Angus Reid Public Opinion recently conducted a survey of business owners generating up to $5 million in revenues and employing up to 100 people to understand what they like and dislike about running their companies. The worst-ranking task was bookkeeping with 85 percent indicating they dislike it and 46 percent stating it was their least favorite task. The problem is that bookkeeping can be tedious, time consuming and the business benefits aren’t as obvious as those from sales or marketing. When organized properly, bookkeeping can be done in a relatively modest amount of time and can help improve your business’ profitability.
Bookkeeping is the process of recording and classifying day-to-day business transactions that affect the value of assets; affect the value of liabilities; generate revenues; generate expenses; or change the value of the owner’s equity. It represents the organized summary of the underlying transactions of your business during a period of time. The raw data used to “keep the books” comes from receipts, invoices, checks and other primary sources. It is a necessary precursor to the preparation of financial statements and the payment of taxes. If accounting is the language of business then bookkeeping entries are the sentences.
Make bookkeeping manageable
Take the following steps to ensure that your company’ bookkeeping doesn’t become an overwhelming burden:
Maintain a relevant chart of accounts. Many small businesses use a generic chart of accounts for their bookkeeping. If the accounts don’t reflect the reality of your business then bookkeeping becomes unnecessarily burdensome as you try to fit transactions into an incompatible account structure. Then every month you need to remember what you did in previous months to maintain consistency. If your business spends a significant amount of money on server hosting then this should have its own account; don’t just use “professional services expense”.
Organize your revenues and expenses. As a business grows it usually increases the number of credit accounts, credit cards and checking accounts that it uses. Having an inordinate number of accounts complicates bookkeeping. Streamline your credit and checking accounts and try to maintain the same patterns from month to month. This includes using the same credit cards to cover monthly expenses and paying vendors in a consistent fashion.
Set aside a regular block of time to process transactions. No more than a week should pass before you update your books. The sheer volume of transactions accumulated over a month can make bookkeeping a daunting task. Even a tiny company can require 100 bookkeeping entries per week.
Make bookkeeping relevant
Owners involved in bookkeeping will have a firmer grasp on the condition of the business versus those that do not. Investing some time in bookkeeping permits an owner to:
Flag transactions that appear out of place and could be fraudulent
Financial institutions use sophisticated software to identify potentially fraudulent credit card transactions to stop them and to notify targeted victims. These systems tend to be very effective but with such a massive volume of transactions happening daily, over 85,000 unauthorized transactions occur daily. This doesn’t include fraud that takes place through other means including fake invoicing, diversion of payments to a third-party account and more. A business owner familiar with their usual transaction pattern will be able to identify one that is out of place and take action before incurring additional losses.
Identify outlier expenses that need to be paired back
Outlier expenses consume an unusually or unnecessarily large percentage of your available cash each month. The best way to identify these costs is to see them in relation to your overall monthly expenses. Bookkeeping allows you to see these expenses as they are incurred so you may find a way to reduce them. The best approach is to identify the top 3 expense categories each month and work towards reducing at least 1 of them over time.
Allow you to speak knowledgeably about your business’ finances
When investors, lenders or potential customers evaluate a potential transaction with a business, the owner needs to show that they have a thorough understanding of the numbers behind their business. Sales skills, marketing prowess and operational control are all important but having intimate knowledge of revenue and cost patterns are a requirement.
Some of these insights could be gathered from other sources but bookkeeping allows one to see them in a short time frame leading to faster response times and better outcomes.
