Why Clean Bookkeeping Is Essential for Small Business Success

Hello everyone. Welcome to another edition of the Empowering Entrepreneurs Podcast. I'm Glenn Harper.

Julie Smith. Go on, Julie. Well, you know, we have such an interesting topic today.

Oh, that we do. Or something that we don't find interesting, or most

people don't find interesting, but— You non-accountants. We're here to deep

dive into it. Well, I can't wait to start. So I think,

you know, what we've been seeing, a trend we've been seeing is people are

not calling for taxes or things like that. People are calling and

saying, What about bookkeeping? And the

entrepreneurs, the companies that we're calling, it's just an interesting

dynamic because something to us that's so second nature is

like, why are people needing this?

Luca Pacioli's hanging out with his buddy Leonardo da Vinci, and they're

trying to figure out the math and all the cool things that they're

doing. And they're like, you know, we gotta come up with a system. To account

for money going in and money going out so we know if we're making any

money. So Luca, the godfather of accounting, basically invented

the double-entry bookkeeping system to account for money in

and money out. And so that is the start of

how do we measure how our company's doing.

And so effectively, the definitions are very important when you run a

business of who does what and how do we do it. And one of the

first things is, is every company is probably going to have money coming

in, we hope, and probably going to have money going out more than likely.

And there's 2 pieces to that. One side is you're trying to

figure out, well, as a business, where's the money coming from and where's

it going? And so the bookkeeping is a function of

taking money in and money out and putting it in categories to

summarize those transactions. So if you have

Staples expense and you're bringing in some Amazon

things that are going for the office and you're bringing some coffee for the office,

you'd probably put that all in office supplies. So those bookkeeping entries

for office supplies goes into office supply category.

That's bookkeeping, is putting it to there. Comes out of your cash account and goes

into that expense account. I hope into that expense account is some cream because for

whatever reason, we just can't seem to get cream in our coffee for Starbucks.

Swinging and missing on the coffee lately, but they'll get it together. They'll get it

together. So you might have to expense that, right? Yes. Well, that's another one. So

where do you put that? So this is an example of money goes out of

your checkbook and goes somewhere, and bookkeeping is how, where do you put it? So

that's the first step to do that. And then it's also when you are billing

a customer and want to collect that money, well, what customer did it come from?

What kind of services did you do? Was it consulting? Was it selling a product?

Was it a service? Could be anything, right? And you can break

that down ad nauseam however you want. So somebody in your

organization, usually if you're a small entrepreneur, it's going to be yourself. It

might be a spouse, it might be a family friend, it might be just a

local bookkeeper or somebody that's just like, hey, just put these things somewhere and

help us account for this. That's step 1. So you put it

all in there, but bookkeeping by definition is like, hey, I

think it goes here. 'Cause most people aren't trained of how to do that. So

do their best guesstimate of where to put that. The next thing you have to

do, that's a bookkeeper's job is to kind of do that. And then you have

this thing we call reconciling, which it says, hey, I

wrote 25 checks out of my checking account and I made

5 deposits. Well, the bank statement says, here's what happened.

And our QuickBooks is usually a good program that you can use. It's not the

best, but it's the best one out there for people that want to do what

we want to do. QuickBooks Online works really well for this. There's multiple programs,

but that's probably the gorilla in the room that does this. And so

you say, well, here's the data I put in QuickBooks. Here's what the bank said

I did. The reconciliation is to make sure that what the bank

says that the bank did matches to what we said

we did in QuickBooks. And anything that doesn't match up, we

have to go, oh, that's why. The check didn't clear the bank yet. Or, oh,

the bank charged me a service charge I didn't know about. And you put those

things together and you reconcile to say that's a good balance in that

account. So that brings me to another question is a lot of time entrepreneurs

start out, or, you know, even we've seen established companies, they have

a part-time bookkeeper or what you said is like a family friend doing it.

How do you know at some point, like, what does that look like from a

bookkeeper kind of maybe doing that role to maybe

transition, transitioning to work with like a firm like ours that

really specializes in what, So there's a couple things to

that. So the software has evolved over the years, um,

to really help. Before, we had to do it by hand.

