The issue of doing your own bookkeeping became prevalent with the advent of low cost accounting software in the early 1990’s. On September 27, 1994 Intuit purchased a program called MoneyCounts from Parsons Technology for $64 Million. Intuit changed the name of MoneyCounts to QuickBooks and created a very effective Unique Selling Proposition “You can save money by doing your own bookkeeping”. That USP resulted in Intuit capturing almost 85% of the small Business market. Accountants were no fans of this extremely popular software program for several very valid reasons. First, it was not a true accounting program with serious security flaws. Second, it was promoting inexperienced individuals take on a crucial segment of the financial process. Third, it was distracting Business owners from their core Business, and last, it drastically cut into the accountants Business.
Addressing all of the issues concerning DIY bookkeeping in great detail would require a book. I will cover as many of the main issues here to provide the reader with an opportunity to gain a better understanding of an extremely important subject. I welcome any questions and comments regarding the subject matter in an attempt to assist entrepreneurs that may not have had the opportunity to properly make an informed decision.
If you’re reading this special report chances are you’re one of the millions of small Business owners struggling with the issue of “doing your own books”. For many, the idea of retaining an outside bookkeeper or accountant to handle your personal financial matters is sort of like opening up your closet to a complete stranger. I believe that this issue of personal privacy is valid. To be perfectly honest, one of the reasons I decided to become a CPA was because I knew I would be in Business and wanted to be in control of my own finances. Most entrepreneurs don’t have that option or the skill set. The issue of DIY bookkeeping is of tantamount importance because it could affect the financial viability of the enterprise. There are a number of issues to address including:
The use of bookkeeping information to prepare tax returns
The integrity of the financial information produced
The validity of historical data to project future results
The management of cash flow
The cost of retaining a professional
The time, effort and frustrations of keeping your own books
Addressing the government’s increasing propensity to audit
The time and effort learning about bookkeeping
Creating the bookkeeping processes
The trust factor
As you can see there are a lot of issues to address in making the right choice. This is by far, not all inclusive. There may be many other legal, financial and/or personal issues at stake. The point here is that the subject of creating and maintaining a set of books and records for a small Business is of significant importance. The decision as to how it will be done should not be made on a whim or by the uninformed. An individual operating a small Business doesn’t know what they don’t know. Operating a Business comes with certain responsibilities and obligations. Not knowing is not a valid reason when the books and records fall into question. I submit that as Business owner it is your duty to know exactly what the issues are and make an informed decision about addressing each of them. You are, by default, the President of your company which comes with all of the associated responsibilities including tax, legal and personal liabilities.
Reasons & Excuses
Most, if not all startups take on the task of creating their own set of books and records for a few simple reasons:
No funds to retain a professional
Limited amount of transactions
Exposing personal financial information
The perception that it’s easy
The propensity to procrastinate
Every Business must file a tax return. Eventually the issue of bookkeeping must be addressed. Millions of individuals choose to prepare their own tax returns which is another issue all by itself. Let me address that before going further. It’s a real easy one and not because I prepare tax returns but because of the complexity of the tax laws, both Federal and State.
I can compare the idea of an individual preparing their own tax return to pulling out my own teeth. When I was a child my teeth came out naturally. I didn’t have to go to the dentist to have them pulled professionally. Even if I pulled them out when I shouldn’t have, eventually my permanent teeth would grow in to cover up my mistaken belief that I was a dentist. As an adult I know better. Hopefully, if you own a Business you know better. To attempt to prepare your own tax return would be the same as trying to be your own dentist.
There is simply too much at stake. Potentially missed write offs or even worse, over aggressive write offs resulting in an audit and the very unfortunate mistake of not incorporating your Business and exposing your personal assets to a lawsuit, just to name a few. If you haven’t figured out my position on this subject let me make it clear. Doing your own tax return is a monumental mistake. If you are going to open a Business you need to enlist the advice of a good tax accountant.
Getting back to the do it yourself bookkeeping issue, another fact to consider is the financial aspect. This is valid as most start ups have zero funds to begin with. The idea of investing in professional guidance takes particular shrewdness. One thing to consider is the very popular “Free consultation”. I don’t know many professionals that would not offer an initial strategy session to a potential new client. That pretty much makes this issue null and void.
If you decide to retain the professional to guide you they will understand the financial issues involved. The right person will be willing to nurture you and your new Business and come up with a pricing structure that will work. Don’t expect a good accountant to work for free and don’t enlist a family member or friend that is willing to work for free. They will not treat you as any other client for the simple fact that you’re not. Some of the worst clients I ever had to work with were friends and family. The problem is that many times I was the bearer of very bad News putting me in a precarious position. If you have a friend or family member that is in the Business, ask them to refer you to one of their associates. You will all be happy you did.
