Why is bookkeeping so important to a business like yours?

• You need to know from one month to the next if you are making a profit. Because if you aren’t making a profit it’s all for nothing
• You need timely financial information to make important decisions about setting prices, hiring employees, expanding your products and services, your marketing plans, etc.
  • If you spend money to advertise your business, will you know if it paid off?
  • If you feel as if you need to cut your expenses, will you know which ones to cut?
  • Do you know which products or services are making you money and which aren’t?
  • Do you know which customers are bringing in the most revenue and which aren’t?
  • You need to be able to communicate with your banker for loans and lines of credit
  • If he asks for a cash flow statement, will you be able to produce one?
  • If you are applying for a credit line with one of your vendors, would you be able to produce a description of your purchasing procedures?
  • You need to be able to pay what you owe in taxes; no more, no less
  • You need to be able to convince investors that your business is worth their attention
  • You need to create and follow a budget but you haven’t a clue how to start

If these issues keep you up at night….
Maybe it’s time to consider hiring an outside bookkeeping service.

Why hiring a professional bookkeeper is a good idea:

• You will save the extra employee’s expenses for payroll taxes, sick pay, vacation pay, insurance: medical, dental, worker’s compensation.
• You will save on space in your office for another employee
• You save yourself from having to manage another employee
• You avoid the problems of employee turnover

What to look for when choosing a professional bookkeeper

• Do they have experience working with a business your size?
• Do they have a computer system for doing bookkeeping?
• Do they have experience working with a business in your industry or specialty?
• Can they offer extra services such as word processing?
• How long have they been in business?
• Do they have recommendations from other businesses?
• Can they explain clearly what they will and will not do for you?
• Can they explain clearly their fee structure?
• Do they have any professional designations, memberships, certifications?
• Is the bookkeeper willing and able to work with your CPA to prepare necessary information for audits and taxes

Should you hire a CPA or a professional bookkeeper?

A CPA will charge about $71 per hour for bookkeeping according to the Intuit 2007 survey while bookkeepers charge between $30 and $60 per hour generally. The survey included both CPAs and bookkeepers and revealed that the average hourly rate for bookkeeping services was $61. While many bookkeepers and accountants charge by the hour, the Intuit survey indicated a movement toward a flat monthly fee for services with the average monthly fee being $321.

You may consider contracting with an independent bookkeeper for your monthly services and a CPA for management and tax services.

Pick a system and stick to it. There are several choices for tracking your daily business transactions. Research them and choose the one you feel most comfortable with and then get into the habit of using it on a regular basis.

Develop a system for tracking the checks you write. Checks over a certain amount deserve extra attention and perhaps a second signature. If you are a partnership, then have another partner signature required. Use your checks in numerical order and always account for voided checks by making an entry in your checkbook. Also review canceled check images that come with your bank statement. In fact, you can go online and do this at any time.

Reconcile your bank statement every month. To simplify this task have your bank cutoff the statement as of the last day of each month. The reconciled cash amount should then match the cash balance in your bookkeeping system.

Separate your personal finances from your business finances. The simple way to do this is by having a separate checking account and credit card just for your business. If you can’t get a credit card in your business name, then at least choose one of your personal credit cards and use it only for business purchases.

Use a filing system. Start a series of file folders at the beginning of each year. Label each folder: expenses, invoices to customers, equipment purchases, inventory, and so forth. Be sure to file all of your daily paperwork in the correct file on a regular basis. You never know when you will need to research a transaction to prove that you paid a bill or to check on what you were charged for a purchase.
Keep a calendar of all your tax due dates. Fill it out in January for the entire year. Depending on the size of your business and your payroll, you may have to make tax deposits as often as monthly. Remember to include your sales tax payments and your personal income tax deposits. If you are incorporated, you will have to make income tax deposits for the corporation.

Use numbered purchase orders and invoices. This will make it easier to spot employee fraud. And be sure to account for any lapses in the numbering sequence, such as voided items. The number sequence also makes it easier to go back and research transactions in case anyone has questions or you are audited.

Have a professional install and setup your computer software. It’s an expense that will pay for itself in the time and aggravation you will save compared to doing it yourself. Make sure that you hire someone who will provide follow-up tech support.

Use a chart of accounts to code your transactions for entry into your bookkeeping system. This will help ensure consistent recording of income and expenses so that the financial reports will provide more useful and meaningful information.

Always use a check, ATM debit card, or credit card when paying for business expenses or purchases. Cash transactions are much harder to track and can’t be reconciled as easily to your bank statement. It is considered unprofessional to deal in cash.

Create and review your financial reports each month. Prepare a balance sheet and income statement and go over them with someone who can explain what they are telling you about your business performance and your tax liability. Realize that the net profit on your income statement will be the basis for taxable income on your tax return. In addition to income tax, you will owe self-employment tax (unless you are incorporated).

Learn about online banking and use it. You will be able to log in to your account from any computer with an internet connection

Get expert help with your bookkeeping. Consider how many hours you spend each month on paperwork and how much revenue you could be making instead.

