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Business success is dependent on a solid financial foundation & success looks different to everyone & there is a lack of equity of access to resources and information for small business owners and independent contractors & there is a societal narrative making us believe “balance” is our ultimate goal & … There are so many “&”s that impact being your own boss. Let’s have some frank discussions on the basics of business with a holistic focus on everything that helps business owners define and find success.
Molly 0:08
Welcome to The Ambiguous &: Business Basics and Beyond, the podcast where we have frank discussions on the basics of business with a holistic focus on everything that helps business owners define and find success. Each episode is a reminder that success isn't one thing, it's a whole lot of ambiguous ands. Like, subscribe or follow and let's explore these ambiguous ands.
Molly 0:38
Hello and welcome to the Ambiguous &: Business Basics and Beyond. I'm your host, Molly Beyer, and I'm here to lead you through frank and holistic conversations on the basics of business. Today we're going to talk about do it yourself bookkeeping. Now we all love a good DIY project, the satisfaction of planning and buying all the supplies and then jumping in often over our heads. Now there are definitely some DIY projects that don't require professional intervention, but more often than not, the project is either abandoned when it becomes too much, stretches on for way longer than it should when the going gets tough, or costs a fortune to clean up and redo by a professional, and bookkeeping is really no different. Whether a business is just getting started or has been operating for many years, proper financial record keeping is essential to the success of that business. Having competent and experienced bookkeeping help can help make it a simple process, but many business owners insist on the DIY method after buying into some common myths. Let's unravel some of those myths together today.
Molly 1:38
Myth number one, YouTube can teach people everything they need to know about keeping their own books. Yes, there are many resources available to help, but there is so much nuance to business financials that it's impossible to teach in a short video or even in multiple videos. While YouTube is a great place to find a workflow or a process specific to a particular software or integration, many of the videos posted by actual professionals are geared toward other professionals with the background knowledge and training to use it as practicing bookkeepers with degrees, certifications and experience. We can attest that not all available videos on YouTube about bookkeeping have accurate or current information.
Molly 2:18
This piggybacks with another myth that bookkeeping is just data entry, so it isn't that difficult. Bookkeeping is much more than just categorizing transactions, though. You need to understand why things are categorized the way they are to be able to figure out discrepancies when reconciling and, what about complex financial transactions like a loan payment? You need to make sure the loan is on the books as a liability and then split out the principal and interest on that loan. As principal reduces the liability, which increases equity, and interest is an expense that reduces income. Missing either of these components will throw off the picture of the business and can cause an incorrect tax liability, and that picture is what bookkeeping is. Well, maybe it's more of a story that creates a picture. Bookkeepers know how to use this data to tell the story and to paint the picture.
Molly 3:06
Myth number two, commercial accounting software makes it so easy to set up and manage the books that a professional is not needed. Yes, mass marketed accounting softwares are intended to be user friendly and allow savvy business owners to manage their own books, but without training and understanding of basic accounting, it's very difficult to correctly enter and categorize expenses to offer the best and most accurate picture of a company's financial position. Sure, there are templates for charts of accounts to choose from, and lots of questions asked to set up an account, but each business is different, especially when it comes to the chart of accounts, the standard chart templates are often overcomplicated and can be very confusing. There's also a difference in the accounts you should use depending on your entity type. A sole proprietor or single member LLC needs different accounts than a partnership, an S corp or a C Corp. When setting up a chart of accounts, the goal is to map out the best way to manage taxes and business cash flows, and this takes a deeper understanding of your business and your tax situation than you can get from answering a few questions. We have a number of small clients that we have set up to handle their own bookkeeping who are also handling their own taxes for them. We set up their chart of accounts to mirror the Schedule C so they can run one report at the year end and easily complete their tax return with it. This is the benefit of having professional setup and training help.
Molly 4:24
The process of adding or updating accounts in the software can also be confusing or complicated, so having it tailored and then training you on it makes sure it's easier for you to manage in the future. And also, as we talked about in myth one, categorization is something you need to learn how to do specific to your business, especially if you have additional apps or processors that are feeding into your software.
Molly 4:48
Myth number three, someone being good with numbers means they will be good at their accounting or bookkeeping. I say this all the time, accounting and bookkeeping are as much craft as science, and though there are some hard and fast rules, most of accounting is a gray area that requires knowledge and finesse. We may be good with scissors, but that doesn't mean we should be cutting our own hair. Not that I haven't tried that to save some money, but it's rarely worth the savings. There is a particular way of thinking that makes a good accountant or bookkeeper, and it isn't often math minded. Most of the accountants and bookkeepers I know were actually terrible at math. Yes, accounting is numbers, and there is a decent amount of math involved, but it's using numbers in a different way. Accounting and bookkeeping rely on accounting principles and regulations. Those are the hard and fast rules and how to apply them in real world situations, not theoretical or abstract ones. There is also a great deal of analysis and interpretation required in bookkeeping to help with the tax liabilities and cash flow management. Bookkeeping requires a significant attention to detail, organization and critical thinking skills. It can also be incredibly tedious or boring and time consuming, so most people want nothing to do with it, but ask a bookkeeper or accountant if they like what they do, and most will light up and take you down a mind numbing path of spreadsheets and reports and the time they spent four hours tracking down a missing $5.72. And if you're fascinated, you may actually have missed your calling!
