Many taxpayers assume that the busiest folks during tax season are tax preparers—but that’s not always the case. Often, it’s those who play clean-up who find themselves in demand. That’s because months (and, in some cases, years) of not paying attention to your finances come to a head at tax time.

It’s nearly impossible to prepare a clean return with messy books. That’s why many tax preparers recommend that businesses—and, in some cases, individuals—consider hiring a bookkeeper.

Bookkeeping Basics

Bookkeeping is, at its most basic, the recording of financial transactions. However, Nicole Davis, the founder and CEO of Butler-Davis Tax & Accounting, based in Georgia, warns that it is more than simply balancing a checkbook—especially for small businesses. It includes recording receipts and expenditures, tracking accounts receivable and accounts payable, and potentially inventory and loans.

Depending on the scope of your arrangements, bookkeepers may also help with other financial transactions, like paying bills and issuing invoices. They may also be tasked with payroll, although it’s common to outsource paying employees and remitting taxes to a payroll company.

Remember garbage in, garbage out? That’s the idea that your output is only as good as your input. So, ensuring that the data entered into the system is correct is essential—that may mean verifying digital information provided by banks and financial institutions, as well as confirming certain transfers or cash payments. Once that information has been entered—and categorized correctly—a bookkeeper can reconcile accounts and make any adjustments.

After the data has been entered, a bookkeeper will provide you with reports. Those aren’t simply papers to be filed in a drawer—it’s important to review them regularly to gauge your company’s health and note any improvement areas.

Potential Pitfalls

Jenny Groberg, CEO of BookSmarts Accounting and Bookkeeping, a full-service firm based in Utah, has seen many businesses assume that they can do the bookkeeping themselves—or they bring in a spouse, partner, or other person who isn’t familiar with the books to do data entry. That’s where taxpayers can run into trouble.

Not having a knowledgeable bookkeeper can create several potential problems. While it feels like your business will be fine if you generally slot income and expenses into the right columns, not understanding exactly where and how to record transactions can cost you money.

For example, when it comes to tax audits, remember that the IRS and other tax authorities rely on data metrics. That means, explains Davis, the IRS is comparing you to other businesses in your category. You can raise red flags by mischaracterizing one expense—say, advertising—as another expense—like travel—because it might not make sense for your business category. Plus, some deductions are limited. Mixing and matching food and entertainment costs may seem harmless, but those categories are subject to different rules—and then subject to even more limitations in each category. Business meals with clients are subject to a 50% limitation, while a company-wide event is likely 100% deductible. Food provided to employees as a taxable benefit is 100% deductible to the company, but office snacks and meals are not fully deductible. And concert, courtside, or Super Bowl tickets for clients? They used to be deductible, but the cost of entertaining clients is no longer deductible due to tax reform.

Putting expenses into the wrong category can impact more than just your taxes. It can hurt your ability to make good decisions about your business’ profitability—or lack thereof. Having income and expenses properly recorded means that you can quickly zero in on why profits might be increasing or where you might be overspending. “If you don’t know you’re doing it,” says Davis, “you’ll keep overspending.”

Groberg also stresses that just looking at the bottom line instead of individual line items can inadvertently cause trouble. For example, some business owners who just peer at a bank balance might think they’re fine. However, seeing the money in the account may also create a false sense of security. She’s had many clients who forgot about payroll and sales tax liabilities and saw money sitting in the bank that they mistakenly assumed was profit.

Groberg recommends segregating payroll and sales taxes from operating accounts to avoid those missteps. Not only does that encourage good record keeping, but keeping that money separate means you’re less likely to dip into money that isn’t yours.

“The wheels of government and the IRS turn slowly,” Groberg says, “but they do turn.” When the IRS or other tax authorities come calling, the results can be devastating. Unlike other kinds of taxes, payroll and sales taxes—sometimes called trust fund taxes—may carry personal liability. Since taxes are collected on behalf of a third party, such as a customer or employee, they never belonged to the business in the first place. The business owner collects those taxes to remit them to the tax authorities—and may still be liable to pay the taxes even if the business fails. Together with interest and penalty, those amounts can add up.

In one instance, Groberg was contacted after a taxpayer had been slapped with a hefty bill over failing to remit those taxes—eventually, he lost his house. When he approached her after the fact for services, she didn’t focus on his previous mistakes and instead, signed on. “I’m here to help,” she says. That meant starting from scratch and coaching him to understand how inflows should be treated differently when there are associated liabilities.

The stress of handling those matters on your own can be a lot. And handing them off to a family member who isn’t equipped to handle it isn’t better. You’re simply swapping out one set of stressors for another—the spouse of a business owner tasked with doing the books for the business once confided to Groberg, “I hate my job.”

