Struggling to keep your business' finances organized? In Episode #2 of On the Money Mondays, Blake Oliver, CPA, joins us to share expert tips on handling your own business's bookkeeping and how to expand without taking on too much debt.
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In this article:
On the Money Mondays, Episode #2
Below is a revised video transcript:
How risky is it to do your own bookkeeping?
Many business owners wonder whether it is realistic to actually do your own bookkeeping, and whether there is anything that you might be missing by not hiring a professional.
To answer that, while it is realistic, it must come a caveat. You probably shouldn't be doing everything on your own. It's best to get connected with a bookkeeper or an accountant who knows your accounting software and can help you set it up correctly.
That's the really important thing. You want to make sure that your accounting system — and especially your Chart of Accounts — is set up to capture the information that your tax accountant is going to need to do your tax return. Because that's usually why most business owners do the books, it's to get a tax return done. So if you don't have the right accounts set up, it's going to be a lot of work at the end of the year trying to sort things out.
How to simplify your bookkeeping
Blake explains further:
"I highly recommend you set up Relay as your bank account, then get a Xero or a QuickBooks file and connect that to Relay so you're bringing in all your transactions. And then on a daily basis, every morning with your coffee, go through and categorize the transactions, and put in descriptions wherever you can for those transactions.
That information, with a good Chart of Accounts, good descriptions, doing this on a daily basis, it's not going to be a lot of work. Might take you five or 10 minutes a day. I guarantee you, you're going to be in a good spot when it comes time to do your taxes."
When should you hire a bookkeeper?
Blake continues:
"I would say if it is taking you more than a couple of hours a week and your time is more valuable than that, what you're putting in versus what it might cost you to hire a bookkeeper, that's when I say go ahead and do that.
But most businesses, they don't have a ton of transactions. You have a handful of transactions per day, you can just go in and categorize that yourself. But when it gets to be several hours a week of invoicing or paying bills, that's probably when it's time to hire.
Now, there is a middle option. You could go and you could hire a bookkeeper who will answer your questions or come in and check your work. I think that's a great solution. So find a bookkeeper who can go in, check your books, clean things up, help you out on a monthly basis, so at the end of the year, you're already set up for your taxes."
How to avoid killing your business with debt
A common worry for business owners is taking on more debt than they can reasonably handle. How do you aovid this?
Blake explains:
"You definitely don't want to kill a successful business with debt. And I'm no expert on this, but I've had a few businesses of my own, and so I can tell you what I did. Personally, I would not expand until your existing business is cash-flow positive. You're making money with your current business, you have paid off the debt or you're able to service the debt for your existing business, and you're not worried about that. Then it's time to expand.
I would recommend setting up a separate bank account and going out and getting financing if you need to, and putting that money into that bank account. And then that is financing that you only use for that expansion opportunity.
Another thing you'll want to do is set up a cash flow forecast. There are templates you can download online that will help you create both a short-term and a long-term cash flow forecast. Or better yet, go out and work with an accountant who can help you do this and keep it up to date.
And that will go a long way to making sure that you don't run out of money too soon. And that's what happens with most businesses that try to expand — they underestimate how much capital they're going to need and they run out of money before they get to breakeven. And you don't want to do that. So hire a professional, keep the money separate, and don't expand until your current business is cash flow positive."
How do you start cash flow forecasting?
Blake:
"If you have no idea where to start with cash flow forecasting, I would say hire a pro. If you've used spreadsheets before, if you know your way around Excel or Google Sheets, you might be able to figure it out.
A cash flow forecast is really just a list of your income and your expenses, and then it shows how much you are bringing in terms of cash or you are losing in terms of cash, every week or every month. And then you just do that in a column for every week or every month. And you see over time how that changes.
You can use a cash flow forecast to figure something out, like if I start with $100,000 and I'm burning, right, or I'm losing, say, $10,000 a month on average, I know that I have 10 months of what we call runway. So you have to figure out how to get to profitability so that you're not losing money within 10 months. And then, of course, you got to service the interest payments on that, and that should be part of your forecast.
If all that sounds really overwhelming, go out and hire a pro."
How to split expenses across multiple businesses
Some business owners wonder how you should be splitting an expense when it is shared across multiple businesses. For example, mileage on a car that is shared by three businesses or software that is used by all three.
Blake explains:
"Splitting expenses across businesses can get really complicated really fast when it comes to doing the bookkeeping. So you want to avoid it if at all possible. I'd recommend trying to set up each business with its own subscription, but I know that's not always possible.
But here's the good news. If you own all of these businesses 100%, which is often the case, the IRS really doesn't care where those expenses happen, because in general, those expenses flow through to you personally if they are passed through entities. So if it's in LLC #1 or LLC #2 or on your Schedule C, doesn't really matter when it comes to computing the income tax you owe.
Note that the above is a generalization. Be sure to check with your tax professional to make sure that's okay.
Now, if that is the case, it's not going to be a big issue in an audit because whether or not the expense is split among three or just in one, doesn't really matter to that ending tax owed number. So the auditor probably isn't going to care.
So my answer is, it depends. It depends how much you want to do things exactly according to the rules or whether or not you want to just get things done so that you can move on and grow your business. And that's always something we have to deal with in bookkeeping and in tax, is you can do things perfectly or you can do things good enough."
