Tag Archives: structure

Why Hiring a Bookkeeper Might be the Wrong Choice for Your Business

When I tell a small business owner I believe they should do their own bookkeeping, I almost always get the same look. It’s a mix of terror and wide eyeballs that say “you’re f***in’ with me right?”

I’m serious though. Doing your own bookkeeping gets you elbow deep into the details of your financial information. You look at every little thing you spent money on, which forces you to think about your expenses in a head space that’s disconnected from the usual emotional high of buying something.

You have a chance to think about why you purchased it in the first place and, with objective hindsight, examine if you maybe should’ve left it on the store shelf. This assumes you’re bookkeeping in a calm and collected head-space. I understand this may not be the case right now. It may be closer to a fear and frustration tornado that’s raining overwhelm (I’ll come back to this).

As you review your expenditures you can catch errors before they become an issue. If you’re looking at your phone bills every month, and one month it goes up by $25, you’ll have a chance to call the phone company in that month to find out what happened. If it was all on auto-billing, it may have gone unnoticed and unquestioned.

Get ready to dig into your numbers! #elbowdeep

Let’s get ready to dig in to your business numbers. #elbowdeep

Doing your own bookkeeping also gives you an expectation for what your income statement should look like. If you know you’ve made the choice to put apps and other software in to Office Expenses, you can look at your income statement and know exactly what’s in the Office Expenses bucket (or line or account or category – whatever you want to call it).

If you outsource this job maybe the bookkeeper decides those items should go into Software Expenses, and only physical office expenses should go into Office Expenses. Now you’re looking at your income statement and you’re not really sure what makes up those amounts.

Your income statement is useless if you’re not sure what makes up the numbers.

How can you lower run-away utility bills if you’re not sure what’s classified as Utilities Expenses? Maybe you turn your heat off and shiver through the winter, trying to lower that expense, only to find out your phone bill was in there too, and the biggest cost was you kept going over your data limit – no amount of shivering will fix that.

Back to the Fear and Frustration Tornado

I understand the idea of doing your own bookkeeping is scary and not something you want to do, and I’m not suggesting you go it alone.

It’s important to have someone walk you through the basics of bookkeeping and receipt management, so you can setup a specific process that’s tailored to you and your business.

Think of it like hiring a bookkeeper as a coach instead of doing it for you. You’ll want to have a few lessons in the beginning to make sure you get started on the right foot (or left, if you’re left footed).

This person should be someone who creates a safe space for you to make mistakes and be honest about how the process is going. The more you can share with this person, the faster you’ll learn and grow.

As you gain confidence in your ability to sort, categorize and reconcile transactions, a lot of the negative emotions will start to ease.

Even the best dogs can get themselves into a mess. #gooddog

We tend to fear bookkeeping because we don’t know where to start, it’s difficult to understand whatever we can find on the internet (or know if we can trust it), and we worry that any mistake will have the Canada Revenue Agency (CRA) banging on our door.

The first two can be helped with a good bookkeeping coach.

The third? The CRA has a bad reputation for being mean and unyielding, and I don’t believe that’s totally accurate. I’m not here to advocate for them, but what I will say is this. You can always call and speak to an agent, who will explain the rules and how to correct whatever happened – you don’t need to be perfect.

No matter how big the mess feels, it can always be cleaned-up.

When’s the Right Time to Hire a Bookkeeper?

I don’t believe you should do your own bookkeeping forever. In fact you probably shouldn’t do it for very long. So how do you know when to hand it off?

1) Start by keeping track of the hours you’re spending on your bookkeeping. In the beginning it will be higher, but once you get the hang of it and it becomes part of your regular routine, you’ll have a pretty good idea of what it takes for you to do it consistently.

When the amount you would be making by doing something else exceeds the amount you would pay a bookkeeper, it might be time to hand it off.

2) If your bookkeeping starts to become more complicated, and you’re asking more and more questions, it’s probably time to hand it off.

3) When you have the available resources to comfortably pay a bookkeeper, it’s definitely time to hand it off.