Groberg compares doing your own books to dental care. “When you’re brushing at home,” she says, “you may think you’re doing a great job.” But when the dental team focuses on your teeth, they may have a different take: you don’t necessarily see what you’re missing.

Davis agrees, noting, “I have not seen one set of books from DIY (do-it-yourself) that has been correct.”

Benefits Of Outsourcing

Businesses and individuals may opt out of hiring because they think they don’t need to spend the money, but tackling bookkeeping on your own isn’t always about cost. Some businesses are worried about another person seeing their books. You can feel vulnerable when someone takes a look at your finances, confirms Groberg. It’s peeling back a layer to your business.

Some business owners also worry about how they might be perceived. But Davis is quick to note that it’s not about being judgy, it’s about learning how to run a better business. “Having someone come in and help you refocus and prioritize,” says Davis, “is immensely helpful.”

Sometimes, having another set of eyes can point out things a busy owner might have overlooked—accounts receivables that haven’t been touched or paying multiple vendors to provide a service that could easily be consolidated. You may need to consider whether those items are a one-time problem or the normal course of business. If the latter, you could easily save money. Groberg says business owners should consider taking on a bookkeeper as an investment. She says there will be a cost, but it’s worth asking yourself, “How much more money can I make?”

(If you need even more hands-on help, that’s where a fractional CFO
CFO
can also come in handy.)

Davis is confident that most businesses can benefit from clean books. Sometimes, businesses find that out the hard way. For example, she points to various Covid relief programs like the Paycheck Protection Program (PPP) and Employee Retention Credit (ERC). Some of those programs were time-sensitive, while others required considerable amounts of documentation. Those who largely benefitted were already prepared—their books were in order.

Davis, a seasoned veteran, doesn’t even do her own books. Why not? “I’m not objective in my own business,” she laughs. She knows this about herself, she explains. Most business owners feel passionately about their business, but can’t always identify what’s holding them back. Even when they can point a finger at the problem, they may not know how to fix it—having someone else who can objectively look at the books and make recommendations can be invaluable.

A client once told Davis, “I’m not good with money.” He had already gone through one bankruptcy. With some direction—and transparency, which Davis says is everything—the client is now “knocking it out of the park.” He’s taken a three-million-dollar business to a 30-million-dollar business in less than ten years.

Groberg had a similar experience. One of her clients, Alyssha Dairsow, Executive Director of Curly Me!, a tax-exempt organization focused on families with children of color, was initially reluctant to hire a bookkeeper. It was “definitely a hard decision,” she says. She bootstrapped the organization, but as it grew, she understood that she needed to involve another professional. And while the company had always been transparent—that’s part of being a 501(c)(3)—she was skeptical at first, noting “that’s still an intimate side of you allowing someone else to see your finances.” But she realized she needed a resource that she could use and trust. “And that’s what I feel like I’ve received since I started,” she says.

Level Of Service

The level of service you may need can vary. Some clients need a low-touch service, explains Groberg—that can be a second set of eyeballs on books prepared in-house. But if you find yourself going to do your own books more than once or twice weekly, it’s time to outsource it to a professional. “Your time is much better spent running your business,” she advises.

Groberg says having multiple checks and balances in place can make the process less scary. And she’s a big believer in having a team. For example, at her business, those who do bookkeeping services are not the same folks who file a return—that gets handed off to a preparer.

Finding A Bookkeeper

So how can you find someone who can help? Davis says to reach out to your colleagues for referrals—and Google reviews. If you have a specific niche industry, like a restaurant or a tech-focused company, it can be helpful to identify bookkeepers with experience in those spaces. Outside of finding the best fit on paper, Davis suggests that you also find out what the bookkeeper’s work and meeting cadence might be—when they’re available can be crucial. Just as important? Communication style—do they prefer to meet in person? Phone? Teams? Zoom?

Finally, Davis suggests finding out who their ideal client might be. “I might not be an ideal client,” she jokes.

How your bookkeeper handles technology matters, too. Groberg says you should ask about systems—she says her team will often make recommendations if they feel your current system isn’t suited for your needs.

You should also feel comfortable about how your data is handled and managed. Davis, mindful of bank alerts that might be sent to clients, has a rule that her team will not log into client accounts after 7 p.m. or before 6 a.m. She doesn’t want any of her clients to worry unnecessarily. “You have to think about the optics,” she says.

Any change at your company can take some time to get used to—and that applies to bookkeepers, too. You’ll need to adjust to having someone take a look at your books and possibly push you on time-sensitive matters that you’ve previously avoided. But when you’re not chasing invoices or scrambling to pay vendors, you have more time to focus on your business. That means, Groberg says, “Everything is going to improve.”

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