According to a survey conducted by SCORE, most small business owners spend at least $1,000 per year on accounting administrative costs. Survey after survey, highlight how bookkeeping continues to be the least favorite activity by entrepreneurs. Bookkeeping Services for Small Business provide entrepreneurs the opportunity to outsource their accounting administrative tasks to a professional firm reducing the amount spend on handling the business books. In this article, we take a closer look at the benefits of bookkeeping services for small businesses beyond just saving you time and reducing stress.
The first task of most Bookkeeping Services for Small Business is to review, setup and if needed, adjust the chart of accounts in your accounting software. The Chart of Accounts is a listing of all accounts used in your accounting software general ledger, and it is the foundation of how your accounting records are categorized. If your chart of accounts is not set up correctly, you can have transactions listed incorrectly which could result in inaccurate financial records. Having a good and optimized chart of accounts is essential in order to have accurate bookkeeping records. A professional that is trained to help small businesses manage their bookkeeping can assist in making sure that your chart of account is set up correctly and is fully optimized. In our article: Chart of Accounts: The Ultimate Guide with examples we explore the chart of accounts in detail, discuss best practices, and provide an example of a well-designed chart of account.
When a bookkeeper is reconciling your bank and credit card accounts, he or she is comparing your financial records against the information posted by your bank or credit card company. Most Bookkeeping Services consider this a critical procedure in order to maintain accurate financial records. This process is not just about bringing in all transactions from your bank and credit card, then categorizing them appropriately. Instead, reconciliation is the process of verifying that your balances between your Accounting software and your financial institution agree. One of the biggest errors most business owners make is to think they can set up a direct feed between their bank account and accounting software and start categorizing transactions. We recently wrote an article about Common QuickBooks and Bookkeeping Mistakes (and How to Fix Them). The over-reliance on bank feed is one of the most common issues we see with business owners that handle their own accounting. It is not uncommon to see bank feeds that import duplicate transaction. Without making sure that all transactions imported are accurate, you will end up with discrepancies between the balances in your accounting software, and your bank accounts. This could lead to inaccurate financial records and inaccurate reporting on your tax returns. When accounting professionals that offer Bookkeeping Services for Small Business handle the reconciliation of your bank and credit card accounts, they ensure that all accounts in the accounting system match the actual bank balances. Reconciliation of bank and credit card accounts also helps in identifying potential inaccurate or fraudulent transactions that might have posted to your bank account without your knowledge.
The true challenge for many entrepreneurs attempting to handle their own business bookkeeping is to properly categorize transactions. Professionals that offer Bookkeeping Services for Small Business, usually had extensive accounting and tax knowledge so that information is categorized correctly. Also, having a tax background allows the bookkeeper to identify and code transactions that provide the best possible deduction for their client. Transactions are usually placed in the following categories:
- Assets: these represent items owned by the business both physical tangible goods like vehicles, real estate, office equipment or, intangible property like goodwill, patents, and trademarks. Effective for taxable years beginning on or after January 1, 2016, the IRS increased the de minimis safe harbor threshold from $500 to $2500 per invoice. This allows business owners to record as expenses, items previously classified as assets. For example, before 2016, purchasing a new computer for $ 1,500 would have required to record this purchase as an asset to the business and depreciate the computer for a period of five years. With the safe harbor de minimums rules, you are not able to classify the computer as an office expense and effectively take the full cost in the year you purchased the computer. In order to take advantage of this rule, your tax professional should make the de minimis safe harbor election on a yearly basis.
- Liabilities: these are usually the legal obligations of business including credit card and business loans. Balancing these accounts on a regular basis is critical in order to understand the overall debt level of your business. A trained bookkeeper will usually review your liabilities on a consistent basis and make sure all accounts are properly balanced.
- Equity: Accounts in this category represent the owner’s interest in the company assets. Transactions coded to the Equity portion of your financial reports include; taking funds out of the business as a draw, adding cash to the business, converting personal assets in business assets.
