This is a common question for new (or potential) clients. How exactly do we do this?
1. I do not come to your office/business to do your bookkeeping. I am a "virtual" bookkeeper. 2. My work is done "after-the-fact". This means that you conduct your business as usual: pay your bills and collect customer payments. This information is provided to me on an as-agreed-upon frequency (usually monthly). If you need someone that is more real-time (day-to-day) to be available to assist with these tasks, it is more likely that you need an actual employee. 3. How to get your information to me:
4. If you have access to the accounting software used, the details and documentation I need from you will vary, especially if you are entering some transactions yourself. If using QuickBooks Online, we can also connect your bank account to have an automatic bank feed. I will compile a list of details I need from you (i.e. transactions in question). I will advise you when the monthly work has been completed and can either send you PDF files of your monthly reports or advise you that they are ready in the system. Upon completion, the month will be closed in the accounting system so that no changes can be made to prior data. 5. If I am maintaining your accounting file in my own system, once I receive all the requested documents from you, within 10 business days I will enter and categorize your transactions and contact you with any questions about the documents received. If there are no questions, I will provide you with a summary of any issues found, along with your monthly (or quarterly) reports - depending on the package you have chosen. 6. After this is all completed, we are set for the next month. Once we have established a routine, the process is very smooth when I am provided with all the correct documentation in a timely manner. Delays in receiving information from you will delay the finished product from me.
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When you bought your last car, did you happen to ask how many hours it took for it to be built? I'm going to place a bet that you didn't ask that, because it didn't matter to you. You were making a purchase based on your perceived value of the vehicle. The time it took for it to be built is irrelevant.
When someone is charging you hourly (for any service, really), there are some negative dynamics that can arise. Hourly rates are incentive for inefficiency. The more they can drag the job out, the more they get paid. The customer begins to question why it took so long. Both are more concerned about defending their position on how long they think it should take rather than the desired outcome. If the person you hire at a cheap hourly rate is inexperienced, it will take them longer to accomplish the same task a more experienced person could do in half the time. You are paying for their learning curve, and at the same time, the more experienced person is being punished because they can do it faster (because of all the years they spent learning and doing). When someone is under pressure to do something faster, mistakes will be made. If you stop and think, value based billing is all around us. For example, doctors' visits are based on level of service, not the amount of time the appointment takes. You're not paying for the doctor's time at that specific appointment per se, you are paying for their experience and years of schooling/training it took them to get to the point of being able to treat you effectively. If I have to have surgery, I certainly don't want the "lowest bidder" to do it. An added bonus of all of this is once we choose a value-based plan for your requested services, there are no surprises. You know what you will be paying every month. Unlike your tax preparer, we need see ALL your source documents pertaining to your business. We need it to ensure we have recorded your business revenue and expenses properly.
Money In:
Money Out:
Other Documents:
Payroll Information
Very simply... Where did your money come from, and where did it go? This may sound like a lot of information, but these are all pieces to the puzzle of your business finances. When your bookkeeper is missing any of these pieces, not only is it frustrating for them (and you will get charged more if they have to chase down information), they can't possibly give you accurate financial reports. A couple weeks ago, we had the misfortune of being woken in the middle of the night to find that water was pouring out of the ceiling into our finished basement. My first thought was a broken water pipe. That actually wouldn’t have been too bad. You see, my husband is a pretty handy guy, and while it still would have been an inconvenient mess, he could have handled it. Alas, after a quick survey of the situation, it was determined to be coming from our septic system (we live in the country, so not on city sewer). Thankfully, it was not actually backing up, and was just water that our sump pump was trying to pump out (from our water softener recycling) and it couldn’t due to some sort of blockage. Regardless, it was a mess and we didn’t know what to do, or if the problem was going to turn into a full blown back up.