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Assets = Liabilities + Equity

Assets are things that you own that will provide future benefit. Some assets have a short life such as cash, inventory and accounts receivable. Other assets last longer such as furniture, equipment, and buildings. Assets with a life longer than one year are depreciated. This is a process where you gradually convert the asset into an expense.

Liabilities occur when you take on a financial obligation to another business entity. An example would be accounts payable. Accounts payable is the account you use to track your purchases from vendors with whom you deal regularly. They have checked your credit rating and have decided to let you buy goods and services on account. You’ll be billed each month and you’ll have thirty days to pay on your account. Other liabilities include mortgages on business property and loans for business equipment and vehicles.

Equity is your net worth. It’s what you own free and clear. Take all of your assets and use them to pay off all of your liabilities. What’s left over is your equity. Equity is increased when owners invest in the business. It’s also increase by profits. Equity is decreased when owners take out assets for personal use or when dividends are paid to stockholders. It is also increased when there is a net loss.

Together, assets, liabilities, and equity comprise the balance sheet accounts. Your balance sheet is a financial statement that tells you the financial condition of the business on one day in time. It’s usually prepared as of the last day of the month. Analysts use the figures on the balance sheet to determine, among other things, the business’s ability to meet short-term and long-term obligations. They can also determine if your inventory is turning over as often as it should. Much more information can be gleaned from the financial statements once you learn to appreciate what the numbers can tell you.

The calculation for breakeven requires you to categorize the costs of doing business. These costs fall into three general categories. Fixed costs are those costs that must be paid every month whether you conduct business or not. They are often referred to as overhead. Examples of fixed costs include: rent, basic utilities, and salaries for staff. Variable costs are those costs that go up and down in relation to your sales. The more widgets you sell the more costs are expended to make those widgets. These costs include the utilities to run the machinery that made the widgets, the cost of materials to make the widgets, and commissions to the sales people who sold the widgets.

A third category is mixed cost which, as it name implies, is part fixed and part variable. An example would be an employee who is paid a base pay plus commission calculated as a percent of sales.

Breakeven can be expressed in dollars or as a percent of revenue.
There are two steps to the calculation.

Step 1. 100% less Total variable cost = Contribution margin percent
Step 2: Total fixed cost divided by Contribution margin (decimal)
The result is your breakeven point in dollars.

How many units of product do you have to sell to breakeven?
You can calculate your breakeven point in units sold in a two step process.

Step 1: Selling price per Unit less Variable cost per unit = Unit contribution margin
Step 2: Fixed costs divided by Unit contribution margin

How would a consultant calculate breakeven?

If you’re a consultant who bills by the hour then an hour is one unit of production. If you determine that your annual fixed costs are $15,000 and you charge $50 an hour and your variable cost is $10 per unit then your calculation is:

________________Fixed Costs_____________ = number of hours needed to break even
Selling price per unit less Variable cost per unit

__$25,000__ = 625 hours per year
$50 – $10

If you only want to work 48 weeks during the year then divide 625 by 48 to figure out you only need to work 13 billable hours a week to breakeven. Lucky you!

Do you find that you keep having to purchase inventory more often than sales would dictate?
Has your cost of goods sold increased more than sales have?
Do your customers complain that their shipments are short?

If so, then your employees may be using your inventory to stock their own private enterprise. Disgruntled employees have all kinds of way of getting back at you. Theft is one of the worst. If your business involves inventory, then you need to be aware of the many ways that employees can drain your profits by stealing your inventory.

Inventory counts — Do you?

How often do you take a physical count of your inventory? Even if you do a regular counting, be aware that the person doing the count may be the one stealing from you. Numbers can be fudged to cover their tracks in the Inventory and Cost of Goods Sold accounts. So, if your Cost of Goods Sold account seems to be growing in a larger proportion than your sales, then look at your procedures for storing and counting the inventory.

Another way to spot theft of inventory is to keep an eye on your Accounts Receivable subsidiary accounts. Sometimes an employee creates bogus sales and ships to an accomplice. The sales may be charged to a fake Accounts Receivable account or to one that is so large that another charge won’t be questioned. Or else they post to a receivable that’s about to be written off as uncollectable.

Do you write off inventory that’s damaged or outdated? If so, then think about doing a periodic review of your procedures for completing the write-off. Inventory that’s been written off as damaged may actually be stolen by the employee doing the write-off.

What can you do?

Create written procedures for maintaining your inventory. Make sure that there’s a paper trail that goes from the purchase order through receiving, tagging, sales and shipping to the collection of money on accounts. You should be able to match up shipping documents with sales invoices and investigate where a match can’t be found. Also review the paperwork related to the payments for inventories to make sure that you’re paying for inventory that actually went into your warehouse and onto your shelves.