Double-entry bookkeeping was terrible. For all these that you can remember, it was no— it

was horrible. You must have been back with Luca, huh? Way back. Well, we had

cool clothes back then, you know, no air conditioning was cool. But now the,

the accounting programs kind of do that for you. So it's

about— the hard part with bookkeeping is setting up the system. Setting up your

QuickBooks to know what accounts do I want to have

for my expenses? What accounts do I want to have to describe my

income? So setting it up is the hardest part.

Once you can set it up and know what to do, which is really hard

for somebody to do who doesn't do that all day long because they just don't

know. Should I have an office expense? Should I have telephone expense? Should I have

fax expense? Like there's all there's infinity. Options.

What does a nice high and tight, like little tiny financial statement that

gives you what you want to know without making it 500 pages long? Because

then it's just too big. So setting up is important. So a lot of people

will do this when they first start out. They'll do their best effort at it,

and they do. It's okay. They're doing their best effort, but it's probably not

going to be the iteration that they ultimately want. But it's a great starting point.

So they'll set it up. The bookkeeper will set up, they'll do what they do,

they'll reconcile it. But at the end of the— what ends up happening is most

people don't know which account it goes in, or

they might be stuck on how to reconcile. Like, where's this transaction?

I don't know what to do with it. I can't figure it out. So sometimes

the bookkeepers can handle that and do a great job on it. And sometimes they

just like, hey, that's beyond my pay grade. And that's when you'd bring in the

accountant. And the accountant says, hey, hold my beer, I got this. You

put this here, you do that, you do this, you do this, this goes here

and this happens there. Authority in the room and it just gets done. And the

bookkeeper goes, wow, that's great. So we just kind of take it that final mile

of service and get it squared away. Well, I think, you know, just thinking about

things, of course I want to know how to write off my clothes and shoes

and all those things. And those don't usually pass the sniff test over here. But

I think also what happens too is sometimes you have, um, someone

particularly doing that And you come to someplace like Harper and

you're able, the person's able to kind of see, okay, this is what all the

accounting looks like, but they can also kind of

forecast and be able to do some of that advisory portion of it with using

that knowledge to be able to say, hey, this actually needs to go here. This

has to go here. I think for the best outcome. Right?

Right. So what happens is the people are looking

for results. But they don't know what steps you

have to put in to get those results. And the results ultimately are,

if you don't have, again, in the bookkeeping accounting world,

there's really 2 financial statements that everybody wants to see. And this is your income

statement. Some people call it a profit and loss. And it's basically a

statement that says, in a period of time, here's how much money I

brought in, here are all my expenses, and here's my profit. How much money

did I make? Okay? That's one statement. And another statement that's very

helpful is the balance sheet. And the balance sheet is at a particular date,

a specific date. As of this date, we have

what we own, which are assets. Here's what we owe,

which are the liabilities, the people that we owe money to. And the difference

between that is your equity, like how much you're worth. So if you have $100

in cash and you owe $75 for a loan,

you're worth $25. If you have $100 in cash and you have

a $200 loan, you're negative $100. Okay?

So the goal of the bookkeeping is to

ultimately create an income statement and a balance

sheet so you can then measure how your

company's doing. People want to measure how they're doing

before they have good financial statements. And that never works because you're using bad

data to make Make decisions. So if you don't have a good

bookkeeper that's doing your books every single month,

closing them out, which means reconcile, make sure everything's in the right category,

and saying, hey, this is what really happened. This is the Bible. This

is Luca's accounting right here. If you can get that,

then you can hand it to the next step. And usually that's going to be

an accountant, or if you have a little bit bigger company, you might have a

controller. Somebody that can sometimes interpret the

statements and go, yeah, this looks good, and they can

analyze them a little bit better. And if you don't have that control, then you

would go to probably your external CPA who's probably versed in

this, if this is what they do, and they will help advise you, hey, do

your financial statements look like good? And when I say

good, meaning does everything look like it's in the right place? Do you see any

trends? Hey, why is your rent expense tripled? Oh,

you put something in there that shouldn't be in there. Oh, you had CAM charges

this month that you didn't have before. Like, there's always a reason why the numbers

change. And especially a small business, we really can't control our

revenue. It is what it is. If we're successful, we bring in money. If we're

not, we don't. But your expenses should pretty be spot on every month.