Where we live, there are plenty of plumbers around. A quick Google search turned up quite a few, and many listed “emergency services” on their websites. Long story short, apparently they only mean “emergency” during business hours, as only one answered their phone. But let me tell you, we were grateful. Someone came out to help us get the problem under control for the night, and told us what they initially thought the problem was. We had to have someone come back out the next day, and found it was actually a little different problem. But thankfully, they had the right tools to figure that out. Why am I telling you this? Because while my husband is handier than most, and can fix almost anything, he didn’t have the right tools or the specific knowledge for this task. He knows his limitations. This is also true in the business world. When you run a business, you might be an expert in your field, but unless you also either have a degree in accounting, or have years of bookkeeping experience, you need to know your limitations. I have seen my fair share of messes in peoples’ books who thought they could save money in the beginning by doing their own bookkeeping. Most “thought” they knew what they were doing, or thought they knew enough to get by. They may have had the right “tools” (QuickBooks is usually the small business tool of choice), but without a good understanding of accounting principles and what is going on behind the scenes of every transaction, it just creates a beautiful mess. And the money you thought you saved in the beginning, most times you are going to end up paying it anyway to have someone clean it up (now in one lump sum, rather than if you had spread that cost out to have someone tend to your books monthly). Sometimes the mess just can’t be fixed. Or maybe the information you gave your tax person is wrong, and your taxes have to be amended (with possible penalties). Many tax preparers simply take the numbers you provide them and enter them in the computer system. (Before you blame them for “messing up your taxes”, remember, they have no way of knowing if the information you provided them is right or wrong.) This is why having a good bookkeeper in your corner is critical. Maybe you think that you have it all under control. Maybe you do. But have you ever heard the saying “You don’t know what you don’t know”? Having someone do a monthly, or at least quarterly review of your books (depending on transaction volume) might be ideal for you. If you can enter your own transactions into your accounting software, you don’t have to hand over total control of all that to a bookkeeper, especially if the cost is a big concern. A periodic review may be all that is needed. I can think of plenty of things in my life that I don’t enjoy doing. For example, I know how to change the oil in my car (after all, I did take a high school shop class, and my dad made sure us kids knew the basics). But you know what? I don’t like doing it. There are plenty of other productive things I can be doing with my time. Things I enjoy. So I’ll pay someone else to do it for me. Maybe bookkeeping is the same way for you. Maybe you could do it yourself, but you don’t really like it. You started a business because it is something you enjoy and are hopefully good at. Bookkeeping is an entrepreneurial byproduct. A necessary one. Many new business owners go an average of 18 months before they realize they need bookkeeping help. As their business grows, bookkeeping tasks get shoved further down the “to do” list and have usually fallen behind or mistakes have been made in haste. Maybe tax time is right around the corner and now it’s an “emergency”. Remember my story about the water pouring out of the ceiling? When something becomes an emergency, there are fewer people willing/able to help you, and when you find someone that will, it will come with a premium price tag. Don’t let this happen to you for something that is completely preventable. We have packages to suit your needs and your budget. We can work with you to come up with a plan that will keep you out of emergency mode. The short answer: Before you think you need one. Why do I say that? Because by the time you realize you need one, things are probably already spiraling out of control, and there could be permanent damage done to your business.
One reason to get someone ASAP may be that your business is growing faster than you thought it would. You keep putting off some of the things you don't really want to do, or just plain don't have enough time to do - like bookkeeping. You're working late at night and on the weekends, spending more and more time away from your family and friends. When was the last time you balanced your checkbook? Are you tracking your income and expenses properly? Are your books a mess when tax time comes? It's important to realize early on when this is happening. Yes, it's going to cost money to hire a bookkeeper sooner rather than later. But you're not going to save money by waiting. Why not? Because if your books are already a mess when you contact a bookkeeper, they are going to have to spend time cleaning up what's been done in the past - and you are going to pay for it. Probably MORE than if you had called them before things got messy. If you have slacked off on keeping your documentation, a harsh reality may be that your books may never be accurate. Bookkeepers are pretty awesome with numbers, but we're not miracle workers. We can't magically create what isn't there and we can't read your mind. Another reason things may be spiraling out of control is if you don't really have a handle on the concept of bookkeeping, but you've been trying to do it yourself to save money. However you may end up in the same scenario as above - the longer you wait to hire a bookkeeper, the more it is likely to cost you to clean things up. Having QuickBooks software does not make someone a bookkeeper. It actually gives a false confidence that everything is fine. And not to sound like a broken record, but your books may never be accurate due your accounting system not properly set up in the first place. Bookkeeping is so much more than just writing your income and expenses in your checkbook register (or in QuickBooks). If you have an employee (even if it's just yourself), deal with sales tax, have any assets (vehicles, equipment, etc), or if you have put equity (funds from you personally) into your business, all of these things require special bookkeeping entries BESIDES what is in your checkbook. If not entered properly, you could pay more in taxes than you need to. Many times tax preparers are NOT bookkeepers, and they are going to take whatever numbers you provide them with to file your taxes, without asking questions. They are not in your books throughout the year to see if something does not look right. The burden is on you if the information you gave them is wrong. This is one of the reasons it is important to have a bookkeeper separate from your tax preparer. I can't say it enough, no matter what you do, keep your business and personal funds separate. You are only inviting trouble from the IRS. If you end up getting audited and your funds are intermingled, they are more likely to dig deeper trying to catch you doing something wrong. If you need money out of your business to pay personal expenses, then you take a draw out of your business and put that money in your personal account to pay from there. Very simple, and will save you a lot of headaches later on. Just remember, you still have to pay taxes on the money you pull out of your business! Do yourself a favor and invest in your business by hiring a bookkeeper as soon as you start making money. It is a cost of doing business and is an important one that often gets overlooked. We have different packages to work with even the smallest businesses and can scale up from there as you grow. According to the Bureau of Labor Statistics, 20% of new small businesses fail within the first year, and 50% by their fifth year. Don't let poor bookkeeping practices be the reason your business becomes a statistic. No. Nope. Nada. I do not. I have chosen to focus solely on bookkeeping tasks. I do not enjoy preparing taxes, and feel that during the first 4 months of the year I would not be able to give your day-to-day bookkeeping tasks the attention they need to get your year off to a good start. I would also have to spend additional time throughout the year researching and keeping up on tax changes, again leaving less time for me to focus on your needs. I believe in focusing on what you're good at, and what you enjoy (hopefully you are practicing that in your business!).