Molly 6:17
Myth number four, their accountant handles their bookkeeping at tax time. This myth has two specific pieces to focus on. First, bookkeeping only needs to be handled at tax time, or mistakes can be fixed at the end of the year. This is so wrong on so many levels, it makes my head spin, even for small businesses like solopreneurs or service based businesses without any physical inventory or location, there are still income and expenses running through the business that need to be categorized at least monthly to make sure you're not getting double charged, that your clients are paying invoices, and that you're able to see patterns and make decisions year round, without up to date data and accurate information regularly available. It's really difficult to make decisions on expenditures or to determine if a price increase is needed, or to even estimate your quarterly taxes that are due. There are also states and cities that require reporting throughout the year and without accurate records, these could get missed or be filed incorrectly, and especially when there's sales tax involved, that can cause a huge headache and possibly audits and penalties regardless of how you're keeping track, whether it's a spreadsheet or a software- with or without professional help, your bookkeeping should be addressed monthly and all accounts reconciled at least quarterly, to make sure you have access to accurate data quickly for decision making.
Molly 7:37
The second part of this myth is that your accountant will handle bookkeeping at tax time while an accountant, tax professional, or CPA, may create some journal entries at tax time to make the books match the tax return. It's not actually bookkeeping. The process of bookkeeping involves categorization of each transaction as it happens so a business has a full and current picture of the financial health of the business. These professionals are also generally viewing your books for the best tax situation only, and not for the best way to manage the business's cash flows. Now, if you have a very large business and use an accounting firm as your Bookkeeping Tax and controller or CFO service, this might not be the case, but for most small businesses, your tax professional is focused on that tax and as a side note, CPAs and accountants typically charge more per hour than bookkeepers and will have to do a significant amount of digging for information to handle bookkeeping at tax time. That translates to a much greater expense and a much bigger headache than necessary at tax time. Bookkeepers work with a tax professional to make tax time as painless as possible for all involved.
Molly 8:41
Myth number five, Google can tell them everything that can be counted as a business expense. Yes, Google can bring a business owner to the IRS website or to any of the hundreds of articles and blogs on the subject and the documents that talk about legitimate business expenses. But the IRS doesn't always seem to speak the same English as the rest of us, and though there are many articles and blogs on the subject, they may contain inaccurate, incomplete or out of date information, but it is helpful to have the guide, because so many business owners go this alone. They include items in their expenses that are not legitimate. This means that their income statement through the year will show lower net income than what their taxes show when their tax person removes those items at the end of the year. Now this can cause issues with money management for the business for making business decisions for things like estimated taxes and things like health insurance if you're working on a marketplace, because the two numbers won't match. Many business owners are told that there are many things they can deduct that they actually can't, or only can if their business is a certain type of entity, and even then, it might be a stretch. This is also where it becomes super important to have conversations on setup with your tax professional, the one that you're going to use, because some may be more risk averse in their guidance than others, and we're going to talk about this more in a future episode on tax professionals.
Molly 10:02
And myth number six, a business can save money doing it themselves. This is one of the most pervasive of the DIY bookkeeping myths, and it really is the encompassing myth for all of the rest. The truth is that typically, DIY bookkeeping costs more some quick math can show a business owner how much time they're losing basically how many hours they're spending monthly on bookkeeping multiplied what they charge, or should charge by the hour for their time, and that generally equals more than the monthly bookkeeping would cost them. So a quick way to test the myth is asking a few simple questions, how much is their time worth to their business as an hourly rate, and how much of their time are they spending handling their bookkeeping tasks? So say they determine their time to be worth $30 an hour to their business. And now this is very low. This is a very low number for most personal and professional services. We're going to just go with it for sort of ease of math. Please don't charge that low. Then let's say that they spend five hours a week working on their own books. So that's $600 a month that they're costing their business more than an actual productivity loss, or more. If you look at a small business average, most studies find that small business owners actually spend about 10 hours a week handling their books, so that would be $1,200 a month lost, and this doesn't even account for the personal loss of their time, which is really worth far more insanity and peace of mind. If they take all the hours that they spend on keeping their own books and reallocate them to their personal life, they work to balance themselves. Most small business owners work well over 40 hours a week, and may feel like they're married to their business and if they're actually married, this payment may put up a strain on their relationship with their spouse. If they're a parent, this may put strain on their relationship with their children, or maybe they just wish they had a couple more hours a week to restore an old car or do some binge watching or go out on their boat or read a book. Additionally, if they think that their accountant can just handle this at the end of the year, refer back to myth number four.
Molly 12:06
DIY can cost so much more in the long run, in both tangible and intangible ways, like we talked about with the DIY craft and home projects, many of us have started and maybe completed, a do it yourself bookkeeping or a do it yourself project. But do it yourself bookkeeping generally ends up costing a business far more than if they just hired the professional. By the time you seek help, you may have a costly mess on your hands to clean up before it can even make it to your tax professional. I always tell people, it's easier, meaning cheaper, to create than to clean. Now, none of this means that you cannot manage your own bookkeeping from day to day, but invest in having it properly set up and getting trained in your specific books so you can avoid many of these DIY pitfalls.
Molly 12:50
Thank you so much for hanging out with us today. We'd love to hear your feedback on today's episode, as well as any requests for future content. Drop a comment or suggestion and join us next time for more frank and holistic conversations on the basics of business, please also like, subscribe, or follow so you never miss an episode, and until next time, I am Molly Beyer, and this has been The Ambiguous &: Business Basics and Beyond.