- Revenue: these transactions represent your sales by the business. From a managerial standpoint, we often suggest for clients to break down the different revenue streams of their business rather than just code everything under Sales. By doing so, you can better understand the amount of revenue you are generating over time from your different products or services.
- Expenses: transactions coded to this category are associated with either Cost of Goods Sold i.e. Direct costs related to your sales or, Operating Expenses needed to run your business. Properly categorizing expenses is very important from a managerial standpoint. Expenses should be meaningful enough in order to evaluate where the business is spending money, but also broad enough so that you don’t break down expenses to such a minute level that you require hundreds of expense categories. A trained bookkeeper can assist in making sure you are not over complicating your expenses categories by making your financial reports not easily understandable.
Tax Ready Reports:
One of the major advantages of hiring a company that offers Bookkeeping Services for Small Business is that your financial reports will be tax ready at the end of the year. This makes the preparation of your tax returns much more efficient and accurate, reducing the possibility of errors and missed deductions.
Usually, your business financial information will be reported on your tax returns under the Cash or Accrual Basis of accounting. Most small businesses by default report their financial information under the cash basis method, meaning that revenue is recorded when payment is received, and expenses are recorded when payments are made. The cash method is easier to report and manage but less accurate from a managerial standpoint.
The Accrual Method records revenue when earned and expenses when incurred regardless of when the payment is made or received. The accrual method requires several adjustments which can make your accounting records more difficult to manage. However, from an analytical standpoint, the accrual method of accounting provides more precise reports to help you better understand your overall business performance.
Cash Flow Management:
With accurate financial records, you will have better control of your cash flow and be less inclined to ask Where did the money go? Understanding the Cash Flow Statement is key in order to run a successful business and having accurate and updated accounting records allows you to understand the cash flow requirements of your business.
Entering all your Bills and Invoices in your accounting software allows you to create an accurate picture of your overall business cash flow. Your trusted bookkeeper can assist in making sure both bills and invoices are updated in your accounting system.
KPIs and Business Performance:
Professionals offering Bookkeeping Services for Small Business often work with their clients to understand what Key Performance Indicators (KPIs) need to be tracked for your business. Often, your chart of accounts and overall process of managing your bookkeeping needs to be modified in order to make sure that accurate and pertinent information is being tracked for your business KPIs.
Good bookkeeping records allow you to run historical financial reports and understand how those key financial indicators are performing over time.
Easier Loan Approvals:
Good bookkeeping and accounting records are the foundation for accurate financial reports which are used for Loan Approvals. It is not uncommon for loan officers to request updated Balance Sheets and Profit & Loss Statements during the loan application process. Being able to provide accurate and updated records, improves your chances to secure your loan in less time and without additional questions.
Many entrepreneurs mistakenly think that handling their own bookkeeping and relying on their accounting software will save precious business funds in the long run. The reality, however, is that bookkeeping requires expertise in both accounting and taxation, both of these have steep learning curves. In fact, we recently wrote an article regarding the costs of not outsourcing your accounting and the potential drawbacks you might end up facing.
Better Tax Planning:
Without good bookkeeping records your Trusted Advisor is less likely to identify tax saving opportunities throughout the year which can save you thousands of dollars. Often business owners are blindsided by a huge tax bill they never planned for. The primary reason for this issue is that no one took the time to run tax projections throughout the year to identify your future tax liability before reaching the end of the year. Good bookkeeping is key in order to properly project your future tax liability and assist you in planning for accurate quarterly estimated tax payments.
Less stressful audits:
State and Federal auditors are trained to spot inaccuracies in your financial records. Having messy accounting records can give auditors the impression that your business finances are disorganized, which often leads to more questions and greater scrutiny. By working with a professional that offers Bookkeeping Services for Small Business, you often enjoy the benefits of having pristine accounting records that are well organized and ready in the event of a Federal or State audit. Well organized records give you a major advantage in order to avoid assessments by an auditor because of inaccuracies in your financial record.