The remaining issues all really have to do with your personal mindset. Fear, procrastination, perception etc. all have to be addressed at the mindset level and I’m not qualified to address those issues so I won’t. Business and personal mindset coaches are in abundance today.
Twenty years ago when Intuit perpetrated the missguided USP that “You can save money by doing your own bookkeeping”, Business coaching was not mainstream. It was probably more in the realm of psychotherapy or Business consulting which was either in the category of extremely personal or too expensive for a start up. Today therapy and Business coaching is standard fare making the issue of mindset really an issue of – are you serious about this Business or not?
That really only leaves one remaining issue to address; which is the volume of transactions. Does it really make sense to seek the help of a professional bookkeeper when the volume of your transactions are minimal? This question leads to another question which is, what constitutes minimal? If it’s not minimal, should you still be doing your own books?
Now I can really get into the subject matter of whether or not a Business owner should be doing their own bookkeeping. Let’s first start with the definition of bookkeeping. It seems obvious that a subject so crucial to a Business needs to be defined in order to properly make an informed decision on the matter.
The definition of bookkeeping:
The work or skill of keeping account books or systematic records of money transactions (distinguished from accounting).
This is from yourdictionary dot com
An example of bookkeeping is the process of documenting bank statements each month.
So its obviously very simple. Or is it? Where does one start? What method of keeping records is acceptable? What is the purpose of bookkeeping? For these answers I will refer you to IRS Publication 583 Starting a Business and Keeping Records.
Why Keep Records?
Everyone in Business must keep records. Good records will help you do the following.
Monitor the progress of your Business.
You need good records to monitor the progress of your Business. Records can show whether your Business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of Business success.
Prepare your financial statements.
You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your Business.
An income statement shows the income and expenses of the Business for a given period of time.
A balance sheet shows the assets, liabilities, and your equity in the Business on a given date.
Identify source of receipts.
You will receive money or property from many sources. Your records can identify the source of your receipts. You need this information to separate Business from nonBusiness receipts and taxable from nontaxable income.
Keep track of deductible expenses.
You may forget expenses when you prepare your tax return unless you record them when they occur.
Prepare your tax returns.
You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your Business and prepare your financial statements.
Support items reported on tax returns.
You must keep your Business records available at all times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.
So the “why” is clearly established by one of, if not the most recognized authorities in existence today, Internal Revenue Service. Now here’s the kicker. On page 12 of Publication 583 Starting a Business and Keeping Records they define the kinds of records to keep:
Kinds of Records To Keep
Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeeping system suited to your Business that clearly shows your income and expenses.
I don’t know about you, but this leaves the door wide open for misinterpretation. Let me get to the long and short of it. Your books and records must clearly reflect the income and expenses reported on your financial reports. Your financial reports are used in preparing your tax returns. During an audit of any kind, figures that are not clear as to the source and nature of each of the underlying transactions will make the financial reports suspect. Your financial reports should be so clearly defined that a person not familiar with your Business can clearly see the logic and methodology of how your figures were arrived at. Not only do the figures need to be clear and concise, there must be supporting documents substantiating those numbers. In accounting we call this an audit trail.
If an audit trail has gaps the numbers become suspect requiring further investigation. If you’re being audited this is the type of statement that can raise anxiety levels, stress, and many hours of lost sleep. Albert Einstein said “If you can’t explain it to a six year old you don’t understand it yourself.”
Compliance issues on their own should compel any Business owner to keep a good set of books and records. Most accountants take that one and only position. You have to do it because “they” say you do. That’s not enough for any entrepreneur to comply. Let’s face it, we are risk takers. Entrepreneurs are delusional to begin with and to let a little obstacle like the threat of audit, Government, insurance or banking institution get in our way is ludicrous.
For me the most compelling reason to build a solid financial foundation is because you are serious about your Business. Knowing your numbers is one of the mantras spoken by just about every successful Business owner. Think about it. Are there any successful entrepreneurs you can think of that do not have a firm handle on their financial information. This was what originally drove me to become an accountant. Knowledge of my numbers. Not only to show me what happened and to show me how I arrived where I was, but to help me get to where I wanted to be.
Your financial information tells a story about you and your Business. If your story is full of holes and embellishments how can anyone take your intentions as being serious. It takes a brave person to address their flaws and shortcomings and true financial information may be a scary subject for you to confront. If that’s the case with you I would strongly encourage you to take a close look at yourself and your intentions. Are you in Business to fill your ego and create a false sense of hope or are you in Business to generate profits?