If you have your own tax preparer, I will gladly work closely with them throughout the year and at tax time to make the hand-off of information as seamless as possible, saving you money in tax preparation fees (because you will be organized and ready!). If you do not have someone already preparing your taxes, don't worry - I have a network of contacts and I can assist you in finding a good fit. Their fees will vary depending on the complexity of your return. Why should my bookkeeper and tax preparer be separate? This is a great question. The greatest benefit of separating your bookkeeping and tax prep is getting two different perspectives. When you have both a good bookkeeper and tax preparer, you have a powerful team giving you the tools to make smart business decisions. "Teamwork makes the dream work." Tax preparers are looking at the big picture; bookkeepers are all about the details. When you work with a firm that only provides bookkeeping services, you get a much more powerful and focused bookkeeping system compared to other combined service providers. We are doing more than data entry. We are constantly analyzing your data to make recommendations to better refine your bookkeeping processes to give you the clearest picture of how your business is performing throughout the year, not just at tax time. CPA firms and tax preparers may also offer bookkeeping tasks. However, this work is generally passed to lower-level bookkeepers, but you will likely pay CPA rates. It is possible that when you make a cost comparison, you may end up paying the same fees to have the tasks separated as you would if they were all done in the same office, but having two sets of eyes looking after your financial health is priceless. I believe in specializing, and you should too in your own business. You can't be everything to everyone, and you will burn yourself out if you try. Life is short. Enjoy the ride. You’ve got a business, and it’s making money. Congratulations! If you’ve made enough profit that you are able to pay yourself, make sure you’re doing it the right way.
If you are a sole proprietor (SP), or a single-member LLC (SMLLC), it’s pretty straight forward. You are not an employee of your company (you ARE your company). You withdraw funds by taking a “draw”, not wages or salary. Of course, you want to make sure you leave enough money in your business account to pay your business bills. (PLEASE tell me that you have a separate bank account for your business funds. Never intermingle your business funds with your personal!) When you set up your Chart of Accounts in your accounting system, you should have an Owner’s Equity account, and an Owner’s Draw account. Any money you have invested in your business goes into the Owner’s Equity account (and your net profit – or loss – is posted to this account at the end of your fiscal year), and any money you take out is posted to the Owner’s Draw account. If you are a partnership, each partner would have their own Draw account. Your net profit flows through to your personal tax return. So if you take cash out of your business, that is not an expense. It still counts in your profit, and you will pay tax on it. When you are a SP or SMLLC, you are essentially paying both the employer (7.65%) and employee (7.65%) share of Social Security and Medicare taxes (total 15.3%). And of course you will pay your state and federal income taxes on your net income. This is why it’s important to keep track of your (legitimate) business expenses to reduce your taxable income. If you are a SP or SMLLC, and you are paying yourself as an employee, including deducting (and depositing) payroll taxes, first of all, you are doing WAY more work than you need to, and you have a mess to fix. The problem is that when you pay yourself this way, you falsely believe you are paying the all the appropriate taxes via payroll taxes, and forget about the rest of the company’s net profit. No matter how you take money out of your business (or even if you don’t take any money out) you have to pay tax on ALL of your profits. However, if you are a SMLLC and you have elected to be taxed as a S Corp, then you are paid wages, and you are an employee of the company. The company will pay the employer taxes, and you will get a W2 at the end of the year. This can be done even if you are the only one working in your business. Whether you want to be taxed as a S Corp or not is a matter to discuss with your tax preparer. There is a “sweet spot” at which it makes sense to make the switch in how you are filing because it will reduce your taxes. In summary, it’s okay to write yourself a check out of your business account. Just make sure you are coding it to the Owner’s Draw account, so that your tax preparer can easily see what you’ve done. If for some reason feel you MUST pay for personal expenses out of your business account (really there’s no reason for it), those charges also go to Owner’s Draw account. If you code either of these as an expense, you are traveling down the dark road of “tax evasion”. Balance Sheet Report
