What A Bookkeeper Does For You
Almost inevitably, the question of “Why should I hire a bookkeeper?” is followed by, “What do you even do for my business?” Here we explain what it is a bookkeeper actually does and how our job can help you improve your business.
The most common misconception about bookkeepers is that the vast majority of their time is spent doing data entry. This is no longer true. The best way for data entry to happen is that the business owner (or employee spending the money) does the data entry when they make the purchases, using her cell phone to fill out a quick expense report. For repeating bills and income, accounting software now does the bulk of the data entry after the bookkeeper or business owner sets up the repeating transaction. Today’s bookkeeper is focused less on data entry and more on classification and analysis.
However, there is still plenty of data entry a bookkeeper will do:
- When setting up a business
- When recording incidental transactions
- When setting up those repeating transfers.
If you do your own bookkeeping, chances are good that you use cash-based accounting. You pay the bill when it is due and apply the payment to that month only. What that means is, say you pay your yearly insurance premium in a lump sum in January. That month looks like it was horribly unprofitable, simply because it had a huge expense. Worse, the other months look more profitable than they really are because they didn’t pay their fair share of the insurance bill.
It is difficult to get an accurate picture of how your business is actually doing with cash-based accounting. Professional bookkeepers, on the other hand, use accrual-based accounting. We divide that insurance payment across all the months that are covered, so that you can tell which months are actually profitable, regardless of when the big purchases were made. Your bookkeeper would enter big payments like new equipment or your yearly liability insurance in a manner that truly reflects the health of your business. They would also keep track of what customers still owe you money and keep track of credit card balances so that you know what money is okay to spend, and which money is already earmarked for future purchases.
Reconciliation is also known as balancing the checkbook. It means going through bank statements and credit card statements and comparing them to the company’s own records. Reconciliation is necessary for two reasons. First, it double-checks the business’s records. It’s sometimes surprising to discover what purchase was not recorded. Second, it’s a necessary security precaution. If a merchant has accidentally charged you twice for the same purchase, this is how you find out about it. Reconciliation will also reveal identity thieves who could be writing fraudulent checks against your account. In both cases, discovering the errors as quickly as possible gives you a greater chance of recovering your money and bringing perpetrators to justice.
Classification of transactions into the proper accounts is the foundation of generating solid financial reports. “Accounts” in this instance doesn’t refer to bank accounts, it refers to the internal bookkeeping accounts. It means that, for instance, purchase X is properly recorded as a travel expense, while purchase Y is a cost of goods sold expense. The bookkeeper makes the classification when they reconcile the bank accounts, and when they set up non-cash transactions, such as allocating insurance to the proper time period.
Preparing Financial Statements
Based on the correct classifications of transactions (see how each step is based on the others?), today’s bookkeepers are able to generate the most customized and helpful reports for the business owner. We can exclude certain transactions to see what the income statement would have looked like if you had made a certain purchase. We can generate an anticipated statement of cash flows to show your company’s expected financial position two months from now, based on historical patterns.
Analyzing your business
The problem with financial reports is that they can be difficult to read. Good news–that’s not your job! A professional bookkeeper is not only good at making these reports, as Dr. Chandra Bhansali says in his recent article for CPA Practice Advisor, they are also good at explaining what they mean to those who have been trained to, for instance, run a restaurant’s front end, but not necessarily trained to read a balance sheet. One-on-one question and answer sessions with your bookkeeper are part of the package.
Based on the analysis of the financial reports, the business owner can get a very clear picture of the company’s financial position. The next step is working with the bookkeeper to set financial goals for the company. Are you considering moving into a larger space? We can tell you how much more product you will need to sell per month in order to cover the increased rent. Want to save up for an equipment upgrade? We can work with you to set aside a certain amount each month until you can afford it. On top of that, we can compare your finances to the averages of other businesses of a similar size, and give you a better picture of how you’re doing.
Why do you need a bookkeeper? Because we know what we’re doing. Chances are that the bookkeeping we will do for you is more sophisticated than the bookkeeping you are doing for yourself, and that this increased sophistication will give you a clearer grasp of where you are as a company, and what steps you need to take in order to obtain your financial goals. Take a chance and hire a professional bookkeeper for a few months, and see for yourself if it makes a difference!