The core method of keeping your financial data up to date is proper bookkeeping. Without accurate and up to date financial data, you are not able to make informed business decisions. Not only is bookkeeping frustrating to spell with all of those repeating letters, it is equally frustrating for a business owner to manage properly while running a business.
Here at Accountfully, we see the side of the entrepreneur moonlighting as their own bookkeeper all day long. The DIY confidence is at an all time high as they click “sign up” in the latest accounting software, but quickly dwindles after weeks of trying to maintain the books properly. Once we are in the books and keeping things up to date, the same business owner soon wonders why they even tackled it all in the first place.
While there are some exceptions to the rule, business owners should focus on what sparked their desire to have a business in the first place, and let us number-crunchers handle the boring stuff. If you were ever in doubt about whether or not you should be dabbling in your own accounting, here is your gauge to decide. We rounded up some of the more popular questions surrounding DIY bookkeeping, including the two more popular ones; when should bookkeeping be outsourced, and is there ever a time you can do it. Read on to see where you stand.
Here it is, the pivotal FAQ. It's also a loaded question, because it depends on a lot of factors and individual circumstances. The best we can do is help outline some facts and ideas to help you decide what is right for you.
The challenge in modern times is real. The tools exist to create, advertise, and manage a business, but they don’t guarantee accuracy and expert level management. At the same time, it is important to get to know your business as it develops, and DIY bookkeeping is a great way to do that.
It has never been easier to tackle your own bookkeeping. The systems that exist these days like QuickBooks Online have relatively inexpensive functions, or versions that can be set up quickly. Before you know it, you are officially handling your bookkeeping. This is all good, but if you are going to commit to doing your own bookkeeping, you will need to start with some best practices, to set things up for success.
A new business means dedicated business account(s) and credit cards, used for that business only. This will simplify all of your transactions and keep them in one place. All outflows and inflows will travel through these accounts, making it a lot cleaner for DIY bookkeeping. You can export transactions from your business accounts and log them in a spreadsheet. This spreadsheet will house information on the transaction itself and allow you to code each.
Not only will this give you the proper, professional tools to get your business management started right, it will simplify your bookkeeping and minimize confusion across any additional businesses or personal accounts.
We hope your business is so successful that you are quickly outgrowing your manual bank account transaction export and spreadsheet process. This is where that modern accounting software comes in. Once you're ready to move forward to an accounting system like QuickBooks Online, get that set up. Be warned, setting things up in the app is step one. Step two is your regular, dedicated process followed to update your information. You will need to ensure that you are spending weekly, dedicated time to being in that App. It can be as simple as every Friday or every Thursday for 30 minutes, you go in, close your bank transactions, pull your credit card transactions, invoice your customers, etc. Without your dedicated time, the App and your bookkeeping endeavors will be rendered useless.
As you are staying consistent with your business process, you will start to get a sense of how burdensome it is for you. Is your time better spent talking to prospective clients or industry influencers? Or is the time in your books well spent because you are getting a better understanding of your cash flow and overall business health?
As a new business owner, we challenge you to actually start doing your own bookkeeping. There are some upsides to doing it yourself, if you are capable. In addition to monitoring your business health, it does save some of that monthly cost as you are getting off the ground. It also allows you to understand the true value of bookkeeping, once you are ready to outsource it.
So at the end of the day, do you need to outsource your bookkeeping? I would challenge you no, not right away. First, try to do it yourself. Get some consistency, get some systems set up, and see if it works for you. If not, then definitely outsource it and look for a setup that will work best for your unique needs. In the meantime, here are a few articles to consult that can help you decide:
Cash basis record keeping is not sufficient to understand long term profitability in the day-to-day management of your business. Where cash basis accounting and record keeping is great for income tax purposes, it falls short as it pertains to management and internal reporting. This is because it doesn't give you the information you need to run your business. What is the biggest thing that you need to run your business, you ask? You need consistent financials from a profit and loss (P&L) perspective, in terms of where you can compare months over, and against each other. This shows comparable data related to revenues, expenses and costs. But first, let’s take a step back, and explain more about cash versus accrual accounting.
Cash basis accounting is posting your inflows and outflows; your revenues and expenses, only at the time they are paid out or received.