This report is going to show what your business has, and who ultimately owns it (you, or the bank for example). In my previous blog post, I over-simplified it by using a house as an example: You purchased your house for $100,000. You still owe the bank $60,000. Therefore: Assets ($100,000) = Liabilities ($60,000) + Equity ($40,000) The equation must always be in balance. Of course, your business is going to be more complicated than that. Let’s look at what goes into each part of the equation. Assets Assets are what your business has (what you “own”). Current assets include cash and anything that will be converted to cash within one year, such as inventory and accounts receivable. You would also include prepaid expenses in the current asset section. These are expenses which you have paid for in advance. If you prepay your rent for a year in January, you book that to a prepaid expense asset account, and recognize the expense as it occurs every month. There is also a section for fixed assets. These would be furniture, machinery, equipment, vehicles, land, and your building. This is another place you will see the elusive “depreciation” show up. As your fixed assets are depreciated, this is where the offsetting entry goes (remember we talked about expensing your large purchases over time?). Liabilities This is where you list any debt you have. This includes your accounts payable, loans, and accrued liabilities. An accrued liability account is when you have incurred a debt but it is not yet due. This happens often with payroll taxes. You withhold the money from your employee’s paycheck, but may not pay it until the next month, or end of the quarter. Like assets, your liabilities are divided into “current” and “long term” depending on when the liability is due. Keep in mind that for loans, you are only tracking the principle amount in the liability account. Any interest paid must be coded to an interest expense account on your Profit & Loss report. Equity This is the “you” section. What have you invested in your business? When you started your business you likely had to put some of your own “personal” money in to get things going. This is your equity. Your equity builds as your company earns a profit. At the close of your fiscal year, your profit (or loss) closes to your equity account. If you’ve made a profit, your equity increases. If you take money out of your business, this goes to a “draw” account, which reduces your equity. If you are a single-member LLC or a sole proprietor, you can take this money out because you will be taxed on any profit on your personal tax return. Withdrawing money does not change what your profit for the year was. This report is essentially a snapshot of your business on a given date. It changes every time you make a new entry in your accounting system. Bonus: Make sure you regularly reconcile the accounts on your balance sheet. The primary one is of course your bank account, however it’s just as important to reconcile the other accounts as well. For example, if you have a loan on your balance sheet, be sure that the principle balance showing on your report matches what the bank shows on your statement. If it doesn’t the first thing to check is to see if you posted the interest amount to that liability account instead of the proper expense account. Profit & Loss Report
In its simplest form, it is a report to show “money in and money out”. It is one of your best tools to see how your business is doing. It is also something banks and investors want to see before lending money to your business. For both of these reasons, you want to be sure that the information it contains is 100% accurate. Income Where is your money coming from? Do you sell a product or service, or a combination of both? Some businesses may simply have one single income account called “Sales”. However, if you want to be able to better track your sales in a more complex business, you can have “Sales–Widget 1”, “Sales–Widget 2”, etc. Maybe you have more than one business location, and you want to track them separately via “Sales–Location 1” and “Sales–Location 2”. This is up to you and your business. How much detail do you want? As far as filing your taxes, the government simply needs to know how much money you made. They don’t really care how much of it was from Widgets or services. Just because the government doesn’t want that much detail doesn’t mean you shouldn’t though. Remember, this is how you are going to analyze how your business is doing. Cost of Goods Sold (COGS) “Cost of goods sold” is technically an expense, but it is shown separately on the Profit & Loss report. How much did it cost you to buy or build the Widget that you sold? These are the direct costs attributable to the production of what you sell. If you sell your Widget for $125, but it cost you $50 to purchase it wholesale, that $50 is your “cost of goods sold”. What all is included in COGS? If you purchased the Widget for $50, but you added value to it at a cost of $25, then your COGS increases to $75. Direct labor costs are also included in COGS. This would include wages for anyone that is directly involved in assembling that Widget. This does NOT include administrative labor, such as the secretary answering the phones, or the CEO. Another item included in COGS is the cost of shipping to get the Widget to your door (freight in). However, this does not include the cost of shipping for you to ship the Widget to your customer (freight out). Gross Profit This is your Income minus COGS. Expenses Where is your money going? Most common expense categories may include the following: Wages Payroll Taxes Advertising Maintenance Office Supplies Utilities Rent Gasoline Insurance Professional Fees Again, the level of detail can vary by business. Some may lump all utilities together, whereas others may break them out into telephone, electricity, etc. What level of detail