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Better Management May Hinge on Better Bookkeeping

Bookkeeping may be tedious and time-consuming, but paying attention to all the dollars and cents has the potential to really add up.
March 02, 2016

Many small-business owners consider bookkeeping one of the worst tasks of running a company. Bookkeeping can be tedious and time-consuming, and the business benefits aren’t as obvious as those from sales or marketing. However, when organized properly, bookkeeping can be done in a relatively modest amount of time and can help improve your business’s profitability.

Bookkeeping is the process of recording and classifying day-to-day business transactions that impact the value of assets and liabilities, generate revenues, generate expenses or change the value of the owner’s equity. It represents the organized summary of the underlying transactions of your business during a period of time. The raw data used to “keep the books” comes from receipts, invoices, checks and other primary sources. It's a precursor to preparing financial statements and paying taxes. If accounting is the language of business, then bookkeeping entries are the sentences.

The following steps may help ensure that your company’s bookkeeping doesn’t become an overwhelming burden:

When organized properly, bookkeeping can be done in a relatively modest amount of time and can help improve your business’s profitability.

Maintain a relevant chart of accounts.

Many small businesses use a generic chart of accounts for their bookkeeping. If the accounts don’t reflect the reality of your business, bookkeeping may become burdensome as you try to fit transactions into an incompatible account structure. Then every month you need to remember what you did in previous months to maintain consistency. For example, if your business spends significantly on server hosting, this may need its own account and not a generic “professional services expense.”

Organize your revenues and expenses.

As a business grows, it usually increases the number of credit accounts, credit cards and checking accounts that it uses. This often complicates bookkeeping. Streamline your credit and checking accounts and try to maintain the same patterns from month to month, which can help ease accounting. For example, you might use the same credit cards to cover monthly expenses and pay vendors consistently.  

Process transactions regularly.

No more than a week should pass before you update your books. The sheer volume of transactions accumulated over a month may make bookkeeping a daunting task. Even a tiny company can generate 100 bookkeeping entries per week.

Owners involved in bookkeeping often have a firmer grasp on the condition of their business. Investing some time in bookkeeping permits you to:

Flag odd transactions that may be fraudulent.

Financial institutions use sophisticated software to identify and stop potentially fraudulent credit card transactions and to notify targeted victims. These systems tend to be very effective, but with such a massive volume of transactions happening daily, there are more than 85,000 unauthorized transactions that occur daily, according to a Federal Reserve System study. This doesn’t include fraud that takes place through other means, including fake invoicing, diversion of payments to a third-party account and more. If you're familiar with your usual transaction pattern, you may be able to identify a transaction that's out of place and take action before incurring additional losses.

Identify outlier expenses that need to be pared back.

Outlier expenses can consume an unusually or unnecessarily large percentage of your available cash each month. One way to identify these costs is to see them in relation to your overall monthly expenses. Bookkeeping may help you see these expenses as they are incurred so you may be able to find a way to reduce them. Consider identifying the top three expense categories each month and work toward reducing at least one of them over time.

Speak knowledgeably about your business's finances.

When investors, lenders or potential clients evaluate a potential transaction with your business, it may help to show you have a thorough understanding of the numbers. Sales skills, marketing prowess and operational control are all important, but having intimate knowledge of revenue and cost patterns are as well.

Read more articles on managing money.

This article was originally published on February 18, 2015.

Photo: Getty Images