A lot if you try to do it yourself.So many businesses think that bookkeeping, accounting or tax services are expensive. This leads many to think they can do it themselves. Add in the fact that there are numerous desktop and online solutions for these services that are constantly promoted and the illusion that this is a do-it-yourself task is increased. And, yet, those also cost money which can influence one to just avoid it all together.The worst thing a business owner can do is to try and do bookkeeping themselves or not at all. Let’s look at some real examples (the names, of course, have been changed, but the facts are true).
What Happens If You Keep No Books for Three Years?A business person working as an independent consultant and operating as a single-member Limited Liability Company (LLC) just kept receipts in envelopes for the first three years in business. They further compounded the problem by co-mingling business and personal receipts. Notwithstanding the problem of not filing tax returns for three years, the business person wanted to get a loan. Any lender is going to want to see some kind of financial statement (income statement and balance sheet) and/or a tax return in order to consider making the loan. In order to get this done, the business owner goes to an accountant, and the following items have to be dealt with:
- Sort the receipts into categories, making sure that business and personal as well as deductible and non-deductible items are separated. Keep in mind that receipts should include a business purpose, and if they don’t, the deductibility of the item becomes questionable. The accountant is not going to guess at this, so the business owner has to spend time going back through any receipts in order to ensure their deductibility or validity. This should have been done on an ongoing basis to be most cost effective.
- Total the receipts by category.
- Show sources of income. Oftentimes this can be done through bank statements, but they still need to be totaled.
- Prepare the financial statements and/or tax returns.
Using a Computer Program to Do It Themselves – The Cons of Do It Yourself Bookkeeping for Small Business Using Software/Using a Computer ProgramThere are many options available to do desktop or online (cloud) bookkeeping, the latter being the trendy new thing. These are marketed as do-it-yourself solutions that will save the business time and money.Maybe, if they are used in the right way.The first thing to be aware of is that these are tools that are primarily used to manage and record transactions, and for that purpose, most are very good if properly set up and the person using them is properly trained in how to use the program. And that is the problem.
Worst Case Scenarios of DIY Bookkeeping SoftwareHere are two examples.
Not AccurateIn our first example, a law firm decided to do their own books. Now I think we can all agree that most attorneys are pretty smart. That doesn’t make them good necessarily at keeping their books, even with a piece of software that is supposed to do it for them. In this case, the business owner just installed the software and allowed its automatic features to decide where to put things. It also had a function, which most of these programs now do, to accept payments through a cell phone.The problem is that the software was deciding where the transactions should go, and since some attorneys have to hold funds they receive in trust until the work is done and the software isn’t set up to properly figure that out, then serious problems can occur. The books balance, but are they accurate?In this case, they weren’t. In the course of getting the tax return prepared, these potential discrepancies were discovered by the accountant. This resulted in many excess hours spent by the accountant trying to reconcile the trust accounts so that the attorney would not face disciplinary action by the State.
Improper Data Entering/No Ability to Plan/Cost of MitigatingThe second situation is a firm that used an industry specific billing and management program to manage the day-to-day operations of the business. The problem was that it didn’t provide meaningful financial statements for management to use in its decision making process. It also didn’t interface with the popular accounting programs available, so someone in the firm had to enter the information from the billing program into the bookkeeping program. The result was that a relatively easy process turned into a nightmare because that person didn’t know how to use the program or understand basic bookkeeping. The fees to have an accountant fix this bookkeeping problem would have run into the thousands of dollars, but the firm decided to try and fix it themselves. The ultimate cost is uncertain at this time.
How to Avoid Major Bookkeeping MistakesThe solution to these somewhat similar situations is to once again engage a competent professional. There is nothing wrong with using one of these computer programs. But the cost, in both of these situations, of fixing the problems ran into the thousands of dollars and could have been far less in the long term if the following steps had been taken with the help of an accountant to avoid these bookkeeping mistakes.
- Have an accountant analyze your business and design a chart of accounts that is tailored specifically for your business (and can usually be imported into the program). These programs simply make assumptions but can’t get down into the real needs and nature of a business.
- If you think you have to change things the accountant has set up, consult them first. This includes using add-on services, especially with cloud based programs, which may change what is set up on their own.
- Have the accountant train you in the use of the software. Yes, this costs money but is well worth it compared to the cost of fixing it later as we have seen.
- Have the accountant monitor the activity on a monthly basis to ensure that the person using the software is doing so properly and the information generated is meaningful.
- Have the accountant provide some analysis and insight as to what the numbers mean and how they can be used to maximize profits, manage cash flow and legally minimize taxes.
- Have the accountant help plan and prepare for taxes so that penalties are eliminated.