Sales - Profit = Expenses

Misunderstanding Business Bookkeeping Can Close Your Doors

Although Do It Yourself (DIY) is popular it’s not recommended for your business bookkeeping and accounting.

 

One thing that can bring any business down to its knees is the misunderstanding of company cash flow. There are proper steps that must be taken in every business to create and maintain a bookkeeping ledger that is true and accurate. Only when these steps are taken, will you as a business owner know the true financial health and wellbeing of your business.

If your bookkeeper is inexperienced and does not understand these steps they can be inadvertently creating a severe ripple effect in your company that will result in major financial problems.

Working with a professional bookkeeper will ensure an accurate view of the financial conditions of the small business at all times. The financial statements will be prepared according to the General Acceptance Accounting Principles (GAAP), the IRS guidelines, and industry standards.

While DIY seems smart and cost-effective at the time. It is NOT! Doing it yourself or hiring an in-house inexperienced bookkeeper can result in costly mistakes.

Business owners may often notice these mistakes in the form of theft occurring due to lack of internal controls, a higher and unexpected tax bill, inaccurate and unreliable cash flow reports, and high receivables account or incorrect reconciliation of accounts.

A professional bookkeeper will accurately track all expenses and tax deductions. They will also possess the understanding of the unique bookkeeping skills needed to profitably operate your business thus saving you time and money.

A common and costly mistake of the DIY or inexperienced in-house bookkeeper is to accidentally enter current transactions into a previous period, which results in balance adjustments that don’t match the bank balance or financial reports. If this error goes unnoticed, all future reports, tax documents, and cash figures will be incorrect.

This can result in doubling the cost to repair the financials, misrepresentation of cash, or harsh penalties from the IRS.

A professional bookkeeper will always “close the books” on a monthly basis. Closing the books includes reconciling the different accounts, preparing the financial statements, and more.
When establishing an accounting set of books, special considerations need to be taken to correctly set up the chart of accounts.

While it is true that the chart of accounts is an important tool used in preparing financial statements it is also important to understand that they vary from industry to industry. A correctly set up chart of accounts can streamline the process of knowing where the funds are received and spent therefore providing an insight into the health of your business.

Most DIY and in-house bookkeepers do not fully understand how to read and comprehend the financial reports. The #1 mistake I see in most businesses is looking at the profit figures for a particular period and unknowingly thinking that figure is available cash.

When thinking about this, you need to realize that the profit amount does not represent the cash available for purchases. This common mistake often causes a business to be assessed with overdraft fees and extra bank charges.

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