Tips for Bookkeeping at Your Small Business
Keeping accurate records as to financial matters is important for every small business. Speaking from experience as someone who started a law firm in 2010, and has seen that firm grow from 1 attorney and no staff members to a firm that about 5 years later employs 4 attorneys and 6 non-attorneys, as well as other businesses over the years, my hope is that this article will make life easier for those who are setting up or expanding their own business and in need of some bookkeeping advice.
Use good bookkeeping accounting software
Having good bookkeeping software, which I would define to mean software that works well and was designed to be bookkeeping software, is a must. Some businesses will try to save money by using spreadsheet software instead of proper bookkeeping software. While this may work for a while until the volume of transactions gets larger, using less-than-ideal software is just setting yourself up to have a bigger headache in the future. Moreover, dedicated bookkeeping software has a variety of features that you may not care much about the day you set everything up, but which will be quite useful down the road. As an example, I didn’t care much about direct deposit on day 1 at my law firm when I was the only employee, but couldn’t live without it now that the firm has more employees.
As far as software, I find QuickBooks to be excellent. There are online versions of Quickbooks as well as versions that install on your computer. A competitor, Freshbooks, is also highly regarded by many businesses. I went with QuickBooks mainly because our accountant (who later retired) at the time was more familiar with it.
Employ a good accountant
Bookkeeping and accounting are different. Generally speaking, the bookkeeper for a business is doing the relatively-simple inputting of expenses, revenue, etc. Many times, the bookkeeper at a small business will also handle deposits, payroll, payment of bills, reconciliation of accounts, and other financial matters. Most people can do a perfectly fine job of bookkeeping with a few hours of training/practice, especially with an accountant to help get things setup at the beginning.
Accounting deals with preparation of tax returns, properly determining what is tax deductible and how it should be deducted/depreciated/etc. Just about every business will benefit from hiring an accountant. Speaking as an attorney, I still benefit from having an accountant as there is no way that I could handle my personal and firm tax returns in a remotely cost-effective manner if I were to try and prepare them myself.
If you are going to employ a bookkeeper, ensure they are trustworthy and competent
It should go without saying that a bookkeeper has to be trustworthy, as the person who handles finances is in a position to easily steal or otherwise mishandle money. I have personally never had a problem with an untrustworthy bookkeeper, but know of many people who have. In many small businesses, bookkeeping is done by a close and trusted relative. While that doesn’t prevent theft, it may reduce the risk, especially if the relative is a spouse with whom finances are shared anyway. When hiring an outside person to be a bookkeeper, doing your due diligence is vital. Background checks, reference checks, and supervision can go a long way to avoid problems. A lack of those, especially supervision, is in the lead-up to just about every bookkeeper theft scenario.
Competence is also key. Just because a bookkeeper claims to have experience with your bookkeeping software, or claims to have worked for a similar business before, that does not prove competence. Indeed, I have seen situations where a bookkeeper whose resume claimed decades of experience was unable to properly perform even simple tasks on their first day. This is where supervision comes in, as the only way to know you have obtained a competent bookkeeper is to review his or her work.
Don’t try to rely upon your memory
Remembering personal finances is relatively easy for most people. As such, there is often a temptation to believe that business financial matters can also be committed to memory. Don’t fall into that trap. Business finances may initially be quite simple when the business is small, only to suddenly grow in complexity with success. That success, as rewarding as it is, also takes up a great deal of time. Combining a sudden increase in complexity with a sudden increase in demand upon your time is a sure-fire way to forget things. Eventually, you will forget something important.
The best solution I’ve found is to use to-do lists, especially computerized ones that have recurring tasks. There are a great many apps and web services that are available, and it is generally fine to use whichever you find to be most convenient.
As an example, I have recurring to-do list tasks to submit payroll information every other Monday, to check that it has been properly processed and that the direct deposit paystubs are available by Wednesday, and to ensure that the paystubs were properly distributed on Friday. It is exceedingly rare that I haven’t done each of those prior to the to-do list tasks pops up, but having those reminders in place gives me one less thing to worry about. Also, reminders come in handy when events like the birth of a child, a death in the family, or other distractions can make us forget about something that we would not otherwise forget.
Backup your electronic data
Regardless of what systems you use to handle bookkeeping, backups are key. No system is perfectly reliable and eventually outages or data loss will occur. In the case of QuickBooks on your personal computer, the computer could crash, the building could catch on fire, or data on the hard drive could become corrupted. Even online services like QuickBooks Online or Freshbooks can have outages, and it is conceivable that they could suffer total data loss (despite all the redundancy and backups they employ). Since your business finances are your livelihood, it is prudent to make backups.
Since there are so many different setups possible, I won’t give instruction on how to make backups other than to say that just about every computer system has built-in backup functionality. There are also many companies that offer backup services for essentially all the data you could need to backup, for well under $100/year. Regardless of how you make your backups, do so early and often. It is also wise to have multiple backup strategies in place (e.g. an online-based backup that run automatically and also a manual backup system that you handle and store yourself, such as backups to DVDs or an external hard drive).
Safeguard your papers
Just as backing up electronic information is important, so too is safeguarding your physical papers. Receipts, invoices, check stubs, and the other documents that are generated as your business buys and sells goods and services are important to keep. Sometimes they will be needed in the event of an IRS audit. Other times they will be important should there be litigation. The best approach is to scan important financial documents and save them electronically, while also keeping the paper version. While it is sometimes not practical to keep the paper version indefinitely, doing so for at least a few years is wise – and if you do destroy the paper version, be sure to do so by shredding it.