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What Does It Mean To Keep The Books?

Bookkeeping Best Practices for Healthy Financials

Here's a little crash course, the nitty gritty of keeping the books. These are just the fundamentals and a quick overview of the accounting cycle. The time it actually takes to go through these steps will depend heavily on the size and industry of the business. But don't get too intimidated. It's like learning how to drive; once you have the essentials down, you can jump into a truck, a van, a compact car, or even a motorcycle. You still have to use the blinkers, you still have to merge, come to a complete stop, etc. Sure, it'll be quicker on a motorcycle than a minivan, but the action is the same.

Start A Bookkeeping System

To ensure healthy financials, it is crucial to establish a solid bookkeeping system right from the beginning. This system will help you stay organized and avoid costly mistakes. It is recommended to have a bookkeeping system that matches your specific business model.
For example, SaaS businesses may need a system that includes MRR (Monthly Recurring Revenue), ARR (Annual Recurring Revenue), and recurring revenue recognition. Good financial records are also essential for accurate tax filings and to avoid penalties and fines. I personally will help any business in their bookkeeping challenges. But, I especially want to help newer businesses with these fundamentals.

Separate Personal Finances from Startup Finances

Mixing personal and business finances can lead to confusion and disorganization. It is advisable to keep personal and business finances separate according to Generally Accepted Accounting Principles (GAAP). If you use personal credit cards for business purchases, ensure that you write them off on your taxes. When I take on a new client, this is one of the first questions to be asked. Do you currently have a separate business checking and savings account at the bank? It doesn't even need to be under a LLC or the like. I'm only asking if there is a separate account that's keeping track of the business income and expenses. One account should be used to pay for expenses and to deposit money from products sold and/or services rendered. It is such an essential step and shift in mindset that I personally will decline to work with a company if they choose not to create a separate account for their business.

Optimize A Chart of Accounts

Creating a chart of accounts (COA) is a key step in tracking your startup's financial health. A COA lists all the accounts your business uses in its general ledger, categorized into assets, liabilities, equity, expenses, and revenue. Does the owner currently offer lines of credit for their clients? Is there a line of credit extended to the owner? Is there a monthly subscription? Do they keep an inventory? These are all questions to be expected so that a prudent bookkeeper can populate an accurate chart of accounts. This in turn helps provide an accurate picture of your financials and makes financial analysis easier.

Mastering the Accounting Cycle: A Step-by-Step Guide

The accounting cycle consists of eight steps that bookkeepers should follow to ensure accurate financial reporting:

Transaction Identification and Analysis: Identify and analyze all transactions occurring during the accounting period. If an owner keeps a separate checking account that they use strictly for business, this step becomes infinitely easier.
Transaction Recording in Journal: Record transaction entries in the company's journal while adhering to double-entry accounting principles. You bought $1,000 worth of inventory with cash. ($1,000 gets put in two different spots: debit inventory (or "Raw Materials", or "Supplies" if doing a service) because it increases. Credit 1k on cash because the cash amount decreases.) Keeping in mind that A=L+E, in this case, liabilities and equity had no effect. Cash and Inventory are both Asset accounts.
Posting to General Ledger: Transfer journal entries to the general ledger, which serves as the master record of all financial transactions.
Preparation of Unadjusted Trial Balance: Verify that the total debits match the total credits in the financial records. This is why it'll be very hard to artificial intelligence to take over our craft. It'll be hard for AI to recognize transposed errors, or errors of original entry, etc. If the total debits don't match with the total credits, this is when we have to roll up the sleeves, get more coffee and highlighters, and do some line-by-line matching.
Worksheet Analysis to Identify Anomalies: Use worksheets to analyze and reconcile debits and credits, identifying and rectifying errors and discrepancies. More coffee.
Make Adjusting Entries: Address any errors identified in the trial balance and worksheet analysis to ensure accurate financial reporting. Here's the victory dance we all strive for. We found the error(s), the debits equal credits. Throw in some numbers for any depreciation, prepaid expenses, accrued expenses, accrued revenue, or unearned revenue. Life is good, home stretch.
Generation of Financial Statements: Create essential reports that summarize a company's financial activities and performance for a specified period. We move on from the scavenger hunt and shift gears to looking at the different ratios that help determine the financial health of the business (liquidity, profitability, solvency)
Closing the Books: Reset certain accounts on the income statement to zero and prepare for the next reporting period. Pat yourself on the back, you finished the books. Time to cheer the clients on and we get to do it all again!

Following these steps ensures accuracy, compliance, efficiency, and accountability in financial reporting. It also aids in internal financial analysis, decision-making, and legal compliance.

Conclusion

By implementing bookkeeping best practices, businesses can maintain healthy financials, make informed decisions, and ensure compliance. Beginning with a well-designed bookkeeping system, separating personal and business finances, optimizing the chart of accounts, and mastering the accounting cycle, businesses can stay organized and ensure accurate financial reporting. These practices are essential for startups to thrive and succeed in their financial management. After awhile, you'll notice that you apply these practices to your personal finances as well. Good luck, and don't forget the coffee and highlighters.

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