do you want to see? For the most part, the expenses shown on your Profit & Loss report are things that you wrote a check for. However, there are some instances where what you wrote a check for will not match what is shown in your expense accounts. The best example of this is depreciation. Depreciation means that you are recognizing an expense over time. If you purchase a large piece of equipment, a vehicle, or a building, you will generally not expense that large purchase in one year. You spread the expense out over its usable life. For example, a computer that you purchased for $1500 has a useful life of 5 years. When you write the check, instead of coding it to an expense account, it would be coded to a Balance Sheet account called “Equipment”. You would then depreciate it over 5 years. In this simple example, you would expense $300 each year ($1500 divided by 5 years). This shows up in the Depreciation Expense account on the Profit & Loss report. In some cases, you will can expense the entire amount in the year of purchase, but it may or may not be in your best interest to do so. This is a discussion for you to have with your tax preparer. Bonus: You should always keep a list of any equipment you purchase throughout the year so that at tax time, your preparer will make the decision what to expense versus put on a depreciation schedule. The IRS has rules and limits (which can change from year to year) in regard to what can be expensed in the year of purchase. There may be options available to minimize your tax liability. Net Income (Loss) The bottom line. This is what is left after you subtract COGS and expenses from your income. You either made money or show a loss. When it’s your first year in business, it can be hard to determine what is good or bad. You can find information online regarding what may be standard for your industry. When you’ve been in business for more than one year, it is very useful to compare your current year’s Profit & Loss report to previous years to evaluate if there are large variations and then further investigate what the cause might be. A very simple example of a Profit & Loss report: Financial statements. What does that phrase mean to you? Have you been asked by a bank to provide financial statements for your business to obtain a loan? If you're a DIY bookkeeper using software such as QuickBooks, you know that you can have the software produce these reports for you. However, unless you understand what you are looking at, you will not know if the reports are correct. Maybe something was posted to the wrong account? Maybe you posted something to an expense account when it should have been capitalized? When you made your loan payment, did you break the payment out properly to the appropriate liability and expense accounts? It is important to understand what makes up these reports so that when you're looking at them you can recognize when something doesn't look right. Banks don't really like it when the information you give them isn't accurate.
For the first part of this blog post, we will look at two of the most basic financial statements: the Profit & Loss, and the Balance Sheet. Profit & Loss This report shows what you earned (revenue/income), and where you spent it (expenses). It gives a snapshot of your business' profitability. For the very basic of businesses, this is your cash in minus your cash out. In a more complex form, one must include other expenses that are a little trickier, such as depreciation (more on those types of expenses in an upcoming blog post). On the income side, this is where you track your sales, whether it is your service or your products. You can simply have one income account called "Sales", or you might break it down into "Sales - Widget 1", "Sales - Widget 2", etc. That is up to you. The great thing about these reports is while there is a standard format, the amount of detail you want to include is customizable. On the expense side, there are some standard expenses you will want to account for, such as: bank fees, utilities, telephone, office supplies, advertising, wages, taxes, etc. Again, you can customize these expense accounts to your business. What's left after you've entered your income and expenses is your profit (or loss). This report can be run to show activity for a month, quarter, year etc. Income and expense accounts are reset at the start of your new fiscal year (for most businesses your fiscal year is the calendar year, unless you choose otherwise). Bonus: In nonprofit accounting, this report is generally called "Statement of Financial Activity". Balance Sheet The Balance Sheet is a snapshot of your company on a particular date, and it is always changing. What the company has (assets) minus what you owe (liabilities) is what your company is worth (equity). As such, the equation is: Assets = Liabilities + Equity For a basic illustration, if you own your own home, let's apply that to this equation. You purchased your house for $100,000. You still owe the bank $60,000. Therefore: Assets ($100,000) = Liabilities ($60,000) + Equity ($40,000) At the end of your fiscal year, your ending profit moves into your Equity account. This is what allows the Profit & Loss report to "reset" for the new year. Bonus: In nonprofit accounting, this report is generally called "Statement of Financial Position". |
AuthorBeth Kayhart, Owner and Operator of On Track Bookkeeping LLC Archives
November 2019
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