How Does a Bookkeeper Help your Business?

What is bookkeeping exactly? It is the act of collecting all financial records and organization of them. This also includes filing that data either physically or digitally. Thus, a bookkeeper will collect, organize and file those financial records for you. Not only that but they will also compile reports of your company. These reports include:

• Invoices
• Receipts
• Bill statements
• Bank and credit card statements
• Payroll records
• Tax forms and returns

The tasks that bookkeepers include this but that is not all they do. Bookkeepers also deal with analyzing your business’s profit and loss. They will compile reports that project your business’s profit and loss. Bookkeeping’s definition does not include long-term analysis of financial records. But bookkeepers do this analysis to help your business. Also, bookkeeper’s work will allow your accountant to work more efficiently. This will then allow accountants to examine the financials of your business and help make predictions about the future.

Why Is Bookkeeping Important?

There are many different ways a bookkeeper can assist your business. These include tracking the profitability of your finances and also prepare your business for tax season. They also help manage your finances, ease reporting for investors, and help you plan for the future. To go into further detail:

Profitability Tracking

To improve the profitability of your business the best way is to track the profitability over time. Then the profit tracking allows bookkeepers to improve your earnings in the future. This profitability allows you to track transactions and also the earnings on your inventory. For your business, a bookkeeper will use various ratios to see how efficient your company has been. For example, these ratios include the gross margin ratio and profit margin. They also include return on assets ratio, return on equity, and return on capital employed.

Tax Preparation

The best way to save time during tax time is to be prepared for it. This can be a very stressful time for small business owners. With the proper planning, you can do the tax preparation yourself. But that process takes up a lot of time you could be doing to improve your business. A bookkeeper can help make sure your documents are in order and also help you save time during the process. This also means that a bookkeeper will help you figure out what kind of taxes and how much you will pay in advance.

Better Financial Management

If your bookkeeping is accurate, you will be able to manage your finances in a more efficient manner. It is also more clear to see your different revenue streams. Also, you can track your spending and how much income you are making. This also means that you know how much cash you have to for any expenditures you need for your business. As long as your financial records are proper how your business is doing and the financial state of it is easy to analyze and also where to improve.

Easier Reporting

For any of your investors, or also stakeholders, you need to prepare reports for them about crucial financial data of your business. Also, you are responsible to tell your employees about the financial state of your business. Your employees need to understand how their work helps your company and if the company is growing.

Bookkeeping will allow this information to be easier to access. Bookkeeping programs can provide different ways to represent this information. This includes graphs, charts and also other visual representations. This is both important for impressing investors and also explaining progress to employees. Explaining your business’s progress to employees also makes them feel like part of the company.

Plan and Evaluate Finances

If you want to evaluate how your business is performing, accurately keeping track of your finances is important. Bookkeepers keep track of your finances and also organize them. These records allow you to see patterns in your business. Also, they allow you to evaluate the performance of your business year to year. Then you can determine where in your business you can save money and also reduce costs. This also allows you to reevaluate how your business is run to stay on top of your business

Bookkeeping allows you to also determine what in your business needs help or improvements. Also, it is important for your business to set projections and forecast what your business will look like in the future. Whether you need to make changes to the operations of your business or also need to hire or fire employees, proper bookkeeping will help you make that decision.

What Financial Records are Important?

There are many different documents that are needed for your business. The following is a list of documents that you should keep. These documents are:

• Receipts
• Invoices
• Tax returns
• Investment statements
• Payroll records
• Bank and credit card statements

It is worth the time investment to organize your financial records. Also, it is worth investing in a filing and labelling system. Digitizing your documents through data entry or by using a bookkeeper is useful also. Storing your digital documents in multiple locations, including the cloud is useful as well. Not only does this let you access your documents from any location but it also means you have backups in case something happens. Additionally, if your documents are organized, should you be audited that means you know where everything is, saving you time.

This organization will also mean you have the documents required for your financial and tax records. Also, businesses are required to keep six years of records for tax purposes. Having both a physical and digital filing system means you have peace of mind in case something happens. This is doubly so if you also have backups in multiple locations.

What should I use GAAP?

Absolutely. Generally Accepted Accounting Principles, or GAAP for short are a set of best practices when tracking and managing the finances for your business. GAAP covers many areas such as the details, complexities and legalities of business accounting. Financial Reporting and Assurance Standards Canada (FRAS) uses GAAP in their accounting standards. If you wish to do the bookkeeping yourself it is a good idea to also apply GAAP to your bookkeeping even if you are not an accountant. This allows your account to be accepted by others should it ever be in question.

