Here we go…part 2! We’ve talked about why accounting method matters and why I recommend accrual basis for my clients. Now I want to talk about actually DOING the accounting. Journal entries are the nuts and bolts of your financial data. Knowing they’re important doesn’t make them any less tedious. I love numbers…and even I hate the monotony of recording journal entries. I can pretty much guarantee you aren’t loving this part either. I am also pretty sure you think I’m crazy to say that your monthly accounting process can get you more time and money because it seems to do the opposite right now. I want to talk about how to make it worth your time or money…because let’s face it, you’re either figuring this out yourself or you’re paying someone else to do it for you. Not doing it is not an option.
We are going to stop keeping a shoe box full of receipts until taxes are due!
What does it mean?
What do all of these words I’m using mean? A journal entry is the transaction recorded when something financial happens in the business (sale, purchase, payment, etc.). The journal entry is how we keep track of business activities. Structurally, all journal entries have a date, account being debited, account being credited, and amounts. Journal entries have to “balance”. The total amount being debited must equal the amount being credited. This means there are at least 2 lines of data in every journal entry. Ideally, each journal entry should also include the supporting documents for that transaction (receipt, invoice, calculation spreadsheet etc.).
I’m actually not going to rehash the explanation of debits and credits here but you can find it on the cheat sheet. The act of debiting or crediting essentially adds or takes away from an account balance. What I want to focus on for this article is the accounts themselves. The list of accounts you use to track your financial information is called a chart of accounts.
Why do you care?
Similar to our discussion of accounting method, the biggest reason you should care about the level of detail in your chart of accounts and journal entries is because it greatly impacts the information available to you for financial analysis.
A detailed chart of accounts gives us the ability to slice and dice the information in a way that make sense for your business.
There are some basic categories when setting up a chart of accounts (assets, liabilities, equity, revenue, and expense) but the specific accounts should reflect your business and your goals. If you’re working on identifying the most profitable service offering or product, you need a chart of accounts that allows you to track the revenues and expenses by offering or product. Yes, even service offerings have expenses. Are you tracking your marketing efforts…advertising, website automation/tools, meals and entertainment with potential clients or referral partners? Do you know which marketing tool is the most cost effective? If you have your chart of accounts setup correctly, the answer should be a pretty easy “yes”.
It’s not just about the type of information available. It’s important to have that information timely. Imagine going through the entire year without realizing you were losing money on a specific product or service. I know keeping up with all of it can be a pain in the butt and it’s not how you want to spend your time. The alternative means you make business decisions on potentially bad information because it is outdated or incomplete.
The best way to make sure the information stays complete and reliable on a timely basis is to perform account reconciliations. Specifically, when you reconcile your cash accounts and notice the money in the bank account doesn’t match the journal entries you recorded…there is something somewhere.
How does it work?
How do you balance the value of the detailed information with the time and money to maintain it? I’ve already said some of this in the “why” of this article but I want to summarize it so you have a clear and concise plan of attack. Step by step, this is how we make it worth the time and/or money without spending more than we need.
1. USE BUSINESS ONLY BANK ACCOUNTS
Make sure you have your bank accounts setup for business transactions only. When you stop mixing business with personal you take away an entire step (figuring out what is business or not). I could go into this further and talk about the best bank account structure (revenue, operating expense, profit, and taxes) but I’ll save that for another article.
2. SETUP THE SIMPLEST CHART OF ACCOUNTS TO MIRROR YOUR GOALS
Having a detailed chart of accounts is important but you can have too much of a good thing. Most small businesses will have a list of 30-50 accounts. If you have more than 50 accounts you might need to re-evaluate why. These accounts should be structured in a way that gives you answers to the questions you have about your business. One of my favorite steps when onboarding a new client is talking through their business challenges and goals to come up with the right set of accounts that helps them find solutions.
3. TALK TO A BOOKKEEPER OR ACCOUNTANT
I don’t mean this as a sales pitch. Numbers are not your “zone of genius”. You have to assess the cost of a bookkeeper or accountant against the time it would take you to figure it out. It’s not just about making basic journal entries. A good bookkeeper or accountant will know how to use the system to its maximum capacity. For example, did you know you can track different sales products/services within the same account? What takes you 2-3 hours to figure out might only take a bookkeeper 1 hour to get it done. What else could you have done with that hour? Every small business owner I work with reaps the benefits of a bookkeeper or accountant. Your time is worth so much more than you pay to get it done.
4. PICK TWO DAYS A MONTH
If you choose to DIY your bookkeeping, pick two days a month to dedicate to paying bills, allocating cash, recording your journal entries, and reconciling cash. Don’t wait until the end of the quarter or the end of the year to know where your business finances stand. If this takes you more than two days, seriously reconsider step 3.
5. RECONCILE YOUR CASH
Ideally, you want to reconcile all of your balance sheet accounts (assets, liabilities, and equity). It really is the best way to make sure your records are complete. If you’re short on time and doing your own accounting, the bare minimum you should complete is your cash reconciliations. Not sure what this is or how to do it? Don’t worry. I’m going to go into more detail on cash reconciliations next week so stay tuned. The short version is make sure the balance in your bank account(s) agrees to the balance your bookkeeping records show for that bank account.
You’ve got this!
If you don’t… I’m always here to help. Schedule a coffee chat to learn how I do all of this and more for my clients!