Small Business Three-Part Bookkeeping

Video Transcript

"Most small business owners just hate the idea of having to keep books. But as a business owner that's one of your primary jobs. The difficulty is really three parts to it. There is setting up the books, there's the data entry and filing that goes with it and then finally there's the analysis of what those numbers mean. Now I tell people that setting up books is kind of like learning word, Microsoft word, and English at the same time. It's very difficult. Because you've got to learn a bookkeeping system plus you've got to learn a software system at the same time. So it becomes difficult and it becomes frustrating. But as I said, this is a job that is yours as the business owner. So once you've set up a chart of accounts, that's the accounts where you know your income is going to go, where your expenses, your car expenses, your advertising expenses, but it's also the balance sheet accounts, your bank accounts, your credit cards and loans you have outstanding, and your equity accounts, which are really ownership accounts. We'll talk more about that later. Those accounts need to be set up to reflect how you actually do business. That's the key. And even though most of you don't want any part of this, I implore you as a business owner, you've got to do it in order to set it up the way you want it. So once you've got the accounts set up the way that makes sense to you, so you can look at the accounts and say I know what's in there, I know what kinds of transactions, or receipts or dollars are in that account. Just intuitively, I know what's in there, then the next step is how to do the data entry and to keep up with the day to day filing, processing receipts and all of that kind of stuff. Well again, most business owners the first person they want to hire is a bookkeeper and do all of that so they don't have to. We suggest strongly that you need to do that until you have decided exactly how you want most transactions processed. Where you want them filed. For instance, you've got a land line phone and you've got a cell phone, do they both go into the same expense category telephone or do they go into different places. You may have postage expenses. Do they go under administrative postage or do they go under administrative and marketing or maybe freight. You've got to make these kinds of decisions. What we suggest is that you keep a small notebook next to where you do your bookkeeping and every time you come across a new transaction, write down in the notebook exactly how you want it booked. So if you get a phone bill, we're going to book that to this account. If you get a freight bill, we're going to book it to this account. So exactly how do you want it done. Once you've got eighty, ninety percent of the transactions done, and some are tricky. Things like how are you going to do refunds, how are you going to do prepaid deposits, some get tricky. Once you've got those figured out then you can delegate that part to a clerk or some kind of a data entry person. Then the third step is really the owner's job. And it's periodically reviewing the books and doing quality control. And saying what are these numbers trying to tell me. My sales went up, my expenses went down. Why did sales go up, why did expenses go down? Is there a mistake some place? What are the numbers trying to tell you about what's happening to your business. Now as a small business owner, you intuitively know what's going on. But the books become the validation of what you think. Lots of business owners go out of business because what they think isn't true. So keep a good set of books to make sure that your assumptions actually reflect the facts."