There are a few ways you can use GAAP standards. These include classifying your assets on your balance sheets, standardizing your chart of accounts, and also using a three-way matching system. The three-way matching system also prevents any double payment of an invoice for any product that has not been obtained or ordered yet.

Different Bookkeeping Methods

By Hand

The most traditional way of bookkeeping is by hand. The act of documenting your financial records with a pen and paper ledger. You can also document your records in an offline bookkeeping program such as Excel or some other document software. You would record your income, expenses and any other cash flow through these mediums. If you like getting your hands dirty and have the most control over your documentation then this is the way to do it. But, there are few tools to help ease the process and take a lot of time. Fewer tools also mean more chances of errors.

Online

There are many online bookkeeping tools that you can use if you wish to handle the bookkeeping yourself. These include programs such as Freshbooks, Sage, Xero, Quickbooks, and also Wave Accounting. They will allow you to record your financial records in a simple way that checks for errors. These programs work better the smaller your business is. Once your business gets bigger, the bookkeeping will also get more complex. If it ever starts to feel like it is taking too long to do or too complicated, consider hiring a bookkeeper.

Many of these programs link with other accounting software and your online banking or payment apps. This means that you also get the benefit of automatic recording of transactions to these programs. Also, they have features to represent your data in various ways such as graphs. They will also perform calculations to show an accurate representation of your income and spending.

What Does Single-entry and Double-entry Bookkeeping Mean?

These are two different ways to enter transactions into your records. For single-entry bookkeeping, you record that transaction only once. It follows then that double-entry bookkeeping, the transaction gets recorded twice. What does that mean exactly? Well, if someone purchases an item, in single-entry bookkeeping then that value would be added to your income. But, for double-entry bookkeeping, that value would be added to your income and then deducted from your inventory.

Single-entry bookkeeping

This means that single-entry has less you have to keep track of. It also means that it is in general a simpler way of recording transactions. For many small businesses, especially very small businesses, this can be a time-saving way to do your bookkeeping. This way of bookkeeping can be prone to errors, especially as your business grows and you have many more transactions to keep track of. For example, if your inventory total does not match your income it can be harder to find the discrepancy with this method.

As soon as your small business grows to a certain size or becomes incorporated single-entry will be less effective. The best practice would be then to implement a double-entry bookkeeping system. Even though it is more time-consuming, it is not much more difficult compared to single-entry bookkeeping. There are many different programs that can automate this process as well.

Double-entry bookkeeping

As mentioned before, double-entry differs from single-entry by also recording the transaction in a different place. This means that if you make a sale, you also lose the value of the inventory items. Or if you take a loan your assets are credited the loan amount but then your liability is debited that amount. Making good use of bookkeeping software can save you time and also give you the peace of mind that double-entry provides.

Another reason to use double-entry bookkeeping is it does not conform to GAAP. This may not be a problem for quite small businesses but GAAP confirmation is important. If your company needs to highlight earnings or changes in a position financially,  it is best to use a double-entry bookkeeping system.

What is accrual bookkeeping?

There are two types of bookkeeping that determine when a transaction is recorded. These two are also known as cash and accrual bookkeeping. Do you record the transaction when something is paid for or when it is initially ordered?

For the cash method, the transaction is recorded when the money actually changes hand. For example, let’s say you order an item that takes months to arrive but you do not need to pay for it until it arrives. In the cash method, you will then record the transaction when the item arrives and you actually pay for it, months after you initially ordered it.

For accrual, instead of recording that transaction when you pay for it, you record it when you receive an invoice. This is recorded even if you have not received the item or service yet.

How do you choose which method to use? There are benefits to both methods. Depends on how large your business is.

Cash advantages and disadvantages

Cash is easier as you just record the transaction at the same time you receive or give money. This also has the advantage of using your bank statements for accurate timings. But, let’s say you were late to make a payment then you will also get a misleading picture of your finances. You may feel like your company is doing better than it actually is. If you are late on a payment and pay for two months’ worth of service, that month can seem way worse than it actually was.

If any inventory was lost for any reason such as theft, damage or you didn’t use it, the cash method does not account for that loss. The cash method would just record the cost of the inventory items also. The result is then that what you are paying for those supplies is not entirely accurate.

