A Proper Set of Books Is Crucial to the Success of Any Business.Large companies have entire bookkeeping and accounting departments staffed by a large number of employees, so it must be pretty important. Small businesses probably don’t have that luxury. But it is important to them too. The task usually falls to the owner of the business or their spouse because they are not ready to hire an employee to do it and they fear that hiring an accountant will be too expensive. Then there is the question of how to actually do the bookkeeping while also running the business – a shoebox, manually or bookkeeping/accounting software (and which one).Any business must get their numbers right on a timely basis and then put those numbers into a format that is understandable to the owner and anyone outside the business who may have an interest so that sound business decisions can be made.
Why Keep a Set of Books?The first consideration, then, is why is it necessary to keep a proper set of books?
TaxesAt a minimum, every business has to comply with federal, state and possibly local tax laws. The easiest way to legally minimize a business’ tax liability and comply with all tax laws is to have a proper set of books. The easiest way to run afoul of taxing agencies and risk losing your business, short of not being properly capitalized, is to not have a proper set of books. A structured, consistent and timely method of keeping track of income and expenses ensures that taxes can be planned for in advance and that all tax laws are complied with when required.
Interested PartiesThe second consideration involves outside entities who may want to know what is going on with the business from a financial standpoint. Most likely this is a situation where the business is looking to acquire capital to maintain or expand the business. The sources of this capital can be banks, who are very diligent in evaluating the business for purposes of a loan, and investors, who should always be diligent in evaluating the investment in the business in return for a share of the ownership.Other examples include a contractor who wants to get a license for their business in the state in which they operate, or companies that want to contract with Federal government. In all these situations, financial information is going to be required and a proper set of books, kept up to date, can quickly allow the disclosure of this information. Without a proper set of books, putting the information together can be time consuming and very costly and may result in missed deadlines and lost opportunities.
Sound Decision MakingThe third consideration, and the one most savvy business owners rely on, is to use the information to manage the affairs of the business so that it can fulfill its purpose. In other words, to find out what the numbers generated by the bookkeeping mean. This is often done in consultation with a small business financial expert such as a Certified Public Accountant. Specifically, the following concepts must constantly be addressed:
- Devising and implementing procedures for acquiring enough capital for the small business to purchase assets that will contribute to the production of income. We’ve all heard that the reason most small businesses fail is due to lack of proper capitalization
- Devising and implementing a strong system of internal financial controls to help ensure the preservation of that capital
- Once income is being generated, devising, implementing and monitoring strategies to maximize profit, the crucial element in a small business fulfilling its purpose
- Once profit is being generated, devising, implementing and monitoring strategies to manage the cash flow generated from that profit. Profit and cash flow are two entirely different things and must be managed accordingly
- Ensure that the small business maintains a strong financial condition so that obligations do not consume hard earned assets and capital. The business must remain healthy in order to continue and earn profit
- Legally minimize taxes through proper, proactive tax planning and compliance. A small business should never be surprised by and have to react to unforeseen tax issues. Tax agencies are often the most interested outside party a small business will encounter and not properly addressing their rules and regulations can be devastating to ongoing success
- Strategic business, tax and technology planning. Although plans themselves often become obsolete rather quickly, the process of periodic planning is invaluable to the ongoing success of the small business fulfilling its purpose
- At some point in time, most small businesses fulfill their purpose. Planning for the discontinuance or sale of the business and its proper valuation should always be a consideration.
What Is a Proper Set of Books?A bookkeeping system should follow basic principles but be tailored specifically to the needs of the business. A service business has different bookkeeping requirements than a manufacturing business or a retail business. Some businesses deal strictly in cash while others send a bill to their customers and wait a period of time to be paid.A proper set of books are only as good as the time spent in initially setting them up and this should always be done in consultation with a professional such as a Certified Public Accountant. Don’t guess at what you need or let some bookkeeping software make the decisions for you. This is not a costly process and can save a business a significant amount of money in the long run.
1. Chart of AccountsThe starting point for any business should be a chart of accounts. A chart of accounts is nothing more than a listing of the potential types of transactions a business may encounter and is helpful in categorizing them (especially for tax purposes). Again, the choice of a chart of accounts for any business should be made in consultation with a professional accountant.
2. OrganizationOnce transactions are identified and properly categorized, they need to be recorded in an orderly, consistent and timely manner. The source documents for these transactions (receipts, bills, paid invoices, etc. should be saved and filed, also in an organized manner, especially for tax purposes.) Most bookkeeping systems use a series of books of original entry known as journals. There are four main journals (there can be more but these are the most common and useful):
- Cash receipts – the money a business collects from its customers.
- Cash Disbursements – the money a business uses to pay its bills.
- Invoices – the bills a business sends to its customers for the work done for them by the business.
- Payables – the bills received by the business that must be paid for the goods and services it needs to operate.
- General Journal – used to record unusual items or adjustments recommended by an outside accountant to make sure all financial transactions of the business are recorded.