Accrual based accounting is what you should be using. It is when you post revenues when you invoice a customer, (not necessarily when you get paid), and expenses when you have a bill to be paid (not necessarily when you pay it). When you do that, you're able to post your revenues and expenses and costs in terms of when they were either earned, or incurred on a month-over-month basis. This allows you to compare those months much better. And there's less "wavy" ups and downs.
Here's a quick example. You have rent of $20,000 a month, and you haven't paid rent in three months. $20,000 times three is $60,000. When you pay the rent owed of $60,000 in month three, that expense on a cash basis hits your books, one month at $60,000 in month three. That's cash basis accounting, and a big swing in expenses on month three.
On accrual basis accounting, you have three bills of $20,000 for each month, so the expenses each month are $20,000 versus $60,000. This same concept applies to your invoices or revenues. You invoice your customers $100,000 over three months, but you don't receive any money until month three: $100,000 all at once. You get $100,000 of revenue in month three, but you would record this across each month; $30,000, $40,000, $30,000, when you want to see that revenue applied month-over-month.
Cash basis accounting is not preferable from a management accounting standpoint, but it is great for tax purposes, especially if you are concerned about being taxed on income not yet received. Accrual based accounting is much better from a management or internal reporting perspective because it shows a more accurate picture month-over-month and allows you to get a better picture of profitability long term.
You can explore more detail on this subject here:
The SaaS platforms that exist nowadays, especially QuickBooks Online, make it so easy to sync items and automate, but we should still be aware of what is going on across these magical programs, and understand what the goals are. When you link your bank account to your accounting software, the transactions flow in and you can set up rules to automatically code these transactions. Your accounting software will even recommend ways to automate these transactions and ask, “hey, does this go into this account or this expense account with this vendor?” This added efficiency is awesome, and can save a lot of time and manual effort. On the flip side, there are transactions that do better not falling into these automations, and this is where you need to be extra aware of where these transactions are actually going.
You sent them an invoice, they paid you $5,000. If you go ahead and say "any deposits or any payments that come through for $5,000, just automatically code to a revenue account", then basically, you're going to be duplicating income. That $5,000 needs to be applied to that specific invoice, marked as closed, and then deposited to the bank account.
You can use Amazon as a vendor in a multitude of ways, each requiring different levels of coding in QuickBooks. You could purchase office supplies, you could have access to hosting versus their AWS/ web services. You could also pay them as a fulfillment provider, or as a 3PL for your inventory when you're selling on Amazon. So any transactions that come through with Amazon tagged as a vendor, you can't just say "go to office expenses", because they may not all be allocated within that Office Supplies account.
In short, leverage technology automation as much as you can, but be smart about which areas need to be automated, and which transactions need some oversight. There's always going to be a level of human interaction required to help organize data and make decisions after automation has supported and helped you. Yes, QuickBooks can automate and code transactions, but don’t assume it is a good plan for everything. Make sure that you're paying attention to whether you should accept that recommendation by QuickBooks when it comes up. After all, you know the intricacies of your business best.
If the answer to the question of should you outsource your bookkeeping is falling closer to “no”, it may be time to consider how you can do your own bookkeeping in more detail. Similar to our recommendations above, it all starts with consistent practices and processes surrounding the task.
Accounting inherently lends to being left brained or organized, consistent, and methodical. If you are used to flying by the seat of your pants and letting things just kind of happen, bookkeeping is not for you. It is time to train yourself to be organized, if DIY is your only option.
Here is where the consistency comes in. Update your books every Friday, or the same two days a week, or put times on your calendar for half a day on a Wednesday; whatever is gonna get you into managing and organizing your data, bookkeeping and accounting. That doesn't mean just categorizing expenses, that also means invoicing customers, following up with customers who owe you money, receiving payments against invoices, etc.
What are the key areas to perfect if you want to do your own bookkeeping? Be organized and detailed. Just make sure you're focused on that- we’re looking at you, creatives. Maintain consistency and implement practices in regularly scheduled times that you're going to engage in, and focus on your bookkeeping and accounting.
The good news is, you can learn it, it's just about organizing the data and making sure you're doing it on a consistent basis. No excuses.
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If bookkeeping is still too frustrating or overwhelming, that’s perfectly normal and 100% OK, we can help you. If it is time to outsource the bookkeeping piece, let’s chat.