I believe that it’s important that you have an understanding of my background and experience on the matter of bookkeeping. Being a CPA does not automatically make me an authority on the subject, although it does provide a level of credibility. What’s more important than my credentials is my experience. First off, as I mentioned earlier I became an accountant because I knew I would have my own Businesses. That’s plural for a reason. There was never any question in my mind that I was an entrepreneur. So first and foremost I consider myself an entrepreneur and a CPA second. What that means for you is that I approach this subject the same way any entrepreneur would.
I graduated from S.U.N.Y Oswego in 1983 with a degree in Accounting and went on to work for a tax attorney in Brooklyn NY. During my first two tax seasons we did over 2,000 personal income tax returns, all by hand. This required calculations using an adding machine along with researching the tax code in an actual book. We had no computers. From there I went on to work at a series of CPA firms catering to small Businesses. Again, there was very little computerization and just about everything was done by hand. From the rudimentary bookkeeping all the way up to preparing sophisticated tax returns and financial statements. I went on to work in management positions at several firms with one high level position being strictly solving tax problems. I handled every kind of federal and state tax situation imaginable including negotiating installment agreements, offers in compromise, sales-payroll-individual and Business tax audits including several criminal investigations.
I bring this up because I feel that it is very important to understand that I come from a real, hard copy accounting background as opposed to the electronic accounting program background. I learned first hand what they want to see and what raises red flags. Most accountants have never had the opportunity to handle the volume of tax audits that I have. I didn’t have the luxury of printing out books and records from a computer program. We always had the hard copy of books and records. This initial experience proved to be invaluable when accounting became computerized. I knew first hand what was suppose to come out of those programs and all too often the garbage that was spewed out were not even close to being representative of an accurate set of books and records. When the government asks to see your books and records, they want to see hard copies of everything. They don’t care one iota what electronic system you used. You have to print it all out and show them your audit trail. If there are gaps you’re going to have problems. Computerization changed the landscape of accounting for small Business and it was not in a positive direction.
In 2009, I began teaching individuals my remote bookkeeping system with the intention of adding to my staff. Surprisingly, I enjoyed it immensely and several of my students went on to land their own clients and bookkeeping jobs. That experience intrigued my entrepreneurial curiosity and I began teaching.
I found that was the best way for me to serve was to educate and guide Business owners towards success. It became apparent that what small Business owners really needed was a good set of books. My skill set and experience allowed for it, I was really good at it and there were already plenty of Business coaches teaching success principles.
My Position Today
Today, I find it alarming to see the quality of what people refer to as books and records. This is through no fault of the Business owner. I place the blame entirely on the accounting profession for this degradation of the small Business financial infrastructure. It is my firm belief that accountants were the trusted advisors that were in the unique position to steer small Business owners away from the perils of that false unique selling proposition put forth by Intuit that “You can save money by doing your own books.”
You might assume based on what I have written thus far that I am against small Business owners doing their own books. At one point, not to long ago I was 100% against the idea but today I have a different opinion on the subject.
I believe that today’s small Business owner must take an active role in the production of their books and records. That does not mean that Business owners should do their own books. Doing your own books means that there is no guidance or instruction from a professional that knows how to construct an adequate bookkeeping system. Quickbooks, or any other program is not a bookkeeping system. Software, the same as pencil and paper, is just a tool to be utilized within the bookkeeping system.
There are not many areas of small Business that can be done effectively by someone with no prior knowledge, experience or skill set to do so. I don’t fix my own car or do my own Marketing for the same reason someone should not do their own books. That being said, I do take a very active part in maintaining my car and working in and on my Marketing system. The issue is not whether or not you should do your own books. The issue is what part or parts of creating your books and records will be your responsibility, what part will be your accountants and what part will be your bookkeepers-if needed.
Lets look at the definition of bookkeeping once more:
This is from yourdictionary dot com
Bookkeeping is a process that at the very least, ends with the preparation of a tax return. My opinion, based on my years of experience, is that no layman can possibly do their own books, completely on their own and expect an accountant to produce an accurate tax return. There must be an interaction between the person preparing the tax return and the person compiling the records. I submit that bookkeeping and accounting, done properly must be a joint venture between the experienced professional, the entrepreneur and bookkeeper. Sometimes and almost always at the outset, the bookkeeper can be the Business owner.
So the answer to the question as to whether or not a Business owner should do their own books, the unequivocal answer in my opinion is yes and no. Bookkeeping is a process that begins the very moment the first Business transaction is consummated and continues fluidly each and every time another transaction takes place. Bookkeeping is the detailed compilation of information that requires a team approach in order to be completed accurately. At the outset, that team usually consist of the Business owner and the accountant. Now the Business owner can be in charge of entering and reconciling all of the transactions but this does not constitute “doing your own books”.
