Accounting has been around for hundreds of years and hasn’t changed all that much over the centuries. In fact, of all the aspects of accounting that have remained consistent, perhaps the most prevalent one is that it’s a very “foreign” profession, a mysterious trade that most people – including business people – don’t understand or care to learn.
For some incredibly bizarre reason, most high schools don’t teach basic financial literacy. Ask anyone what “balancing the chequebook” actually means and you’ll be met with blank stares. Everyone knows the phrase, but most have no idea what it really means or how to do it.
Since Bookkeeping falls within the accounting realm, it gets the same treatment. Most people have heard of it (they associate it with tax preparation) but they admittedly don’t really know what it entails or why it’s so vital.
Taken a step further, as many small business owners and entrepreneurs see it, bookkeeping is a necessary evil they “endure” and is at the end of the list of services they would ever consider outsourcing . . . that is, until they realize what a top-notch bookkeeper will do for them – and their business.
Just a little bit curious? If so, I’ll keep this short simple.
There are 4 main tasks your bookkeeper performs:
each one is critical;
each one is also done to some extent by every business owner;
each one of these is often done incorrectly;
But, when each one is done professionally, consistently, and accurately, it contributes to your business’ growth and to your quality of life.
1. Classify transactions
A transaction is an event that has a monetary impact on the business. (add link)
Common examples of transactions are making a sale or paying a bill. Any time there is money coming in or going out of your business, your bookkeeper needs to classify that transaction.
To classify it is to determine what the transaction was and which bookkeeping accounts it will affect.
This isn’t as simple as putting the money from sales in your revenue account. I’m not going to get into accounting principles today, but it’s important to understand that all accounting is based on the “double-entry system”. This means that anything that happens in your books, happens to at least 2 accounts.
Bookkeeping is all about balance! Classifying your transactions correctly is the only way to create a solid base for all other bookkeeping tasks.
2. Account reconciliation
Account reconciliation – the process of verifying that all the transactions of the business have been captured and classified correctly – is extremely important. This is something that should be done monthly.
Any mistakes made in your bookkeeping can snowball out of control very quickly. This means it’s imperative to catch any issues early, and that requires many systems of verification. A $10 misclassification is simple to fix if you catch it quickly. But it can turn into an absolute nightmare if it’s not caught until months later.
Reconciling the bookkeeping accounts in your software to your bank accounts helps to ensure that all the transactions have been captured and nothing has been duplicated.
3. Financial reports
There are many financial reports that can be created from your books, but the most common three are the Income Statement, the Balance Sheet, and the Statement of Cash Flows.
Each of these reports summarize a different portion of the books and gives you key decision-making information. And while each provides valuable information individually, together they provide a complete picture of your financial health.
Your financial reports need to have a good relationship with each other, and you need to have a good relationship with all of them. It is the only way you can forecast your growth, measure your growth, and increase your growth.
4. Analyze and Advise
As stressed above, your financial reports are an incredible asset in your quest to achieve your business goals. A professional, dedicated bookkeeper is well-versed in analyzing your financial reports in order to understand and show you what your business needs, and why, in order to operate at a profit and achieve your stated goals.
It’s surprising to many people just how much information can be gleaned from their finances. Inefficiencies that are hidden in day-to-day business can become glaringly obvious when looking at the numbers. Not to mention how incredibly useful historical data is when weighing out decisions, like major purchases.
A great bookkeeper becomes your business partner. By analyzing your finances and providing the resulting recommendations on ways to improve, your bookkeeper is your “translator” – converting numbers in ledgers to actionable advice that will help your business run smoother and grow in the direction you intend.
Bottom line:
Most business owners assume bookkeeping is only useful for tax prep. They throw together some totals at the end of the year and hand them over to their CPA to sort out. This is a mistake – the most common, harmful, yet easily correctable mistake most business owners make.
This may not be you. Nor does it have to be you. Why not find out for sure?
You’re one email or phone call away from discovering if and how your business could afford – and benefit from – professional record-keeping and analysis, i.e., bookkeeping services. Hint: This will be especially beneficial if any of the 4 bookkeeping tasks featured in this article are “foreign” to you. (In other words, you’re not doing them properly, thoroughly, or at all.)