A Contractor’s Guide
Breaking Down Bookkeeping
Bookkeeping – the word itself is a little intimidating. To be the keeper of books, what does it even mean?
In the world of bookkeeping, records and attention to detail are everything. Recording your revenue and expenses will put you on track to understanding profit and loss. These are two critical accounting terms anyone running a business should be familiar with.
It doesn’t matter how you choose to keep your books. You can do it by hand, on a computer, or through the help of a third-party service provider. Regardless of how you do it, your focus should be on finding a way to do it right. Doing it right means keeping the books for your business up to date no matter what. Your books should be accurate and in compliance with IRS requirements.
How you choose to keep your books often depends on the type and size of business you’re running. A “mom-and-pop” small contracting business might find success just running a hand ledger for some time. A contracting business that is working with a growing number of customers might want to think bigger and go digital.
If you have no prior accounting experience, there is great value in live or online training courses and some serious research. While the IRS doesn’t require businesses have a bank account, the IRS does require that you report every bit of your income. One wrong entry in your books can stay with you all year and surprise you at tax time.
The concept of bookkeeping is rather simple, it’s the recording of certain details that tends to trip people up. Every transaction you make under your business’ name carries with it important information that you need to plug into your ledger. Recording that you spent seventy dollars on paint isn’t helpful information if you’re unsure which project it was for. Additionally, if you’re not breaking a project’s expenses down into line items then you really can’t accurately track your costs. This may mean you won’t really understand the profit for that job, and even worse, you may repeat mistakes in your next bid.
A spreadsheet can be a great way to start your books and manage simple bookkeeping. This is especially true if your company is just starting off or has very few transactions. Begin slowly and take some time to understand how each piece (transaction, expense, income) affects the whole (profit and loss). Google is your friend!
Keep your books safe by storing information online and backing up your files. Because the cloud is great for filing receipts and other non-sensitive items, this is a popular option. However, some experts encourage small businesses to make use of online programs to store their financial records. Most of all, be sure you can access these records from any remote device with a safe and secure internet connection.
If you do go the route of hiring a third-party bookkeeper or accounting service (Bookkeepers and accountants aren’t the same! Read how they’re different), there are some precautionary steps you should take. Most third-party service providers will require access to your bank account information to most effectively manage your books. This means that while your business account is adding revenue or paying out expenses, the service provider can keep your books in real time. They categorize each deposit and each expense to the correct project and the correct revenue or expense line in your chart of accounts.
However, under no circumstances should you allow your accounting service provider to manage your money, trusted or not. Generally speaking, it’s not their expertise to help you make financial decisions or decide on purchases, no matter how large or small. Some service providers will have the capability to deliver invoices, receive payments, and pay bills on your behalf. But you shouldn’t expect these service providers to run your business for you or make decisions on your behalf. Your team should of course include a trusted accounting service provider for the daily management of your books. Similarly, a CPA for your annual tax planning and tax return filing, and a financial adviser to help you with financial planning and financial strategy.
Finding Your Solution
No matter who you assign your bookkeeping to, take care to do your part by making transactions move through the process quickly and efficiently:
• Avoid paying for expenses with cash
• Ensure that your receipts include the job for which you made the expense, and move each receipt quickly into a filing system or cloud storage so they don’t get lost.
• Don’t leave checks lying around uncashed; use a mobile app or make regular bank visits instead
• Don’t rely on personal draws and don’t use your personal accounts for business expenditures (This is important for many reasons – read more about it here)
Bookkeeping is a skill, but it is a skill you can learn. It will take you some time to get comfortable with bookkeeping and to do it well. So, research your options. Decide whether you want to take this challenge on or if outsourcing your bookkeeping is the best use of your time and focus. Be honest with yourself about the effort and your potential time and management constraints.
The end goal is to have an accurate, up-to-date and useful set of books that give you the confidence of knowing how your business is performing and where it is headed. That’s really the bottom line. If you can get there, your company will really thrive!
We recently came across a great contractor’s digital hub: Contractor Talk. We’ve found their forums to be a valuable resource and wanted to share this with you!