Establish a system for identifying and counting your inventory. This might involve creating a numbering system so that each classification of item has its own unique identifier. In this way, the more expensive Widget 1A1 can be distinguished from the Widget 2B2 which has fewer features and sells for less. That way your employees won’t be able fudge inventory counts by using the less expensive models to count as if they are the more expensive ones that he stole.

Separate duties. Even better is the requirement that counting duties be separated so that the employee doing the counting is separate from the employee who keeps the records. Make sure that inventory counts happen without notice so that boxes can’t be rearranged to cover up theft. After the count, you might have a different person do a recount and check to see if their figures match up. Merchandise recounts are especially helpful regarding inventory with a high value. Break up the tasks involved in ordering, receiving, storing, disbursing, scraping, and counting your inventory. Have different people performs each task. With so many people involved in handling the inventory theft will become less likely.

Restrict access. Finally, do what you can to restrict access to the inventory. Not all of your employees need to have keys. Most don’t need to be working unsupervised after hours. Always make sure that a supervisor is present. Think about installing surveillance equipment and use it.

Review the accounts. Periodically have your accountant review the sales and cost of goods sold accounts. Look for discrepancies in how they’ve changed from last month and last year and how they’ve changed in relation to each other. Calculate your gross margin percent (Net Sales minus Cost of Goods Sold divided by Net Sales) and compare it to previous periods. Check your inventory turnover rate(Cost of Goods Sold divided by Average Dollar Value of Inventory On-hand) to look for unexplained changes.

The accrual method, on the other hand, dictates that revenues and expenses are recorded when they occur. So you’ll record an expense when you get the bill. The expense account will increase and so will your accounts payable. Revenue will be recorded when you generate a bill for your goods or services. You’ll increase your revenue or sales account and you’ll increase your accounts receivable.

Which method is the best to use? Well, that depends on what you want. If you want things to be simple then the cash method would be your choice. If you want your books to be accurate then the accrual method is the way to go. With the accrual method you’re recording revenues and expenses together in the same time period. This is a process called “matching” and accountants like it because it will give you a more accurate picture of your profit. Yes, the money you pay and the money you receive occur in different periods from those where the revenues and expenses were incurred and recorded.

Which method do you use on your tax return? It’s a good idea to use the same method on your tax return that you use to keep your books and prepare financial statements. If you carry inventory you must use the accrual method at least for reporting sales and cost of goods sold. Using accounting software such as QuickBooks makes the accrual system much easier to maintain.

If you want to keep track of your cash then be sure to prepare a statement of cash flows. This financial statement shows the sources and uses of cash. Cash comes into your business in three ways: from daily operations (sales), from owner investment, and from financing from loans. Cash leaves the business in the same three ways: paying for daily operations, increasing investment in long term assets, and repaying owners and creditors. The statement of cash flows will answer the question of why you still don’t have any money in the back even though you’ve made a profit.

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If you’re already up to your ears in credit card debt, the last thing you need is another credit card. Yet the credit card companies love you because you faithfully make the minimum monthly payment. That’s why you get several offers each week in the mail tempting you to open up another card account.

The smart thing to do is to pay off the cards you have as soon as possible. The longer it takes to pay off your debt, the more interest you end up paying. Yet those new card offers are enticing. They promise a low entry rate to get you hooked and then they reel you in like a mackeral. Don’t be fooled.

Stop those offers coming by opting-out. Opt-Out refers to a process that allows you to remove your name from mailing lists used by card companies and insurance agencies that want to send you offers. You can choose to opt-out for five years or permanently. This service is only for individuals and does not include a business or company that might want to opt-out.

You can go to http://www.optoutprescreen.com and read more about the process. You can also use the web site to complete the opt-out process. If you choose to permanently opt-out, you’ll have to follow up your web request in writing by submitting a Permanent Opt-Out Election form also available at the web site. The service is easy and it’s free.

You won’t be able to stop all mail solicitations but you can cut them down substantially. So if you’re tired of sifting through piles of junk mail, then do yourself a favor and opt-out.

Working gives us a sense of worth and accomplishment. We feel that we are making a valuable contribution. Getting out among people and interacting with people of different ages can be a great way to stay involved and engaged.

If you’re considering going back to work you’re not alone. It’s predicted that by 2015, the number of workers age 55 and older will be about 30 million, or 20 percent of the workforce. With so many older workers, it will be interesting to see if management can adjust to workers who will very likely expect more flexibility in scheduling.

What kind of work can you do part-time in retirement? In October, AARP online posted an article with several suggestions including: librarian assistant, medical assistant and bookkeeper. Indeed, if you have a background in bookkeeping or accounting, you should be able to either work part-time or even start your own home-based bookkeeping business. At this point in your life, being your own boss may have lots of appeal.

Bookkeeping can be an ideal business for a retiree or anyone else who thrives on being able to work from home and choose their own hours. You can even learn how to work over the internet thus limiting the number of trips you have to make to see clients in person.

For more information and assistance on starting your home-based bookkeeping business consider buying my book on the subject, Jumpstart Your Bookkeeping Business.