Bookkeeping Best Practices

What are bookkeeping best practices? Look, I get it. Bookkeeping can feel like this huge, overwhelmingly complicated thing that you're supposed to be doing, that you heard that you should be doing. And sometimes it feels so big that as business owners, we can feel like it's impossible for us to fully understand what that actually means. So kind of like not, not too different from the tax code, right? I've said this before in previous videos, but, you know, one of the things that we automatically commit to, whether we wanted to or not, when we start our own business, whether that's a business that we're trying to grow with big team and we're getting investors and growing it really big versus being an independent contractor, and just getting a 1099 from maybe one person paying us, both of those are businesses. And in either case, it is assumed that you accept the commitment to do your bookkeeping. Because without your bookkeeping, you're going to get in trouble with the IRS. They will eventually find you. And if there's no records to even figure out why you put whatever you did on the tax return, Boy, that's the F-word, fraud, and they do not like that very much at all. And the other reason is you do, you can get in trouble with yourself without bookkeeping records because you'll truly never know the actual picture of the health of your business. Should you stay in business? Are things going good? Are things going bad? Without records of what's going on, you won't be able to know that. There's no such thing as a gut manager when it comes to understanding the health of your business. I remember I worked with a client and he had a bunch— he had 3 restaurants and he had like a wholesale company that he created that primarily fed the food supply to his different restaurants. And he asked me to come in and clean up his books. And as I was getting into the books, I'm like, hey, you know, I'm curious, how are you funding all these losses? He's like, I know my business is profitable. I'm not losing money. Like, well, how do you know that? Like, I just can feel it in my gut. I know when things are profitable and when things aren't. In your gut? Really? That's— wow, that's pretty cool. It's like, yeah, I know that if I— when I buy a product, if it's in this right range in my head, in my gut, that I'm going to be profitable. Like, well, look, it's not my first rodeo, but based on your actual bank statements going on in real life, you're not making money. And see how your credit card balance has gone up month over month, year over year, and see how you had to take out this loan. Those are all indicators that you are actually not profitable. A lot of back and forth conversation ultimately. Well, I mean, let's just say it didn't work out well for him. He didn't want to take advice. He was— his gut said he was profitable. Well, his bank account, lenders, everyone disagreed. So that's why it's important to implement best practices. That's just one of the things that we'd like to avoid. So to help support you with best practices, I have 6 things that you can focus on to implement this into your business. And if you consistently do these things, all the other little elements of bookkeeping likely are going to fall into place. And if they don't fall into place, doing these 6 things are still going to put you a step ahead of everyone else. And you're going to notice the information you get from doing this is going to be super valuable. So these best practices apply whether you're coming from a standpoint of, I don't have any bookkeeping in place right now, to I am paying someone to do my bookkeeping, you still want to understand best practices. Because ultimately you can outsource the data entry of your bookkeeping. You can even outsource, like we provide a service where we sit down monthly or quarterly and we'll sit with the business owner and talk through, this is what we're seeing as accountants. But ultimately it's your business and you know the story behind the numbers. All we can do is ask the right questions. So number 1, and this is probably the most important one, so I like that it's number 1. Schedule your time to do the bookkeeping so you don't have to think about it at any other time. And you have to honor that appointment. You can't schedule over it. Bookkeeping is important that it becomes a system, and the only way to make it a system is if you have the recurring appointment happening on your schedule so that you're taking the time to do this. Now again, I'm not necessarily suggesting you have to be the one that does the bookkeeping, but there should be a schedule. You should know when you should— when you're going to be expecting the financial statements from your bookkeeper, because you should still have time on your schedule at a minimum to look at What is being done. So again, these best practices apply whether you're doing it yourself, whether you have an internal bookkeeper, or whether you're outsourcing it. These are best practices that your bookkeeping system should incorporate. So number one, schedule the time to do it. I know it sounds so silly and people hear it and like, yeah, yeah, yeah, but they don't do it. Like, if it's not scheduled, please take time today, the 10 seconds it takes to create a recurring appointment on your calendar and schedule it. Number 2, you have to be consistent in how you classify or categorize your transactions. It would almost be better to have no information than it would be to have a report that has completely incorrect information. Because in those cases, your gut is going to be better because the facts that you think are facts are completely incorrect. So be consistent in how you categorize your transactions. In most accounting softwares, this is actually pretty easy. You can go up and see who the vendor was, and you can then pull up a list and you can see how all of the previous vendor transactions were classified. And so then you can see if you're being consistent or not. Number 3, keep your personal and and business records separate. We have had clients come in and we're looking at their books and the top half is their business activity and then their bottom half are all their personal expenses, paying their mortgage, paying whatever, all their personal stuff, personal groceries. Not a good idea to have those in the same set of books. There's