Step 0: Have a Business
If you run a small business and/or are alive today then you probably know as well as anyone that a small business has to keep their books or… well no, there’s really no alternative here. I think the IRS made that clear somewhere in their 3.7 million words of tax code (in case you’re curious, yes… that’s the real number). Essentially, to summarize 3.7 million words into one sentence, I’d say it would sound something like this: “Kind citizens, please keep your books and pay your taxes. Much love, IRS”.
Now, I realize that this isn’t news to you; well, I hope this is not news to you. That’s because people generally understand that they have to keep their books when they run a small business. What people don’t know is how to manage this task and to do so efficiently and accurately. So that’s what we’re going to focus on in this article.
Here are 5 simple steps that you could implement immediately to better manage your company’s books!
Step 1: Have a QuickBooks Online Account
You can probably tell that I like to start with the fundamentals. But look, if you’re not a fan of QuickBooks and are curious to see what else is out there, that is entirely okay. I personally have used QuickBooks Online for both my own company and all my clients, and I view it as your best bet for a trusted, simple-to-use accounting software. As you consider which software you want to use, however, I will advise you to stay clear of the trap that says ‘this or that software will solve all my problems’. I think all too often we look to software as the solution to our problem, so we spend hours and hours on research and transition only to find ourselves with the same complications as before. Now, is software vitally important? Absolutely! But will leaving QuickBooks for another software because you can’t seem to keep QuickBooks updated solve all your problems? Sorry, but I don’t think that is your answer. Don’t fret though, we’re about to explore what could be your answer here in these next steps.
There you have it, the simplest 1st step you’ll ever have… well, are you now on QuickBooks Online?
Step 2: Have (or Be) a Bookkeeper
Okay, you have a business and you have a QuickBooks Online account. Fantastic! Now, it’s time to settle a very important issue. Are you the best person to do the bookkeeping for your company? As entrepreneurs, every aspect of our businesses seems to always need our full attention. It can be difficult to really do all these tasks well and keep the business (and our lives) afloat. Thus, we learn to distribute our attention properly and diligently delegate the rest. But the key is to delegate the right tasks (and to the right people). For some, this may mean that they definitely need to delegate the books to someone else. Perhaps details and numbers aren’t your forte or you simply do not have the time at this point in your business, so it makes perfect sense to delegate this task to the proper hands. For others, they may have the attention to detail and availability necessary to handle this task themselves, and it therefore makes sense for them to run with it. Take some time to consider which would be best for you.
For the sake of this article, I want to focus on a few key tools and tricks for those that decide to do their small business accounting themselves. However, if you know that you don’t have the attention to detail or the availability to really succeed in this area, I also have a solution for you. My company, Clean Finances, exists because we’ve realized that there is a serious need for a reliable and simple solution when it comes to bookkeepers. We actually implement the steps that I talk about here for our clients so that they are able to run their business freely and understand it fully. So, if you’re in this camp and need a bookkeeper solution, definitely reach out and see how we could partner with your business in this area.
And that’s step 2! So, what will it be… will you have (or be) a bookkeeper?
Step 3: Have a Structure
Alright, you have all the tools you need: a business, a QuickBooks Online account, and a bookkeeper. Here’s where we move from the tools to the tricks. From the mouth of Samuel L. Jackson, it’s time to “hold onto your butts”.
When it comes to structure, I want to focus on two parts: (1) do you have the appropriate Chart of Accounts set up and (2) do you have the appropriate classes? Let’s tackle these one by one.
Chart of Accounts
This is where you take a step back and evaluate if you have the best Chart of Accounts for your company. To look into this, take a look at your Profit & Loss report for the last six months. Start at the top and read down your different income and expense lines. Do they flow? Do they make sense to your business model? Do you clearly see the different ways your company has made and spent money, or is it fuzzier and more complicated to read and comprehend? Is it too detailed and perhaps should be simplified? Also, do you want to possibly include account numbers and thus force a certain order to your income and expenses? These are the types of questions you want to consider in this step. And, while it may seem like a lot, this step done correctly could result in the crucial boost from just keeping your books to understanding your finances.
