Why should Solopreneurs and small businesses implement bookkeeping?

bookkeeping

Bookkeeping simplifies your life. Running a small operation does not always entail complicated finances, cash flows, transactions, or even compliance matters. Accountants are very familiar with our ‘shoe-box’ clients. The phrase emerges from clients who in days of old would accumulate their receipts and paper records, place them in a shoebox, and provide them to their tax preparer at tax time.

Of course, now Dropbox has become the proverbial ‘shoebox’, though the other realities of year-end accounting remain mostly otherwise unchanged. In general, small businesses tend to focus on making sales and “keeping the lights on“, and only arrive at dealing with the annoying tax and accounting matters later.

We’ve seen it all, excel spreadsheets, receipts, mileage jotted down on pen and paper, a dozen PDF bank statements, etc. While with some effort we can convert haphazard records and verbal accounts into a proper tax return, this style of reporting is not able to give business owners a fair or value-add accounting experience.

Our sherpas note that there are at least 4 noteworthy benefits of doing periodic bookkeeping:                                

  • Timely financial information                       
  • Current accounting                          
  • Confidence in Company Results                                  

Audit and compliance purposes.

Bookkeeping results in timely financial information

Businesses have a lot of moving parts, and many of those parts cost money. Unfortunately, expenditures don’t do a good job of timing themselves or describing themselves on credit card statements or email notifications. For example, you may choose to set up payment on an annual basis to obtain a discount (for example your Zoom.com subscription or web hosting). If you pay this and several liabilities later in the year the cash balance in your checking account may imply your business is booming.

Have you in past years paid your taxes and then wondered whether you were actually profitable in the prior year? And if all the entrepreneurial hardships were actually worth it? The only way to understand your business is to account for you and properly interpret financial results in the same month or quarter. Furthermore, accounting for transactions (i.e. keeping updated accounting books or records) timely is the only way you will understand your projected profit and related tax.

Current Accounting

Beyond taxes and profitability, basic accounting including that for sales, cost of goods sold, variable costs, fixed costs, and even the balance sheet accounts (assets and liabilities) is the only way to begin to understand finance in a way that leads to valuable operational and accounting decisions.

Solosherpa provides our book-keeping clients with the tools and analysis required to understand their average monthly inflows and outflows, their most profitable clients, products, and market segments, and we make recommendations at year-end and throughout the year as needed to time financial and operational decisions so that tax and other unpleasantness is avoided or best managed.

For example, we can give you the exact benefits of choosing what year to buy expensive equipment, vehicles, or when to fund a 401k or take a salary from your business. Without maintaining and understanding your books month to month you and your advisors are effectively crippled from proper decision-making perspectives.

Bookkeeping provides confidence in company results

Without an accurate and ongoing understanding of profitability, and even liquidity, you cannot have true confidence that your efforts are properly rewarded or recognized. When applying for loans, other credit instruments, contracts, or especially in the case of selling your business you are at a tremendous disadvantage without recent books. More substantial loans and business agreements may even come with the stipulation that you provide the most recent 2 years worth of audited financial statements.

Bookkeeping and accounting lead to generating monthly or quarterly profit and loss (aka income statement), balance sheet, and possibly cash flow statements. Accounts can be classified to a degree to your preference via the maintenance of a chart of accounts, and at the same time feed into apples-to-apples financial statements which can be quickly processed by your collaborators or potential partners.

What does all this look like?

While business owners will all have their preferences, our solopreneur sherpas typically guide clients to reconciling books every month (e.g. January books will be prepared mid-February) and in-depth preparation, reconciliation, trend analysis, and reporting is completed every quarter (e.g. 1/1/2022 to 3/31/2022 or Q1 2022 books will be finalized for Client review and discussion by end of April). Our more hands-on clients meet with us to review the balances and trends, which results in visual changes, corrections, and financially valuable recommendations.

In conclusion

Bookkeeping need never be a struggle and need never be a last-minute rush. Once a strong accounting routine is in place, time spent overall on taxes, accounting and compliance will decrease for several reasons. After a few periods are completed in this manner, accounting even becomes fun (in addition to being profitable) as you can see where your business and its sales are winning and losing.

Photo by Xan Griffen on Unsplash

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