23 Apr Back to Basics: What IS Bookkeeping?
How would you go about explaining bookkeeping to a six-year-old?
You might say that it’s keeping track of how many coins you put into your piggy bank and then how many you take out. While that is the basic premise of bookkeeping, it’s certainly more complex for businesses.
Businessdictionary.com simply defines bookkeeping this way: The systematic recording of financial aspects of business transactions in appropriate books of account.
The old-school method includes a lot of data entry, spreadsheets, and tedious administration. With a slew of new technologies, bookkeepers should be using software, processes, and automation to stay a step ahead of your finances every month.
What should you get every month from your bookkeeper?
Let’s start with the master document called the general ledger. This document keeps track of what you earn and what you spend. It includes sub-ledgers for earnings and payments (like accounts payable for money you owe and accounts receivable for money that’s owed to you).
Bookkeepers track numerous transactions, including but not limited to:
- Expense payments to suppliers
- Customer payments
- Loan payments
- Payroll expenses
- Travel expenses
- Monitoring asset depreciation
Every single financial transaction pertaining to the business is recorded on a day-to-day basis… or should be recorded on a daily basis, for those of you who have yet to wrangle that pile of receipts. 😉
Typically, bookkeepers track and report on four key financial statements:
- Income statement (or Profit & Loss) – shows all earnings and expenses over a certain time period
- Balance sheet – shows the company’s financial position at one specific point in time
- Cash flow statement – shows all cash (and cash equivalents) entering and leaving the business
- Statement of changes in equity – shows changes in shares, reserves, and retained earnings over a specified period of time
There are two methods of bookkeeping to track and produce these financial statements: single entry and double entry.
With single entry, transactions are recorded only once as either an expense or an earning. Assets and liabilities are recorded separately. If you have a simple business that doesn’t include inventory or equipment, this may work for you.
Double entry bookkeeping is more complex, but also more informative. All transactions are entered into a ledger twice, as both a debit and a credit. For example, if you own a burrito food truck, each time you sell a burrito, the sale is entered as a credit to your “cash” account and also as a debit to your “burrito supplies” account. Debits and credits entered in the ledger should always add up to zero.
So, what now?
Good bookkeeping is essential to the long term financial success of your business. It provides a literal look at where you stand financially at any given moment. It also tracks history and reveals trends that can provide a good indication of what the future might look like.
That said, the ways you can really benefit from bookkeeping don’t stop at the bookkeeping itself. The next step for you as a small business owner is to get proactive advice. The following 4 insights, provided by a trained CFO, can help you go well beyond the basics.
#1 — PROBLEM SOLVING
You want to make the best decisions for the growth of your business. It helps to have an experienced sounding board to bounce ideas off of and then transform those ideas into an actionable plan. Running a small business is complex and you’ll have a lot of questions about the best next step to take, even if you’re a seasoned, successful business owner.
You may come up with a lot of answers, but knowing the right one to act on is another matter. Thinking it may be time to hire, but not sure it makes sense financially yet? Wondering which direction to head next in your business? Having a bookkeeper that also provides CFO advisory services can help you figure out the right answers.
#2 — BUDGET CREATION & MANAGEMENT
Regardless of the size of your business, when you have a competent CFO developing an annual plan for your money, you’re able to accomplish specific budget goals. You’ll be better informed to make strategic decisions about financial challenges or opportunities that relate to both short-term and long-term activities.
Having a general sense of your profit and loss situation is all well and good, but do you know when you’re in danger of dipping into the red from one late payment? Budget management will help you have a handle on that.
#3 — CASH FLOW FORECASTING
You want to maximize your business outcomes wherever possible, and your CFO can help you do that by effectively navigating the tension between stability and outflow. You’ll be informed about cash gaps and surpluses before they even happen.
Understanding whether or not a business move is feasible in cold hard cash, rather than what may be an unrealistic profit and loss scenario, will help you minimize risk. On the flip side, if your forecasting shows a significant chunk of cash will be coming in a few months, knowing this beforehand allows you to decide if you want to reinvest it in your business to drive growth.
#4 — METRICS DASHBOARD
Imagine if you could clearly see relationships between the actions you take and the money you make. Setting up a dashboard to measure the right metrics that are relevant to your business opens the door to that understanding. With so many metrics to monitor, be sure to gauge those that matter most to your business.
Sure, standard financial metrics such as cash, AR, inventory, sales and profitability should be monitored. But maybe monitoring other metrics like Google analytics or website traffic can also offer important information for your business. Your CFO can help you build the right dashboard.
At the end of the day, you want to have peace of mind that someone is looking out for the future of your business so that you can focus on your customers, team members and improve operations for your company’s overall health and growth.
Curious what it might take for you to get better clarity on where your business stands with the 4 insights mentioned above? With our CFO Consulting & Advisory services, you have your own experienced sounding board to evaluate ideas and create strategic action plans to achieve your business goals. We’d love to talk with you about how we can help you achieve your vision for your business. Call us at (865) 212-0063 or get a price.