nothing wrong with wanting to keep track of your personal expenses if that's something that you do. Just make sure it's a separate file because we don't want your personal activity and cash flow to cloud or mess up the reality of your business activities. Because it's your business that's funding the personal, we want to be very clear on how that business is funding, for good or bad, your personal lifestyle. So keep them separate. Number 4, learn to understand and interpret your financial statements. So if you're coming from a standpoint of, I don't even know where to start with this, and so me telling you that this is the best practice isn't that helpful. So let me take it a step further. It is not as complicated as smart people who like to sound smart and want you to feel that they're smart. It's not as complicated as they make it seem. Understanding and interpreting your financial statements is simply the act of looking at trends and asking questions about those trends. So if you're starting from the standpoint of, I don't even know where to start with this, start there. All your bookkeeping systems will be able to let you run some sort of profit and loss statement by month. You can do it by month, you can do it by year, you can do it by quarter. When I'm looking at trends, I do prefer monthly, and then I like to compare that to a previous year. And you're literally just looking like, did my income go up? Did my income go down? And then why? Why? Whatever that was, why did it do that? My advertising went up. Did I get a bump in sales? You're literally just looking at your numbers, and you can see when a number is higher or lower. We all learned that in elementary school. So it doesn't have to be complicated. I know a lot of people out there will metrics this and metrics that, and I love metrics. I really do. And I think they're important. But that's one of those things that if you have these best practices in place, the metrics will eventually fall into place. So if you don't know where to start, start with the simple act of I'm gonna look at P&L by month, And I'm going to look at trends and I'm going to ask questions about the trends. Is this a good trend? Why is it a good trend? What am I doing to keep it good? Is this a bad trend? How do I break it? Did this number go up unexpectedly or did it go down unexpectedly? All of those— you look at the numbers, you can see a pattern, you then ask a question. That is number 4, learn and understand— learn to understand and interpret your financial statements. The metrics can fall into place later. Okay, number five: You do want to pay particular attention to cash flow management. Bookkeeping of itself is simply the act of recording, right? You're basically journaling your financial transactions. Cash flow management allows us to then maybe take those records and have a good system to make sure we don't run out of cash, or better yet, that cash is coming in in such a way that it enriches. And the lives of our team and ourselves. So if you know anything about us or have seen previous videos, we love the Profit First system. There is no better cash flow management system out there than Profit First. We strongly recommend it. It has been life-changing for our business. And at this point, millions of businesses across the globe. So we like it because it plugs on top of your bookkeeping records. It doesn't replace it, but it does allow us to make sure cash, which is the lifeblood of our business, is still pumping through. So that was number 5. Number 6, reconcile your books. Reconcile is just a fancy accounting term that says I'm going to match what happened in real life to what I have in my software, because again, your software has Is the journal. That's why they call them journal entries. I don't know if you knew that. Like, we just, like, we journal in life, you know, dear diary, I saw Susie today and she winked at me. Yay, thanks Susie. My heart pitter-pattered, whatever. We're doing journal entries, you know, dear diary, I spent $10 at Costco. Okay, that's in my accounting software. And then in real life, My bank statements tell me what happened in real life. My credit card statements tell me what happened in real life. My loan statements, all of those are real-life things. And all we're doing when we reconcile is we're saying, this happened in real life. I'm now just gonna check that that exists in my accounting software. And your accounting software, everyone that we've seen that predominantly used has a very easy, Method to reconcile the account. You click the button, I want to reconcile it, and then you just compare. Oh, I have this accounting in my software, I see that happened in real life. That allows you to identify if you've duplicated a transaction, meaning you put it in twice. We don't want that because that now means our accounting isn't accurate, or we missed a transaction. We see in our statement, hey, this happened in real life, but it's not showing up over here in my accounting software. Then we input it. It's really— we match it so that they 100% match each other. Now real life matches our financial statements, and now we can look at our record keeping. We can see a trend. We can ask questions because, of course, we're consistent in categorizing our transactions. Okay, so that was number 6. Our team has put together a checklist for you on recommended things to do weekly, monthly, quarterly, and annually when it comes to your bookkeeping. So click the link in the description below to download that. But it will help you with the scheduling. Like, well, I have— great, I scheduled these appointments, John. I did what you asked. I took the 10 seconds to put on my calendar. What do I actually do then? We're giving you the recommended activities to do, you know, on your weekly, monthly, quarterly type of— calendar items as you do your bookkeeping and implement best practices. You will see a difference as you have consistent bookkeeping done and you take time to analyze and understand your financial statements. If you found this valuable, please like, subscribe, share it with others. We want to keep small business in business, and the IRS is not interested in that. They really just want to take money from you. That's why we think they suck. Um, but we want to keep you in business, so please pass this on if you found it valuable, and we will see you next time.