As a bookkeeper, I have learned a lot about the practice by working with many different types of businesses in a variety of different industries. Here are 13 things I bet you didn’t know about bookkeeping:
- Bookkeepers can offer strategic planning. While some bookkeepers can only provide you with data entry services, great bookkeepers can help you to strategically plan for your business’ financial future and to form a budget based on your last year’s income and expenses. Great bookkeepers can help you to analyze dilemmas and find solutions to problems that your solo practice or small law firm may encounter in the future.
- Financial statements are irrelevant without an explanation. Typically, financial statements are prepared two to three weeks after a financial period ends. By that time, you may have already moved onto some alternative way of running your practice because you wrongly thought you knew which areas needed improvement or may have already forgotten the details behind the last period’s financial information so you are confused about what purchases were for. Without an explanation from a bookkeeper to highlight problematic areas such as a marketing that is costing too much money and suggest ways that you can improve your practice, these financial statements may seem like a foreign language.
- Bookkeeping can be outsourced. In areas of the country where employees are hard to find, many attorneys have begun to outsource their bookkeeping. Because outsourced bookkeeping can help law practitioners to grow their practices with real-time data and guidance and without the need to place a full-time employee on their payroll, outsourcing is sought out in more places than in the smallest towns in the country.
- Bookkeepers can help with cash flow management. As a solo practitioner or small law firm, you are not always prepared for the financial crises that arise. Fortunately, many of these crises are not really crises. They are normal expenses that occur annually and are only overlooked because they happen infrequently. A great bookkeeper can help you set up deadline so that you are never shocked when a large payment is due.
- Your tax returns are rarely the same as your financial statements. A lot of solo practitioners and small law practices file their taxes on a cash basis so that they only pay taxes on the increase in cash they made that year. However, by changing your financial statements so that your revenue and expenses are on an accrual basis, you can gain a more accurate look at your financial health. Let’s say you billed hours in December but collected the payment for those hours in January. While according to your taxes, the money collected in January would not be included in your previous tax return, according to your financial statements, the money would be included in your income for December.
- Bookkeepers make sure that you are prepared for tax time. In January, a great bookkeeper will have already closed your books, and the reports you will need to send to your accountant will be ready for delivery at the push of a button. With a great bookkeeper, you can be at ease knowing that your accounts have been reconciled every month and that you have not missed any transactions.
- Bookkeepers can help with forecasting. Great bookkeepers will look at historical data to help figure out the direction of future trends. Forecasting allows small law practices to have a better indicator of items like growth, capital needs, and profitability. In summary, forecasting can help you to plan ahead and prepare for the things to come.
- Your profit and loss statement (income statement) understates your liabilities and overstates your assets. Your assets contain items like insurance that has been prepaid. While this can be helpful for accounting purposes, for small practices, it represents cash that has already been spent for something that the practices will probably never get back. Also, your equipment does not show the repairs and maintenance that will be required to it keep running so it is overstated. Similarly, profit and loss statements do not show loan payments nor the cash you paid for the prior year’s income taxes. In other words, if you look only at your profit and loss statements, you may see profits in spite of your lack of cash.
- Bookkeeping is centuries old. The need for someone to figure out the books has been around for centuries. Luca Pacioli (1447 – 1517) is known as the father of bookkeeping and was the first person to introduce double-entry bookkeeping to the practice. It is hard to believe that we still use a system that was invented so long ago.
- Your bank balance will almost never match the balance in your bookkeeping software. Unless you only have one or two transactions per month, your bank balance and the balance in your bookkeeping software will never match. Don’t worry about it. More often than not, these balance discrepancies result from checks that have been written but have yet to be cleared by the bank. Even after a bookkeeper reconciles your bank statements to detect transactions that you may have overlooked and confirms that your balance in your bookkeeping software is accurate, the balances between your software and the banks’ records will never be identical. If only you could find a way to make people deposit their checks as soon as you have written them.
- The bank does not rely solely on your financials. Yes, they are going to require them before you get a loan, and yes, they may require updated monthly or annual financials, but these are only a portion of the process for determining if you are in good financial health. After they have reviewed your financials, punched their numbers into their spreadsheets, and decided that the outcome of these numbers is where they need it to be, they will move onto other methods for determining whether or not you can pay your loan. Most banks detect financial problems through conversations, visits to business offices, and by checking other data such as looking at the future of your industry. Your bank will not be in business long if they rely solely on your financial statements to determine the quality of your financial health.
- You can take pictures of your receipts instead of putting them in a shoe box. We all know someone who throws their receipts into a box and pretends that they do not exist until they have to file their taxes. However, good bookkeeping software allows you to take a picture of a receipt at the time of purchase. Following this, you or your bookkeeper can record the purchase and match the receipt to the correct transaction.
- Bookkeeping is not only about entering numbers into a journal or ledger. Bookkeeping is about so much more than data entry. It is also about interpreting data and explaining it in a way so that you can understand where your law practice stands financially. An informed understanding of your financial data can also help you to more effectively manage your day-to-day cash flow and operations.
You may not have known these 13 things because you lack a great bookkeeper. If you would like to speak with someone who can explain how bookkeeping can grow your small practice, click here to schedule your free 30-minute consultation.