Do I Really Need a Bookkeeper as a Small Business Owner?
Bookkeeping comes with the territory of running a small business.
You have to keep track of your company’s finances for a variety of reasons…and you know this. You need to track what you make, what you spend, and what is left over so you can file accurate taxes, stay in budget, and maybe even make projections. Overall, the goal is to recordkeep so that you can know how you are doing so that you can do better.
Don’t believe the myth that the only reason you do books is so that you can pay taxes. There’s so much more available to you when you have clean and accurate books!
The question is: Can you do this yourself?
What is at risk if you do your own bookkeeping?
What can accurate and detailed bookkeeping save you…and maybe even make you? When you buy into the “What you measure, you can grow” and “What you focus on you create more of” principles, then bookkeeping becomes significant.
A few things to consider at the outset:
Do you have a bookkeeping or accounting background?
Do you enjoy doing bookkeeping?
What is the opportunity cost of doing your own bookkeeping?
When you are doing bookkeeping, what are you not doing?
What if you are categorizing transactions incorrectly, and they actually increase your tax obligation?
As you can see…quite a bit is at stake.
So, should you do your own bookkeeping?
The short answer: No.
Unless you have an undergrad degree in accounting and you just love it, then stick to your strengths and don’t risk it. If you are a finance nerd, more power to you. If not (and you know if you’re not), then find a bookkeeper to speed you up, get you back to building your business, and increase the accuracy of your books.
Did you know the number one factor to minimizing your tax obligation comes down to how accurate your books are?
Do you understand the nuance between the balance sheet, income statement, and statement of cash flows?
If not, you need a bookkeeper.
Here is one simple example:
What accounts would you use in your chart of accounts for these transactions?
$1,000 transfer to the business owner (yourself) - not paid via payroll
$75 meal while traveling on business
$10,000 estimated tax payment for your LLC
If you have any doubt about how you’d categorize those three transactions, then you need a bookkeeper.
Let’s see how you did if you attempted to answer these:
$1k transfer is a distribution and should be categorized as an Owners’ Distribution.
• This is not tax-related as it isn’t an expense and will live on your balance sheet and show up on your Statement of Cash Flows.
• Did you know this won’t even show up on your Income Statement?
The $75 meal should be categorized as Meals and Entertainment and is only tax deductible at 50%.
• If you are curious about your travel meals vs. your other business meals, you can set up another sub-account to your Meal and Entertainment to track Travel Meals.
$10k estimated tax payment for your LLC is actually a distribution.
• This is not an expense and doesn’t show up on your Income Statement (or P&L depending on your terminology).
• If you are an LLC or an S-Corp, you are a pass through entity which means the tax burden passes through from the business directly to the owners.
• Estimated tax payments are, therefore, personal in nature.
• The income and obligation for the taxes originate from the business, but the business doesn’t actually pay those taxes.
• Therefore, if you make a tax payment (income tax/estimated tax) from the business, it is essentially coming from the person that is the owner or owners.
Do you know about Section 179 in the tax code or home office deductions?
If you don’t or if your CPA that files your taxes doesn’t ask you about the square footage of your office in relation to your home, then you are missing out on tax deductions and potential credits.
All this to say:
you can do your own books, but will they be accurate?
Will they help you minimize your tax bill to the rightful amount?
To what level of detail do you record your expenses and revenue? (A deep dive on this is a topic for another day). For now, imagine if you had two accounts in your small business books for your Income Statement: (1) Revenue and (2) Expenses. Let’s say you made $10k in revenue for the month and had $8K in expenses, leaving you with $2k net profit. What would you make of that? What would you need to know to make decisions from it? What would you need to measure to be able to understand those numbers? You would need to know the details.
The first thing I would do with you if this were your scenario, would be to press into what revenue streams the $10k came from so I could strategically analyze how to grow those revenue streams. Then, I would press into the details of the categories of how the expenses came about. Where the funds are spent matters. An expense isn’t just an expense, it comes with certain tax deduction percentages and allows you to make cost-cutting decisions, all of which puts money in your pocket.
Accurate and well-categorized books put money in your pocket. Quality books not only reduce taxes but they also help you make smart financial decisions. They reveal where you can lower your expenses and highlight opportunities to grow your revenue streams.
Can you do your own books? Sure.
Will they be good? Doubtful.
Can you spend your time better in another area? 100%.
If you are doing your own books, it's likely time to stop. We can help. We do small business bookkeeping, CFO coaching, and fractional CFO services.
If your books are bare bones and only there for you to comply with taxes, then you are missing out. You can comply with taxes and still pay way too much in taxes.
Focus on your strengths and have someone help you with your books.
Here’s to lower taxes, being able to make decisions off of accurate books, and being able to do the things you originally wanted to do when you started your business.
Disclaimer: We don’t provide tax advice or tax filing service. If you file your taxes yourself we can help by pointing out relevant tax information that may help reduce your tax obligation. We do recommend that if you need tax assistance that you seek a tax professional.
Cheers,
Lane
CONSULTANT + PARTNER
P.S.
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