How Many of These Accounting Wake Up Calls Have You Had?

I’ve consulted with a lot of small business owners over the years. And I’ve noticed that they all pretty much go through the same “evolution” when it comes to tracking their expenses and revenue (also known as “accounting”).

PHASE ONE: No System. When they first fire up their business, they barely think of it as a business at all. So, of course, they barely think to even track expenses and revenue. They just pay the bills and deposit the checks. That’s it.

Then they wake up one April and realize, “Oh wow, I made $32,000 last year, I guess it’s a business.”

I won’t go into the hassles associated with “waking up” to the fact you have business. But let’s just say the tax implications can be brutal.

PHASE TWO: Excel. Once they wake up to the fact that they need to track expenses and revenue, their first thought is “I have Microsoft Office, I’ll track everything in Excel!”

The good news is that they now have records. The bad news is those records are subject to human error. Sure, a spreadsheet will do the calculations perfectly, but it takes a human to set up those formulas. Were they set up correctly? When you don’t find out until April that the formulas are wrong, it can be another cold water “wake up call.” 

Also, are you categorizing everything correctly? Have you set up a chart of accounts that fits your business? Do you understand your chart of accounts? When was the last time you reconciled your accounts to make sure you didn’t mis-record, or flat out miss, any transactions?

Once small business owners get this second “wake up call” they usually move on to Phase Three.

PHASE THREE: Quickbooks Do-it-Yourself. Moving to a real accounting software platform is another step in the right direction. And if you have the time and patience, this can be a solution that works for years.

Ah, there’s the rub. It’s been my experience that, by the time small business owners get to the “professional accounting software” phase, it’s no longer a good use of their time to be making accounting entries (if it EVER was!)

Usually, small business owners “wake up” a third time and say, “Why am I spending several hours per week on accounting when I could be spending that time growing my business, finding customers, or delivering my product or service?”

PHASE FOUR: Outsourcing to a CPA or bookkeeper. Eventually sanity kicks in and the business owner says, “Why am I trying to handle this mess myself? Why don’t I pay a professional to make sure it gets done right? Why don’t I concentrate on what I do best and let the accountants do what they do best?”

What phase should you be in?

If you think there’s a chance that you’re starting a business, messing around in Phase One isn’t going to do you any favors.

Setting up a separate bank account and credit card that you’ll use exclusively for business should be high priority for you, otherwise you’ll be stuck spending hours trying to separate out a bunch of business expenses from your personal expenses when tax time rolls around. Every expense that you forget will cost you money in the form of taxes you wouldn’t have to pay if you had better records.

I think you should skip Phase One and at least get to Phase Two as quickly as possible. If you only have 10 or so transactions a month (sales, expenses, equipment purchases, etc.), and you don’t have inventory, it’s probably okay to hang out in Phase Two for awhile.

If you have a lot more than 10 transactions a month, or inventory, or other significant business assets, and bookkeeping doesn’t drive you crazy or take more than 4 hours a month for you to do, you could probably DIY your accounting with QB, FreshBooks, Wave, Xero, etc.

Phase Three or Phase Four are where I think that serious small businesses belong.

If you aren’t good at bookkeeping, don’t like doing it, or realize that you’re giving up sales to do it yourself, it’s time to take a good hard look at outsourcing that task. A professional bookkeeper will probably do a better job, in significantly less time than it takes you.

Additionally, the less time and energy that you, as a business owner, have to spend on routine accounting entries, the more time and energy you have to focus on the big picture. And I have yet to see a small business who will reach their goals by saving a few bucks on bookkeeping.

Taxes are the same way. If you’re in Phase 3 or 4 it’s probably time to stop trying to handle it yourself.

Why go to all the trouble when, for nearly the same price as H&R Block you could have a tax professional who works with small businesses handle your taxes for you?


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-Josh