Accrual advantages and disadvantages

On the other hand, accrual is a more complicated method but only a bit. It is also a bit more time-consuming. But, it is also a better solution as your business grows. One of the reasons accrual is more difficult is that your bank statements are not always the same as what is on your income sheet. This is worth it because it also provides a more accurate account of your finances.

A bookkeeper will use accrual accounting by default. They will also help you transition your business from the cash method to the accrual method. As your business grows in the future a bookkeeper is also an asset to operating your business. They will also ensure that your records are accurate using your financial records.

LIFO Method of Accounting

LIFO stands for Last in, First Out. This means the last, or also in another way, the most recent thing is dealt with first. For example, the most recent inventory item would be sold before your oldest inventory items. And that is also what this method assumes to determine the worth of your inventory. LIFO is more accurate when your inventory has costs that different costs between your most recent and oldest items.

What is LIFO accounting? LIFO means Last In, First Out. It is one of the methods you can use to determine the current worth of your inventory if you operate a retail business. This accounting method presumes that your most recent (last in) products will be the first to sell (first out). If your inventory costs fluctuate between the first and last items, this bookkeeping method helps keep the most accurate records possible.

If you are a furniture manufacturer for example or someone who makes their items, then your inventory will include items at different stages of completion. For example, a piece of furniture that is unfinished, in pieces and completed. Your ledger will then include how many items you have of each product in each state.

Completing the items will then allow you to track the cost of the goods sold. This also includes all of the direct costs. By performing a cost assignment on each state of the goods you can figure out the direct and indirect costs associated with the goods or services you provide.

FIFO Method of Accounting

Contrary to LIFO, FIFO means First In, First Out. This accounting method evaluates your inventory by assuming your first items purchased or produced are sold first. The FIFO method resembles more closely how produces most commonly is bought and also sold. This also means that it is in theory the most correct valuing method. For businesses with items that expire such as a grocery store, this is the most accurate representation of how products move in their store also. For example, a grocery store wants to sell old fresh fruit before selling new fruit. This then prevents loss of product due to expiration.

The FIFO method resembles most closely the balance sheet where costs have been incurred most recently. Also, it matches costs of inventory purchases that are older against revenues that are currently coming in. Which means then that revenue vs. cost can be not properly represented sometimes. This also results in a higher gross margin than actual in some cases.

For either LIFO or FIFO, you need to make sure your documents are properly filled out. This is to also maintain a consistent way of filling out your financial records and how you manage your bookkeeping. To do this make sure you are also using the previously mentioned GAAP.

What does Net Present Value Mean?

There are many times when you want to evaluate how a business project is going. A good way to determine how a project is going or your business as a whole is doing is by calculating the Net Present Value (NPV). What is NPV exactly? The Net Present Value calculates your incoming cash flow and determines the difference between your current cash outflows over a period of time. In other words, it lets you know how profitable your business is over time. When using it for business projects it can be helpful to determine when to invest in a new project by estimating cash flows. You can see an example of how to use it here.

Small Business Taxes

In Canada, there are many tax incentives and deductibles for small businesses. Maximizing your tax return should be a goal for all small businesses. The best way to hire someone who knows how to make the most of it, like a tax consultant. But, you will want to provide them with properly detailed financial records. This will then make the process a lot smoother. A bookkeeper can help you keep track of all the money that your business has made and spent over the year. If you want to learn more about taxes, read our article on tax preparation and how to use those tips for your small business.

Should You Hire a Bookkeeper?

As you have read so far there are many things to keep track of when it comes to your finances. For many businesses, a bookkeeper is invaluable in keep track and also recording your financial reports. Bookkeepers have the knowledge and training that can help you also establish an efficient system for your records.

For smaller businesses, the finances of the business may not be complicated. There are tools that assist businesses with their bookkeeping, so you may not need a bookkeeper at a certain level. But as your business grows and also gets more complicated a bookkeeper helps your business more and more. Also, as your business gets more complicated the time required for your finances grows as well. Your time is also better used for your business. A bookkeeper will help free your time and let you improve your business.

Our team at Headquarters Inc. would love to help you with any bookkeeping needs. We are able to provide your business with bookkeeping, management, tax preparation, corporate registries services, and also personal and business tax services. We are located in Calgary and provide our services to Calgary and the surrounding areas. Also, you are able to learn more about our services here. You can also contact us today to learn how we can help you.