Today’s content is from Jaren Nichols, Chief Operating Officer at ZipBooks. Every small business owner needs his advice, but none more so than the women out there working to make their big ideas come true! Read and share with every other woman you know who might be struggling with this.
Empowering Your Business with Basic Bookkeeping
Small business owners don’t need to fear their books—the basic principles are actually pretty simple. To be great at bookkeeping you don’t need to have any background in business, finance or even math!
It is true that bookkeeping can be a bit boring, but the results of bookkeeping—they’re thrilling. There’s a thrill at the end of the month when balanced books show an actual profit. Or at the end of year when you’ve stayed within your budget. Or at tax season when you add up all your write-offs and you’re actually getting cash back instead of owing. This kind of invaluable financial data can only come from accurate books.
You put your time into the things you value most. If you truly value your business, you will put your time into your books and you will see financial growth because of it.
What is bookkeeping?
So, what is bookkeeping? Exactly what it sounds like—keeping the books. Every business needs to know where their money is and where it’s going.
The goal of bookkeeping is to produce accurate and up-to-date financial statements that can—and should—inform your decision-making.
In the past, keeping your books required a lot of data entry: recording transaction amounts, listing debits and credits, and compiling totals to build useful reports. Today, (thankfully), most bookkeeping is done online through online accounting software. These affordable solutions make the mechanics of bookkeeping easy to understand—and they produce reports for you!
If you’ve kept accurate books, you don’t have to do any complicated math to view your financial standing. You just have to complete two simple tasks: categorization and reconciliation. Then, your software will do the heavy lifting.
Task #1: Categorization
As a business owner, you know that organization is a powerful catalyst for growth. Categorization is how you organize your financial records.
It all starts with a “Chart of Accounts”: the group of categories you’ve created for your business transactions. Accounting software products typically create default categories and subcategories for you (e.g. “Assets” and “Accounts Receivable”), but you can always customize as well.
Every business transaction needs to be categorized in your books. These categories have multiple levels. For example, while you might categorize a transaction as “Office Supplies,” that transaction would fall under the parent category “Office Expenses,” then “Expenses” and finally “Owner’s Equity.”
This is commonly done for tax purposes, so that you can itemize expenses. But the more important purpose of categorization is knowing where your money is coming from and where it’s going.
Task #2: Reconciliation
Aside from choosing categories, you will also need to verify each transaction. This is called reconciling.
If we travel back in time to the kitchen table, we’ll see your mother with her eyes locked on her checkbook. Balancing her checkbook is how she guarantees that every transaction is accounted for. Then, ideally, the checkbook matches the bank statement at the end of the month. Reconciliation does the same thing—but for your business.
These days, both paper-and-pen and manual data entry are things of the past. Modern accounting software syncs with your bank and automatically pulls in every transaction. It’s up to you to go through the transactions and make sure that they match up with what you know happened in reality.
On occasion, the syncing systems aren’t perfect—either the bank connection was off or someone in the accounting system did something wrong. This is why we reconcile.
The Importance of Being Timely
In the digital age, neither categorization or reconciliation are that hard, but they do take time.
The longer you wait to verify your transactions, the harder it will be to remember what the transaction was actually for. Then, you have to dig up old receipts and follow the paper trail, until you can say for sure where that money went. You don’t want to misrepresent yourself on your tax forms or file a faulty return.
Instead, commit to regularly maintain your books. If you can put bookkeeping in your calendar, the task will only take a few minutes here and there, rather than hours or days at a time.
Take Advantage of Financial Reports
If you have accurate books, you will have the strength of financial assurety on your side. You will know exactly where your money stands, how you can grow, where you can afford to spend a little more and where you might want to cut back.
There are many financial reports that you can create with accurate books. If you have a QuickBooks or a cloud-based alternative to QuickBooks, like ZipBooks, your software will produce these reports automatically. We’re only going to talk about the big three.
The Balance Sheet reflects a balanced accounting equation: Assets = Liabilities + Owner’s Equity. This equation must always be true. The data reflected on the Balance Sheet is invaluable to business owners because it helps you to see where your business stands right now, particularly in terms of cash in the bank and debts owed.
The Income Statement (also called “Profits and Losses” or “P&L”) breaks down sales and expenses over a specified time period. Your net income, or “bottom line” on your Income Statement is what you pay taxes on and it tells you if you’re actually making a profit!
The Cash Flow Statement combines data from the P&L and the balance sheet, giving you a summary of your cash position, and how you’re earning that cash. Your ability to create and sustain positive cash flow, as reflected here, is what gives your business value.
Hang in There!
We know that tackling your books can be a bit stressful, but it makes such a difference for your business. If you can stick to a schedule, bookkeeping will get easier with time, not harder.
Additionally, there’s no shame in handing your books over to a professional—if you can afford it. Many small business owners don’t have room in their budget to outsource (not yet at least), but you can still be an astute bookkeeper with dedication and with smart software on your side.
Jaren Nichols is Chief Operating Officer at ZipBooks, free accounting software for small businesses.
Jaren was previously a Product Manager at Google and holds an MBA from Harvard Business School.