Small Business Bookkeeping and Accounting
Maintaining your business’s financial records, like the recording of expenditures and income is the basics of bookkeeping. This is the starting process of financial management that can lead to the success of your business. It helps you track where the money comes from, and where it is going. Many small businesses fail because of poor record-keeping because poor financial maintenance will lead to poor business decisions.
Business owners are good at what they do! A mechanic knows how to fix cars, a painter knows how to paint, a chef knows how to cook but typically these entrepreneurs are not accounting experts.
There is much more involved in accounting than just placing numbers in a program and spitting out these numbers on a piece of paper and calling them financials. True accounting is more involved, it digs deep into your business, and helps you and your advisor make real and on-time decisions about your business. It is the basis for your marketing, sales, production, manufacturing, and every other aspect of your business. Not having the proper partnership with an accountant is like driving a car with no brakes and broken steering without insurance. You are just setting yourself up for failure or in the best case scenario just throwing away thousands of dollars every month.
Many small business owners utilize accountants to do their taxes and try to maintain the company books themselves. Sure this can save you some money, and with the upgrades in technology, it has become relatively easy. But if you don’t understand the numbers and what they are telling you this can be more harmful than the money you think you are saving. It also still takes time to do the entries which are more time away from managing your business or away from your family. I have one pet peeve that I stress to all our clients, you did not get into business to have a JOB! This is a vicious cycle with many small business owners. Because of poor financial management, cash flow becomes tight. To save money the owner begins to work for the business. Because the owner’s focus is steered away from the growth of the business, sales suffer more, sixteen-hour days become the norm, and the decline continues. The business declines along with the owner’s attitude until both eventually quit.
Focusing on working on the business will create more growth while partnering with the right accountants and advisors will provide an accurate view of all aspects of the business and provide the cash flow needed to grow and expand. This is the secret sauce that has built a small business into empires. Yes, all successful business owners started in the trenches but as they evolved they replaced themselves and were able to focus on being the driving force that provides the fuel that grows the business. Having the right accountant will also provide you the access to things that many small business owners feel are only perks that big businesses enjoy. The fact is, there is a whole world of benefits that a small business can utilize but it means setting up the back office foundation properly and constantly building on it.
- An Eye On Business – Maintaining your financials and reviewing them will provide a clear picture of how your business is doing. Is the business making money? The route to making money, knowing your making money can all become clear if your financials are done accurately. What about sales and expenses are they increasing, are your expenses in line. A proper analysis will show you where your expenses are too high, or where certain trends show you where you should spend more because the return is much greater. Having control provides you the control over how you grow your business.
- Decisions and What to Do – proper record keeping can show you the benefits of the growth actions you are taking. Presume you want to run a sale on an item to build a business. You go and pay for some advertising, mark the product down, and it’s a hit. You have never been busier. But, without reviewing the financials you will never know that you lost money! With the markdown, the cost of advertising, the extra payroll to handle the volume of business, and the lack of add on sales, you lost thousands of dollars. These losses, typically do not affect the business for a few weeks, long after the sale is over, and can be very detrimental to the business. Evaluating the business financials will allow you to drill down and see what the actual costs are and the effect they can have on your business. Understanding this will allow you to make better business decisions on how to move the business forward.
- Affordable Money – The number one reason that so many businesses fail is due to the lack of cash flow. The root cause for this cash flow problem is poor record-keeping causing poor decisions. Remember we discussed the availability of benefits that big businesses enjoy? One of the most important perks is the ease of obtaining low-cost financing to grow a business. What many small business owners fail to realize is that big business understands the importance of financials and showing profits. This makes them lending institutions’ dream customer. The business needs to build its credibility within its entity. It’s not the business owner paying the bills, it’s the business that pays these expenses. The owner is just a facilitator. Lenders look at the business financials and bank account to determine the ability of the business to pay the debt. Having proper financial recording and maintaining a business bank account in good standings will allow the business to obtain ample financing at competitive rates and terms. Poor financial records and poor bank account management will limit opportunities and force those businesses who need financial help to pay up to 50% interest or even higher.
- Investors, Partners, or Sale – As your business grows you may look for investors or partners to help you handle your growing empire. You may even think of franchising. Any person looking to invest or become part of your company is going to want to review your financials. They want to see that the financials are up to date and that the business is moving positively. Nobody wants to invest in a company that is consistently losing money and has no future.
- Proper foundation building and maintenance will make your business easier to sell and to sell for more money. Prospective buyers will use your financials as a reference on the state of your business. Having established proper business procedures and building the viability and credibility of the business will make your business more valuable to those prospective buyers.
- Budgeting & Planning.- Having clear records will allow you to plan and build budgets that will help you control expenditures. This is important for every business to plan for emergency expenditures or change in business volume during seasonal changes.
- Income Tax Return -. With good records, preparing an accurate tax return will be easier and you’re more likely to be able to do it on time. Poor records may result in your underpaying or overpaying your taxes and/or filing late (and paying penalties). If your accountant prepares your income tax return, poor records will almost certainly result in your paying higher accounting fees. If your business is a partnership, not only will you have to prepare a partnership tax return, but partnership return amounts will pass directly to the tax return of each partner. So your recordkeeping will directly affect the tax return of each partner.
- Compliance – If you have employees or collect sales tax proper record keeping allows you to stay up to date, and makes it easier to calculate the tax deposits you must make to keep the men in black and the state off your case. It is also required that you file certain quarterly reports which need to be done in a timely fashion to stay away from unnecessary and expensive penalties.
Accounting is Not Just Numbers
Like everything else in the world, there are differences. People are different, cars are different, restaurants are different, even the planets are different, and so are accountants. Usually, when you opt for a certain car it is based on the style and what your result is that you are trying to achieve. If you’re into being green and looking for something to get you from point A to point B maybe you buy a smart car. If you’re into luxury maybe you buy a Cadillac. But your purchase is also based on your budget and sometimes that results in something less than what you want. Continuing on the car story, if your finances are poor and your credit subpar you may end up with something that you spend money constantly fixing, the same as if you abuse the car.
Accountants vary in quality also. And like a car, accountants are there to take your business from point A to B, but those points are the growth of your business. An Accounting firm should be willing to do what it takes to help you build your business, and they should be willing to work with you to make it affordable especially when you are starting. A quality accountant will partner with you, take control of your back office so that you can do what you do best, work on building and growing your business.
There is so much more involved in running the back office, much more than income and expense. It means creating a harmonious environment so that the front and back offices complement each other and drive profits and sales.
From the Team at Ebizmore