Also, if you are in the situation where you have just created your QuickBooks account, then this step will be even more important (and convenient) for you! You actually have the luxury here to completely dream up how you would want to see your income and expenses laid out, and you have a blank slate to create that structure before all the transactions start to fill out the space.
Last point here, before you start to merge and delete certain accounts, you’ll first want to have the finished plan written out in Excel. This is crucial, so that you know the end goal before you start messing with your QuickBooks accounts. Trust me, this will save you a ton of headaches.
The second piece to your structure will be your classes, which are the different ‘divisions’ or ‘departments’ in your company for which you want to clearly track both the income and expenses and thus see the related balance or net income. Picture this as the columns in your Excel spreadsheet. Now, this piece is not always applicable and should only be used when there’s a clear and definite need to track separate classes. Keep your bookkeeping life simple, and don’t use classes unless it’s necessary because of your business model. However, if your particular business does operate off of different ‘divisions’ or ‘departments’, then now would be the time to consider what these different classes should be in QuickBooks. And remember, only create a class for those situations that you’ll need to track the balance on with both dedicated income and expenses.
Step 4: Have a Story
Are you all set with your structure? Great, time to have a story. What I mean here is that you want to be able to look at your reports and know that the story they tell is both (1) up-to-date and (2) accurate. Starting with up-to-date… If you’re behind on your books a few months, this is where you’ll want to carve out the time to play catch up. This would also be a great time to ensure that you’ve connected your different bank and credit card accounts to QuickBooks. This feature is absolutely important for you to easily be able to manage the books. The transactions are all pulled into the system and you then ‘code’ them in one by one. Once you have all the transactions coded into the system, you’ll have a story. But here’s where you need to verify its accuracy: yup, it’s time to reconcile. Now, if reconciliations are new to you, don’t worry – while they can sometimes be complex, they’re usually quite straightforward. You simply need to start back with each account since it was last reconciled and reconcile one month at a time to make sure your books accurately reflect and match up with your bank statement. As you go through this process, you’ll start to notice certain transactions that may have been entered into the system twice, or others that may not have been entered at all. Clean up these transactions as you go, and your books will become more and more accurate. This process is one to take slowly and make sure you do carefully, but is also the key to ensure that your books tell an accurate story (which of course is a pretty important piece on all this).
Step 5: Have a System
By this point, you have it all updated with your structure and story. Congratulations on the hard work! It’s time to implement the final step. Now that your books are all cleaned up, it is time to keep them that way as you move forward. In other words, have a system. What I really mean here is to commit to (1) a time slot that you will set aside each week to update your books and (2) one day a month that you will set aside to reconcile, review, and reconsider. Let’s start with the 1st point; this is crucial (but simple). All I want you to do here is to pick a time slot (the amount of time will vary based on your books, of course) each week and mark your calendar with that slot. This is when you will stop what you’re doing and update your books each week. To make sure you actually do this, I would suggest either Monday mornings or Friday afternoons so that it can be out of your way from the rest of your week. So, be sure to mark your calendars and stick to this one! The 2nd point here is to set a day each month to reconcile, review, and reconsider. This can actually be the same time slot as your weekly review, but only on the first week of each month. This essentially is a way for you to ensure that your books remain accurate as they tell your business’ story (reconcile), allow you the time to review that story and truly understand it (review) as well as make any updates to your structure that you may think would contribute to the clarity of the story (reconsider). If you stick to this weekly and monthly review system, your books will not only be kept up-to-date but will more importantly continue to be improved upon so that you can add clarity and value to the entire process.
And there you have it! I hope that these five steps have helped to add value to you and your business. If you have any questions, we are Clean Finances and would love to talk with you. Now you’re all set to manage your company’s books. Looks like it’s time to get to work!