If you’re still not sure, talk to your bookkeeping coach. They’ll have a good understanding of your specific situation and will be able to advise you based on your needs.

When you do hire a bookkeeper, you’ll get far more out of the relationship because you have experience doing your own books. You’ll have an expectation for your income statement and will be able to ask your bookkeeper why your numbers are changing.

When your numbers are changing, it gives you questions to ask about operations, and that’s where the real value lies. What are the business reasons for the change?

All your financial reporting, be it monthly statements or year-end analysis, can tell you everything you need to know about the health and status of your business, but they are written in a different language. The language spoken by accountants and bookkeepers.

Immersing yourself into the process of making those reports in the early stages will help you learn the language and understand the story behind the numbers.

Kaitlin

Do You Need a Business Bank Account?

You’ve probably heard it before – “you need a separate bank account and credit card for your business.”

It’s true, you do.

But why? It makes everything harder! Money goes into the business account, but all your bills come out of your personal account. How are you supposed to pay for things like groceries if all of your money is in the business account?

I get it, I’m a small business owner too – my business income has to pay my personal expenses.

Whether you’re incorporated or a sole proprietor, you need a separate account.

As a sole proprietor, things are a bit simpler because everything you make goes on your personal taxes, so you can transfer money to your personal account without too much planning (besides some cash flow management, but that’s beyond the scope of what we’re talking about here).

Why does it need to be separate?

Having a clear line between your personal and business expenses, ensures you’re only claiming the business ones against the business income.

The Canada Revenue Agency isn’t going to let you deduct cat food if you’re a coach. Sorry about that.

On the other hand, you definitely want to deduct everything related to the business – if you don’t, you’re paying more in taxes than you need to. Nobody likes that.

Taxes are a huge reason to keep everything separate. Not only for the sake of compliance but also to save time. When the inevitable tax season comes around, you don’t want to be going through every bank statement for every bank account and credit card you have trying to pick out the expenses you think might be business related.

It’s time consuming, tedious, and honestly, it’s pretty unlikely you’ll make it through the whole exercise without making a mistake somewhere.

Trying to remember what you bought at Canadian Tire eight months ago is going to be a tough one, and if you can’t prove it was business related, you can’t deduct it for tax purposes.

Maybe you keep all your receipts and write on them to say what you bought and why. That’s great! That will definitely help to keep things separate. You’ll still have to go through and add up all of those receipts at the end of the year.

Pro tip: you can take a picture of receipts with your phone and toss out the paper. The CRA will accept digital copies as proof of purchase. Yay!

What if the business is incorporated?

Corporations are technically separate legal entities from their owners (a.k.a. shareholders), which means they for sure need their own bank account and credit card.

The corporation will need to pay tax on its income, and you’ll need to pay tax on what you receive from the business. When you have only one bank account, that makes things tricky. Where’s the line between business and personal?

Having a separate credit card makes life SO much easier. The fee on your bank account will be way less if you only have a few transactions every month, and you can use the credit card to pay for everything. I know it’s hard to get credit for the business, especially if you’re just starting out, but it can be as simple as just getting another card issued on your personal account. The important thing is to have another physical card that you only use for business. It will show up on your statement separately from the other card.

Are taxes the only reason?

Nope, it’s just the one with the biggest potential consequences.

Reporting will be difficult too if you only have one account. How much did the business make in net income? Will you have cash in the bank to pay your suppliers on time? If everything is in one account it will be tricky to know the answers to these questions, which makes it tricky to run the business efficiently.

If the business is a side-hustle and you still have a day job, you’ll have no idea if the business is making money if it’s not separate. You might be bankrolling the business and not even know it.

At that point it’s more of a hobby than a business, which is ok, but keeping your finances separate will give you all the facts.

What’s the take-away?

At the very least, the business should have its own bank account, and ideally a credit card too. It will be so much less stressful and time consuming when taxes inevitably roll around. Plus, if/when you start working with a bookkeeper or an accountant, you’ll save money because they’ll spend less time on your taxes. Win!

Kaitlin