Every bookkeeping system requires oversight. There must be checks and balances put in place to ensure that all of the transactions of the Business are being properly recorded in a timely fashion. The only individuals with the knowledge and experience to design and oversee a bookkeeping system is a good accountant. Bookkeepers do not design systems, they maintain them. Therein lies the root of the problem. When Business owners make the unwise decision of doing their own books they unwittingly take on the assignment of developing their own bookkeeping system.
It’s not really a question as to whether or not a Business owner should do their own bookkeeping. The real issue is who has developed the system and who is responsible for overseeing it. I submit that this is the accountants responsibility and any accountant that allows their client to simply bring in what they have and attempt to prepare a tax return with suspect information is doing their client a grave injustice. Before low cost computer software this would have been unfathomable.
A great accountant will educate their client as to what needs to be done in order to create an accurate set of books and records. This is our job as trusted advisors. Business owners did not make a mistake when they decided to “do their own books”, accountants did by not embracing the software and becoming an integral part of the process. Instead of dismissing QuickBooks as an inferior accounting program and leaving their clients out on a limb they should have educated themselves and their clients as to how they could incorporate this new technology to best serve their clients needs.
The idea of attempting to do anything on your own in Business can be a slippery slope. The first question you need to ask yourself is how serious are you about this Business. If you’re not that serious and are just in it to make a few bucks then go right ahead and do everything yourself. Im not saying that sarcastically. There are millions of small Businesses out there because the Business owner decided that this was going to be just a part time “Business” generating a small amount of revenue and questionable tax write offs. I say questionable because by definition the IRS requires a Business’s objective to be to make a profit. If a Business simply breaks even or loses money every year you run a very good chance of being classified as a hobby.
For those serious entrepreneurs, I believe that you must take an active role in the production of your books and records along with the resulting accounting data. This can only be accomplished with a pro-active small Business accountant. The accounting process is a never ending system of compiling a growing number of detailed transactions. This will require constant tweaking and education for all parties concerned. The accountant must be informed of all ongoing and planned Business transactions while the entrepreneur needs to stay on top of the results and comparative projections. In other words, when an entrepreneur does something and expects it to result in a profit the accounting system must be structured in such a manner to provide tangible, reliable results.
The only real solution to the “doing your own bookkeeping” is “how are we going to do our bookkeeping correctly?”. It has to be a collaboration. Apple Computer would have never materialized if it were just Jobs and Wozniak. They needed the financial guy that put all of their ideas into financial reality. That’s just as obvious an example as I can come up with but the truth is as I stated earlier-any successful Business owner will tell you that knowing their numbers is a key component in their success.
I see no real way around the fact that when an entity begins the owner should and must be the bookkeeper. I will qualify that by saying this – as long as it’s done correctly and in conjunction with the accountant. When a Business starts at zero, and even if it doesn’t, I believe that the education and experience obtained in keeping your own books will be invaluable. Knowing your numbers involves knowing how the numbers got to be where they are. Making Business decisions, creating new revenue streams, keeping cost down and profit margins high require a working knowledge of those facts and figures.
Where to Start
You need to start with a pro-active accountant that does not expect you to simply drop off your bank statements and check stubs. If you are working with an accountant that does not ask you any questions you should start looking for a new accountant right away. When I first started in this Business that’s what accountants did. We asked questions about the Business and about the client’s personal financial situation. For most small Business owners, the Business they are running is their main source of income and their personal finances are not mutually exclusive. They are connected but unfortunately most accountants have lost sight of that.
You should form a mastermind with your accountant with the objective being your financial success. If you’re not familiar with the MasterMind concept I encourage you learn about it. In short, a MasterMind is created when two or more individuals join in perfect harmony for the attainment of a common goal. What I am suggesting is that your accountant should not just be a historian explaining what has already transpired in your Business. You already know that.
I submit that your accountant should be working with you and your bookkeeper to disseminate your financial information to understand how you are where you are and more importantly, how to use that information to get to where you want to be.
Your accountant should set you up with the most appropriate tools and information to help you achieve financial success. This includes educating you about transactional data entry, reconciling accounts, recording payroll and paying payroll taxes, what kind of software you will use and at what point will it make sense to bring in a professional bookkeeper.
Bookkeeping must be a collaboration and yes, you should be an integral part of the bookkeeping process. I believe “Doing It Yourself” may not be the best terminology to use. Doing your own bookkeeping does not mean you should be doing it alone. Bookkeeping requires professional guidance, education and gaining first hand experience in nuances of accounting and bookkeeping. You must be a part of the process so that in the event your Business takes off, you will be in the position of not just hiring your first bookkeeper but training them. You, and your accountant will be training them so that you can devote more of your valuable time to expanding your Business. Isn’t that why you started the Business in the first place?