering numbers.
We recommend saving receipts for each and every business expense and attaching them to your accounting software transactions. Therefore, if you come across specific questions on a transaction while reviewing your financials, you can have the details right in front of you.
A common mistake we often see, bookkeepers are incorrectly classifying loan/line of credit payments. You need to make sure to enter the payment between the principal and interest. If you put the full amount to the loan balance, your loan balance and interest expense will be understated, and your current ratio will be lower.
Now that everything is entered into your accounting system, you will want to categorize each expense into appropriate categories. Most accounting systems come with pre-set categories that make it easy for you, but you may need to add some to personalize it to your business.
It is also critical to note that when you categorize, you must do it correctly. For instance, a common mistake is when professional fees are listed as "office expenses." While that may seem like a "DUH" statement, you would be surprised at how often it happens.
Now that you have the who, what, and how taken care of, it is time to reconcile everything.
You should make sure to reconcile your bank account at least once a week. You don’t need to wait until the end of the month to get your bank statement, you can always see your daily account balance when logging into your bank. What you do is take yesterday’s ending balance and reconcile your accounting software.
For your credit cards, you will need to wait until the statement is available, but you should make sure to reconcile when it’s available.
You should also make sure to reconcile your Loan Receivables/Loan Payables accounts every month. You will have two benefits from doing on; first, you will see if you need to follow up with someone to pay their balance and, second, you will notice any mistakes. When it’s Loan Receivables/Loan Payables transactions, if the transactions are more than three months old, people tend to forget the details, and you will always need to adjust the loan balance.
One step that is often fudged is the dates. It is a must that you are always using the correct date, whether it is for invoicing, bills, or receipts. Every transaction should be entered on the date it occurred. So, if you bought a piece of machinery on 12/31/2021, but you didn’t get the bill in the mail until 1/7/2022, you would still need to list that expense on the date of purchase in December (which should be listed on the invoice.)
Now that you have everything reconciled and categorized, we highly recommend that you stay up to date on your accounting. Set aside time each week to update your books. The last thing you want to do is wait until the last minute and frantically try to get your books in order, as it often leads to errors that could cost you thousands of dollars. By consistently updating your books, you will easily be able to reference them when needed and provide updated reports whenever needed. For example, when you go for a loan or refinance, the bank will need updated financials, and if your books are not up to date, it will take you a very long time to provide those reports.
Consider an Accounting or Tax Pro
Before wrapping up your books at the end of the year, you should consider hiring an accountant or tax professional to review your books. This is a fail-safe system that allows you to get an extra set of eyes on your books and a deeper understanding of the subject. A professional will be able to identify mistakes, advise on how to improve, and update you on any changes in the law that you may not have been privy to.
Learn more with Oberlander & Co.
If you would like to learn more about business accounting as well as how to create and manage good books, please check out our website or contact us for more information! Click here to learn more about our Virtual CFO services.