Most small businesses come to exist because their founders believe they can provide a product or service that is in some way better than what can be found in the current market. This inspiration may come from friends applauding a unique or helpful solution, or a founder noticing a gap in the market and trusting themselves to fill it. Whether they recognize a shortage of landscapers, have a waiting list of people who want them to build decks and garages, or just happen to be next door to a guy who needs a lawyer, those businesses are meeting a need. Those businesses also want to predominantly focus on the activities they specialize in and get paid for.
There’s a big difference between operating a small business and operating a profitable, small business. According to the US Small Business Administration, about one-third of all businesses will fail in their first two years of operation. Business News Daily lists 20 mistakes to avoid when starting a business, which include: being disorganized, trying to do everything yourself, and not implementing a proper bookkeeping process.
So, if your small business needs bookkeeping, what do you need to know about it?
Bookkeeping: What Is It and What to Know About It
Very simply, bookkeeping is the process of keeping track of the money a business spends and the money it brings in. These happen in transactions, when one party exchanges something of value for something in return from another party. For instance, if you buy a computer for your business, the transaction involves you receiving a computer and giving someone money. Organizing that information and being able to track it is essential to the day-to-day function of any business. Think about it: You need to know how much money is in your bank account. You need to know what money you spend, such as your monthly phone and internet bill; the cost of raw materials you’re converting into saleable products; rent or mortgage; salaries; even toilet paper for the employee restroom.
Here are the basics:
In 1458, Benedetto Cotrugli standardized how merchants kept track of their expenses — and their assets, the money they were owed (receivables), their inventory, their liabilities, money they owed (payables), and income (or profit and loss). It’s impressive that this approach has lasted for nearly six centuries, but it did because it was a highly effective method.
Cotrugli introduced double-entry bookkeeping, which made it possible to catch errors when they occurred. The system relies on the designation of accounts or categories of transactions. They can be defined any way the bookkeeper wants. Since the 15th century, they have generally included assets (such as cash or office equipment) and liabilities (such as money you owe your employees). Each transaction is listed in a journal in a way that’s balanced, with one debit and one matching credit. Consider the computer transaction above. After spending money on the computer, a bookkeeper would credit your bank account for $1,000. But while your bank account was diminished, a bookkeeper would debit your office equipment account by $1,000 because of the computer acquisition.
Most businesses conduct more than one or two transactions a month. That’s where bookkeeping is essential. The primary benefit is that when both sides of a transaction don’t match, it alerts you that there’s an error. You can go look for it before it becomes critical — for instance when you’re preparing your taxes.
Bookkeeping also provides the data that is used in accounting. Accounting produces reports from bookkeeping data to analyze the business’s financial health, gather insights, and pay taxes.
What Small Business Owners Fear and Overcoming Those Fears
Many people who are in business are good at what earns them their money, but fear the math and calculations involved. They’re worried about going out of business. Often, they’re fighting off alligators when the swamp needs draining, tackling the disaster of the day, and putting off the bookkeeping until later.
What’s happening is that you may be afraid to know how your business is performing. Many people get used to running their businesses the way they always have because it’s what they know. Psychologists call this habituation, and it could mean missing opportunities to grow. Overcoming your fear of bookkeeping will lead to business success as the business operates more efficiently. Don’t sabotage your success by giving in to your fear.
One way to overcome bookkeeping fears is to get some help. Don’t get lost in page after page of spreadsheets that confuse or paralyze you. If you can afford a bookkeeper, hire one. Your bookkeeper or tax accountant will focus on organization. One helpful tool available these days can scan your invoices and receipts straight to the cloud. It even recognizes the numbers on those documents and automatically assigns them to the account you (or your bookkeeper) specify. This is especially useful for small business owners who do not have accounting skills.
Every business owner approaches bookkeeping differently. This self-evaluation can give you an understanding of your specific financial management personality. It just may just give you the insight you need to take command of what you fear.
Why Bookkeeping Is Your Friend
Having your books clean and up to date removes obstacles that can block your business’s success. Planning is easier when your financial information is readily accessible and accurate. When can you buy that new tool to help double your productivity? If your records show you’re clearing $500 a month and the tool costs $2,000, you can buy that tool in four months. Or maybe you meet a competitor at a service group meeting, and he tells you that he’s decided to retire. You’d love to have his customers, and he’ll sell you his mailing list if you can write a check today. If you’re unsure what your cash flow is, you can’t make quick calls.
If you overcome your fears and commit to keeping your books up to date, you can make business-growing choices confidently. Face your fears in small bites. Jeff Wise, the author of Extreme Fear: The Science of Your Mind in Danger, suggests thinking small. Complete one small task at a time. If you can devote just five or 10 minutes a day to keeping your books, you’re ahead of where you were. Better still, embrace your fear. Writing in Psychology Today, Noam Shpancer, Ph.D., notes that the only way to overcome your fear is to go through it. He writes, “Every time you confront your fear, you accumulate evidence of your ability to cope (I did it yesterday; I can do it again today).” Talk to your tax accountant, research small business financial management platform options, or block 20 minutes out of your schedule each day to take on bookkeeping tasks, even if it’s just scanning those receipts. The benefits to you and your business will be tremendous.
Jim Conroy is the CEO of The Neat Company.