Getting Started with a Bookkeeping System
It's amazing how quickly it all happens isn't it? One minute you're dreaming up your business. The next thing you know it's mid-March and the tax deadline is looming. You're in a panic not having any idea what your business has made, what you've spent, or how much you're on the hook for with the CRA.
It's one of the reasons so many small business owners despise tax time. It's just another thing to add to a never-ending to do list. It doesn't have to be anxiety inducing though. It can actually be quite empowering.
Imagine this. You wake up a year from now. You know exactly how your business is performing. You know how much you owe the CRA. In fact, that's old news! Because you already paid them, and now you're focused on the next 6 months. Looking forward, working to achieve the next phase of your business. You thought your goal was achievable by year 3, but the monthly reports you've been generating say otherwise. You've managed to capitalize on a market opportunity because you were able to see what was really driving your profits. You've managed to identify the most costly areas of your operations and found ways to streamline them to increase your bottom line. For the first time since you started your business, you're compensating yourself.
Sound like a pipe dream? It doesn't have to be. This could be you. All it takes is a commitment to get things set up, and some consistent dedication to make your accounting a priority.
I will say this time and time again.
Your numbers are your secret weapon. Use them.
You're in charge of your business. You need to be empowered enough to be in charge of your financial results too.
So how do you start? Where do you get the numbers? Easy - you need a system.
And not just any system. A system that:
Is properly set up
You understand and know how to use
Gives you the output you need
If your system is missing any of these components you're going to be making things a lot harder than you need to. Will you still get accurate results? Possibly. But the time you spend getting there will be longer than necessary.
System Set-up
Setting up your system properly is crucial to ensuring the data you're getting from it is accurate. Make sure the following areas have been set up properly:
Tax Rates:
If you're registered for GST/HST or PST/RST, set up your tax rates with the appropriate names, percentages, and components. Ensure the system recognizes when a tax paid is non-refundable (like PST or RST) so the amount paid isn't accumulating as credits in your sales tax balances.
In your chart of accounts, map accounts to their corresponding tax treatment. IE - If you always charge GST on sales, ensure all sales accounts are mapped to the "GST on Sales" tax rate.
Chart of Accounts:
Most software systems have an option to import or use the default chart of accounts. This is totally okay to do. If you are going this route, comb through the list and archive or delete any accounts you won't use, or that are not applicable to your business. Add any accounts you'll need - or change the names of existing accounts to suit your needs.
Invoice Settings:
If you're using your bookkeeping software to send invoices, spend some time learning where you can edit the appearance and ins and outs of your invoices. Add your logo, GST number, business address, and preview what customers can see when they receive an invoice. If you use a payment processor to collect sales, you can often integrate it directly to your invoices.
3rd Party Apps/Integrations:
Nowadays there is an app for practically everything. The good news is that you can integrate many of these apps with your bookkeeping system to seamlessly pull in your data. The intricacy of the set-up varies from app to app, but some can be quite complex to do properly. Mapping will often be involved from the app to your bookkeeping system's chart of accounts, and some apps will even automatically create accounts as a part of the set-up.
Understand How it Works
Now you don't need to be an expert. But if you're serious about doing it yourself and you're completely new to the technology, you should take advantage of the support available. Both Xero and QBO have support blogs, resources and instructions to troubleshoot issues. Many bookkeeping and accounting experts have created video tutorials on YouTube to help newbies get acquainted with aspects of these systems. Give it a google and see what you come up with! These can be quite helpful when you're just getting started. A word of caution though, several of these tutorials are cookie-cutter solutions. They are not one-size-fits-all solutions and may not work for your business, or give you the expertise you need.
When it comes to your system - you should know the following:
What it can do
Fundamentally, you need to understand what your system can and cannot do. Is it going to be creating and sending your invoices? Is it tracking the time your employees spend on their projects? Is anyone using it besides you? What access do they need? Understanding the system's capabilities, and defining how they are going to be used should be done early on in your system adoption.
How to record transactions
The information feeding in to your system and how it is recorded is going to make or break the effectiveness and accuracy of your bookkeeping system. Your bank accounts drive the transactions feeding in to your system, so ensure they are all imported or connected. Understand how to record the who, what, and tax treatment of your transactions.
How to correct mistakes
Mistakes happen. Knowing how to find and correct them is a fundamental part of ensuring your bookkeeping stays up to date and accurate. If you record a transaction to the wrong account, vendor, or tax rate where does it go? How can you find it and correct it? If you match a payment received to the wrong invoice, how do you fix it? These are all issues that WILL happen no matter how careful you are. They're no big deal, they happen to everyone - even the professionals. You need to understand how to fix them.
How to generate reports
We'll talk more about this next. But if you're going through the trouble of setting up a bookkeeping system, don't let that be as far as you take it. Know how to make reports. Understand what they mean. Create them. Review them. Use them.
Output Matters
There's really no sense in setting up a bookkeeping system if you're not going to generate reports to monitor your performance. Sure - you'll be caught up for whenever you need to file your taxes. But that's not really the goal of your business, is it? You should be measuring how you're doing, when you're doing it. You do that through reports.
Profit and Loss
Your profit and loss statement covers a specific time period and tells you the sales you've generated, less expenses you've incurred. The amount left over is your profit (if sales are greater than expenses) or loss (if expenses are greater than sales). Generating this report, and understanding it, is so important for business owners. If you're not keeping track of your bottom line you're missing out on the opportunities you have each and every day to increase it. You're in charge of your business. You need to be empowered enough to be in charge of your financial results too.
Balance Sheet
Your balance sheet is typically generated at the end of a month or financial period and shows your assets (what you own), liabilities (what you owe) and equity (the amount available to owners once liabilities are settled) at that time. Main areas to look at and understand on the balance sheet are liabilities - sales or corporate taxes payable, and any shareholder loan balances,
Comparables
Looking at a single month of reports often won't tell you much about your overall performance. Add comparables by month, quarter, or year to see trends in performance and understand the bigger picture.
Can you do it yourself?
So, now that you know the general ins and outs of what you need to know in order to set up a good system... here's the 10 million dollar question: Can you do it yourself?
The answer is yes. Absolutely you can.
I have seen owners set up beautiful bookkeeping systems that work perfectly for what they need and how they run their businesses. It's not rocket science if you're a little tech savvy, have some accounting knowledge, and have some extra hours on your hands to get a system established. There are also some major perks to learning the accounting function from the ground up. You'll have extra insight into the finances, and gain a thorough understanding of how your operations impact your financial results.
The catch is - you need to be honest with yourself. You likely already know the answer to whether or not you have the skills and capacity to add a system set-up and implementation to your plate. Brain space, capability, and time. Those are your biggest indicators.
If any of the following situations apply to you, seek the help of an expert when setting up a system to ensure you get set up properly.
You have a bookkeeping system in place and are looking to change providers (either software systems, or service providers)
If you have been operating as a sole proprietor and recently incorporated your business
If you're really, really, really far behind (think years)
So there you have it. Give it a go yourself, or get in touch with us to help you sort it out. Either way - we're cheering you on :)