Most businesses, it's pretty level. So when you look at

Say rent expense for January, February, March, April, May, June,

it should be the same amount or very similar. And if it's off, it's easy

to see what that is. But if you don't put the things in there, reconcile

it, and you're trying to analyze it, you're going to make assumptions on

bad numbers and you're going to make decisions and it's going to really mess up

your company because you're making bad decisions. So you got to get the bookkeeping

set up, this accounting system set up. You've got to have a bookkeeper

that's going to enter that data or not. And then the accountant kind of goes

and reviews it from that lens because

most people, most entrepreneurs, again, a smaller size

company, you're not going to have 500 accountants on

staff, CPAs, and, you know, 30 attorneys on staff to figure out what you're

doing. You're going to probably do this stuff yourself. So you're going to have one

financial statement that you're not only going to look at how your company's performing, but

we take that statement, we also incorporate it into your tax planning.

So when we say, oh, this is how much money you made, what does

that look like on your tax return? So we can plan out how much tax

you might owe. And bigger companies, they do all kinds of

crazy stuff to make these adjustments. But most small businesses, we don't have to do

that. So we try to make that financial statement reflect the

company, but also what it will look like on a taxable income standpoint. Okay.

So what do you see? And I think you kind of alluded to it, but

what do you see? What are, what's one or two big mistakes that you

see come through the door of people who maybe You know,

haven't quite made the jump to hiring a CPA or getting

outside reflection on, on that bookkeeping. It's the same thing

when I practice my dentistry at home on myself, right? I can

probably get close, but at the end of the day, I'm probably not going to

do it as well as the dentist is going to do. So when you have

somebody who wants to do their books, but they just didn't, they don't

know how to set it up right, and they don't know really how to do

it, They're just not going to get the right result. So, when we see

clients come in the door, it's more like, oh my God, you guys did a

great effort, but you just got to tweak this and this and this. And then

they're like, oh my gosh, nobody ever told me. And they're like, yeah, you set

it up like this. Now you do it like this. Great. You can have your

internal bookkeeper do those things. We just come in over the top and do the

accounting side. It makes it easy. But most people don't set it up right and

they don't understand what it is that the statement, the financial statements are

supposed to tell you for your company. So let's say a client comes

into Harper and you sit down with them and, you know, you decide you're going

to do, you know, A to Z for them. What does kind of that transition

of that bookkeeping look like for a potential client moving to a client?

So it's funny, the size of the company dictates what's going to happen.

And again, most of the time the owner is doing their own

books. Because that's just the cheap way. Is that a red flag when someone comes

in? No, it's like it would be a red flag for me. As an owner,

you don't have the resources to pay somebody, even though you don't realize that then

what you would pay would save you gajillions in time. But you don't think

like that because you're trying to be on a tight budget. You're trying to do

everything yourself. This is one of the things that an owner will do. And so

they're probably trying to do it themselves. Then eventually they're like, I can't do this.

I'm going to hire it out. Well, if they have A bad accounting

process, it's not reconciled properly, they

bring in a bookkeeper to then take over and nobody ever addresses that elephant

in the room. Well, they're just doing bad stuff going forward. So then here we

are, the problem continues. So if you

get lucky and you're like, man, I don't want to do this anymore, do I

need a bookkeeper or do I need an accountant? Well, you probably need the

accountant first To kind of see what's going on.

Sometimes as an accountant, we can do those bookkeeping functions

mixed with the accounting functions together. So you don't really need a

bookkeeper anymore. But sometimes you have so many transactions, you have

a lot of day-to-day things that goes on, you should have a bookkeeper. There's no

reason to pay an external CPA to do that, an external accountant. So

we will work with you either way. We can take over doing both of those

things or we can work with your bookkeeper inside and teach them what they need

to do. Because if they don't know, it's, again,

they're putting everything in, the owner's looking at it, but it's not giving them, they

have no, it's not been reconciled and tied out to what they're looking at is

just bogus. It doesn't tell them anything. So if someone's Googling

bookkeeping, bookkeeping services, accounting,

what's one thing you would want everyone to know?

