Why do I need Clean books?
TL;DR
Your books are a reflection of your business on paper
You need them so you can understand your business (and be legally compliant)
‘Clean’ books - means that your representation of your business is accurate
You can do it yourself, but I’m here to help :)
This question is one that needs to be answered, though it may seem obvious it still should be answered. That way we can have a full understanding of why we need clean books. I do not want to take for granted an understanding of why we need to keep the books in the first place either. So we will start at the beginning
About your “Books”…
What are they?
Your ‘Books’ are just a representation of your business on paper. It is a log of all of the transactions you do in your business (particularly financial transactions). So, when you sell a product or service your books will reflect money you are owed or have received and the amount of inventory you have on hand. In general your books will record to following:
Assets (equipment, inventory, cash on hand, accounts receivable, etc.)
Liabilities (Debt, accounts payable, etc.)
Equity (This is just Assets - Liabilities, but it is what the owner(s) actually own)
Revenue (Income - money spent, interest received, etc.)
Expense (Money spent, overhead, COGS, etc)
Schedules (Amortization, depreciation, etc)
I’m going to add onto here what your books are not. They are not Legal Contracts and files, your books are not your CRM (customer relationship management) system. Your books don’t tell you about business you might get (there is an exception, but generally), or things that are happening in the future. Your books are very narrowly restricted onto financial transactions in your business.
That is incredibly useful, because you can use your books to tell you how effective a marketing campaign is, or identify where expenses are ‘leaking’. It does give you a good understanding of your business and what is going on. The books, sadly, are not everything.
Why do you need them?
Your books are a reflection of your business. You need them for a couple of reasons ,1) to be legally compliant, paying taxes and such, and 2) to understand your business.
Right now you probably have an Idea in your head of how your business is doing. You know how much money is in the bank, how much you are taking in, how much you are spending… but the information in your head is not exact. Your books are exact - at least more exact than your head. Also, as your business grows it gets harder to hold all that information in your head. So you have your books.
If you want to understand what’s going on in your business you only need to look a your books, and some summaries of them (i.e. reports & KPIs) to have a good idea of what’s going on.
What makes my books clean?
Clean books are books that accurately represent your business in a reasonable/understandable way. So if your books are clean, they will be accurate. This is simply that there a no financial transactions that are not represented by your books. Perfectly accurate books are hard to come by, but the less transactions you are missing the better.
The second part of having clean books is structuring them in a way that is reasonable/understandable. This means that I have the proper accounts to put all of my transactions and balances into. If I have to many it will be difficult for me to understand what’s going on as there will be too much information. If I don’t have enough accounts I have the same problem.
It is also important that the accounts match what your business does. For example, I do bookkeeping, and consulting, so it doesn’t make sense for me to have an income account for landscaping services (when I build a retaining wall for my parents). It also doesn’t make sense for my business to have an excavator on the books, because I shouldn’t be using that for what my business does. So having proper accounts is important, and it can change over time.
About Clean Books…
To keep your books clean
You need to do two things
Represent your business’ financial transactions
Organize those transactions and balances in a reasonable/understandable way
We’ll do that by Categorizing and Reconciling, and a Chart of Accounts, respectively. I will start by describing the COA.
Chart of Accounts (COA)
The Chart of Accounts is just the list of accounts, having them organized and structured in a way that reflects your business is very powerful. I’m not going into extensive detail but if you’d like more information there is some here.
Accounts should reflect what you want to measure.
Categorize & Reconcile
Now Categorizing and Reconciling basically amount to properly sorting all of your transactions into the proper accounts (Categorization), and double checking that you have all of the transactions recorded in your books (reconciliation).
If you have a properly set-up Chart of Accounts and you properly Categorize and Reconcile you are well on your way to clean books. There is more to it, but this covers a majority of what you will be looking at.
Risks of having Messy Books
Legal Headache
If you don’t have clean books, and the IRS comes knocking… you are in trouble. The same goes for if you are ever sued. If your business and personal accounts are muddled then you can be personally liable for your LLC, which negates the entire purpose of having an LLC (which is to limit your liability).
Ignorance
Some say it’s bliss, I don’t. If you don’t know what is going on in your business it is easy to be taken advantage of. The largest risk here is somebody stealing from you. That is why it is also important that the person who is cutting the checks is not the same person who is doing the books. If you work with Courage Bookkeeping, we do not and will not access or have access or want to access your money or the moving of money to avoid issues like this coming up.
The other risk of Ignorance is just not knowing whether or not your business is profitable.
Benefits of Clean Books
Compliance
It is nice to rest easy knowing that if the IRS or some Lawyer comes knocking you have all of your ducks in a row. You can be better prepared to deal with legal issues, and be able to respond with follow-ups quicker.
(I am not a lawyer and do not play a lawyer on TV, please refer to a legal professional for anything pertaining to laws and compliance. I am just giving insight based off of my experience, but your experience may be different than mine for lot’s of reasons)
Understanding
There is also a lot of peace in knowing how much your business makes. If it is in trouble or not. If you know how much you spend you can control it. The upside of knowing for sure is that you can take definitive action. You can make changes and see the impact of those changes. You are not in the dark. I could probably go on about this, but I would hope that this point carries itself.
Can I do this myself?
100% Yes! You can do it yourself, and when you are getting started off you may want to do this. That way you have a clear understanding of your business, and you have a very tactile feel of every little detail that is going on.
Why you might not want to…
Time - It takes a lot of time to do your books properly, and you could spend that time working in or on your business. (Or just with your family and friends)
Frustration - If you don’t know what you are doing, it can be frustrating
Money - If you don’t do books properly it can cost you money, either leaving it on the table, or it being stolen by unnecessary expenses.
Quality - I assume if you have gone through the trouble of reading this article you want it done right. You can certainly do it right, but that requires more or the three others.
My shameless plug for the services Courage Bookkeeping Offers…
This is definitely something you can do yourself - I don’t want to turn anyone away from that, and I want everyone to be in control of their own business. However there comes a time when - in order to grow - you need to build a team around you. That free’s up your time (which you almost certainly don’t have enough of).
Feel free to contact me - even with questions on how you can get your stuff going. If you are in Yakima WA, or the surrounding area, I would love to take you to lunch.
Now I’ll sign off like a letter:
Best,
Gunnar Newell Gunnar@Couragebookkeeping.com (509)643-3424