If you think your books are messed up, they are. What

if I think they're perfect? They're still messed up. As

a general rule, until you've handed off, just like

whatever you do for a living, you're a doctor, a dentist, a financial advisor,

everybody's going to do their thing the best that they know how to do, but

it probably isn't going to be as good as if you had a professional look

at it. Even if it's just a one time to take a look at what

you have and say, oh my gosh, You're right, it is perfect. Very rare, but

it does sometimes happen. Or it'd be like, you know, you're close, or, oh

my gosh, we have to scrap this whole thing and build a new one 'cause

this is so messed up. And we've had clients A to Z on

that. So it just depends. So it's worth your while if you think

things are messed up, you're just not sure, takes a while to get your books

closed out, you look at the statements, it just doesn't make sense, your bookkeeper can't

really tell you anything, Probably you need somebody to come in and just do a

deep dive and kind of fix it. And then

you either decide you want them to keep training your bookkeeper, which is perfectly fine,

we do that all the time, or just like, you know what, let's just move

to the professional to kind of handle that. It ends up there's a

cost benefit for everything for a business owner, right? Sometimes it's more cost

effective to have a bookkeeper do all these transactions and the accountant just review it.

Sometimes it's more cost-effective the accountant just do it. Just depends on your

circumstances. And sometimes if you're big enough, you'll be lucky enough to have

accounts payable person, accounts receivable person, a controller,

and maybe even a CFO. And if you don't have all those, you're not big

enough to have that. The CPA at Harper, that's kind of our role is to

be that controller, CFO,

external CPA, be on your board of directors to help advise you on those things.

Because now we have good information because we've trained your people how to do that

to the extent that they can. So obviously I hear things

differently, but something I think that I, I heard though is

bookkeeping is the foundation and you have to have a good

foundation to have a good, to be able to advise someone, to

be able to run a good business, to be able to have a really good,

I don't wanna say outcome on your tax return, 'cause that business tax return's probably

gonna affect your personal tax return. And so it's just this, trickle-down effect that if

you don't get this done, probably the rest of your business is in a

little bit of a disarray. And so it's really, really important to

get that bookkeeping function under control. I, I can't believe you actually understood what I

said. This is a miracle. Everybody write this down. But yes, the

bookkeeping function, and included in the bookkeeping function is the setup of the

accounting process in the QuickBooks, say QuickBooks Online, chart

of accounts, everything. If you set it up right, Do your bookkeeping. Most

people don't have that. If you can just get that, at least we can get

to the next step. But that exactly, I can't believe you understood it.

You know, every now and then I can get it. And if you understand it,

everybody else will. Hey, I don't know about that. Any other parting words again in

regards to that bookkeeping or what entrepreneurs need

to know in regards to that and to move forward with that? I would

say that if you are gonna run a business and you're gonna say, I have

a budget line item, to pay my rent. I have a budget line item

to pay my, I got to pay some office

expense. I got a budget line item to pay my telephone. I got to pay

my Wi-Fi. Put a budget line item in there to do your

bookkeeping, accounting, whatever, at the bare minimum.

Because if you don't have that, you can't tell what's happening. So

make it a priority. It is

so far so highly unlikely In fact, I've never seen

it happen where if you don't, if you don't do your books properly,

it is impossible to tell how your business is doing. All right, you may be

making gajillions of money and you're just spending like a drunken sailor, and that's fine,

but you have no idea how you're actually performing, all your metrics. You don't know

if you're making money, it's great. If you start losing money, now you're up against

the wall. So bookkeeping, accounting for your money, and that is the

number one priority. After that, we can then building blocks on

top of that to interpret that data, do some tax planning, do some advisory

work, and help you achieve your goals. But if you don't have good numbers, it's

really hard to do any of those things. Bookkeeping sounds like the health of your

firm. It's the start. It's the first step. So if you haven't, if you don't,

if you feel like, hey, my books are just out of whack, I'm looking at

my income statement and I can't, that can't be right. My bank account doesn't

look right. How come I can't get anything done here? And it's 3

months after the month end and I still don't have my financials. You

probably need to look at that. Some good information that maybe I understood.

I don't know. This is crazy. So, hopefully that's helpful.

And so, again, what's great is you might already have that. Just bring in a

professional to take a look at it and help you with it and make sure

it's okay and put their blessing on it, if you will. And Luca would be

very proud of you if you can get this to work right. If you're like,

don't have any of it, Again, bring in the professional to help you set it

up. They'll help you evaluate if you can do it in-house, if you need to

have somebody just coach you with it, doesn't matter. As an accountant, we don't care

who does it, we just need it done, right? Somebody's got to do it. So

if you can bring in that professional help, that will be helpful on that. And

once that gets done, then you can see how your business is going, but you

got to do step 1. So hopefully that's helpful.

Another positive rendition of the Empowering Entrepreneurs Podcast. I'm Glenn Harper.

Julie Smith.