[MUSIC PLAYING] Hey there. Oscar from Bench here, and today we're going to talk about bookkeeping. What is it, and why should you care about it? Bookkeeping is an essential part of running any small business. And when you take care of it the right way, bookkeeping helps you track your money, cash in on any tax deductions, and plan how your business is going to grow. But first let's start with the simple definition.
Bookkeeping is the act of recording all the money that comes into your business and all the money that goes out of it. So sell a product, record it in the books. Pay a bill, record it in the books. With bookkeeping, you're tracking every penny. Now each time you make one of these transactions, you categorize it. And this lets you tell the difference between money that you spent and money that you earned.
It also tells you where you spent it and where you earned it from. And at the end of each year you take all this bookkeeping information and use it to file your taxes or have an accountant file them for you. Now a lot of new business owners are tempted to skip bookkeeping and just try and kind of play it by ear. They keep track of all the money they have in their bank account and do their best to pay their bills on time.
Now this is a really bad idea, and here are the four reasons why bookkeeping is super important. This one is our first because more tax deductions equals a better tax return, and that's good for everyone. So only certain business expenses are deductible. And since bookkeeping is categorizing all these expenses, you can go back and see exactly what you spent on what at the end of each year.
For instance, if you're planning to write off the cost of business trips at the end of the year, you can see exactly how much you spent whilst on the road. And that then gets deducted from your tax bill. But if you're not doing bookkeeping, sure, you might be able to go back and dig through some of your receipts and try and add up how much you spent on business trips. But you're almost guaranteed to miss something.
Like did you keep every receipt from each meal you ate whilst on the road throughout the year? With good bookkeeping there's no missing these deductible expenses. You just check under the category business trip expenses, and you'll find them. So you'll save as much on taxes as possible. Before they hand over any money, lenders, usually banks, are going to want to be sure that you can pay it off.
So if you're planning to take out a business loan, apply for government grants, or open a line of credit, it's essential to have organized books and monthly financial statements. Only monthly financial statements can prove that your business is profitable and you have enough money coming in to make those loan repayments. Don't plan to borrow money. Organized monthly financial statements are still important. Emergencies can happen.
But as long as those financials are up to date, you'll always have the option to apply for a loan. So if you suddenly need funding or you just want to take advantage of a new business opportunity, you won't be left empty-handed. Now when we say banking errors here, we mean any unexpected mistakes having to do with bank transfers.
For example, let's say a bank scans a check in the wrong way, and you end up with the wrong amount in your account. Or maybe a client makes an error paying an invoice so you end up with less than what they owe. Both these mistakes can leave you short of cash with no way to tell why unless you comb over your bank statements. But when you do bookkeeping, you reconcile your bank accounts with the books, meaning that once a month you go in and double check that your bank account and your books match.
So if you have more or less cash in your business bank account than what you planned for, your books will tell you right away. So you'll never have to second guess whether you have as much money as you think you have. OK, let's say you run an e-commerce business and you want to know whether or not you're charging enough for shipping. Bookkeeping makes this really easy. The money you're currently spending on shipping will be recorded under its own postage ledger.
So if your customers are paying you less each month than what you're spending, you know you either to have to bump up shipping costs or find a more affordable shipping option. This will all be visible on your financial reports. Now financial reports are summaries of what you record on the books each month, and we'll cover that in our next video. So your books tell you where you're spending the most money so you can plan to cut costs.
And it'll also tell you which products are bringing in the most revenue so you can take advantage of that to grow profits. Basically, it's like having X-ray vision into your business so you can see how it works, and this helps you plan your business in the long run. Let's take a look at a real-world example of a business owner that used bookkeeping to grow their business.
Trisha Okubo runs her own e-commerce business, Maison Miru. After a career in the tech industry, she struck out on her own and decided to turn a jewelry hobby into a full-time business. Things started moving quickly. And as her business grew, Trisha soon became bogged down in admin. And before long, her bookkeeping was a disaster. "When I started Maison Miru, it was just me. I was bootstrapping the business and I didn't have the luxury of a team to help lighten the load," she said.
"I did everything. Sales, merchandising, marketing and social media, customer service fulfillment, general admin, securing trademarks, and of course bookkeeping." So Trisha decided that she wanted more time to focus on running her business. And for her, Bench was the obvious answer. We took care of her bookkeeping for good. But you may not need a professional bookkeeping service.
You can start saving time and keeping track of your money better simply by organizing your bookkeeping using a spreadsheet. So those are four pretty good reasons why bookkeeping is important. Now what can you do to take care of bookkeeping for your own business? If you fancy doing your own bookkeeping, you've got two options-- use a spreadsheet or buy accounting software. If you're just starting out and your business is still pretty simple, you may be able to handle your bookkeeping using a spreadsheet, so a program like Excel or Google Sheets.
Each time you make a business transaction, it will be up to you to record that in the spreadsheet. And then depending on how good you are with formulas, you may have to use a little bit of math to make everything add up. For example, if you want to see your total income for the month or summaries of certain transaction categories. On the bright side, there are plenty of free bookkeeping templates online for you to download. And if you can find one that works for you, you'll be up and running a lot faster than building one on your own.
The nice thing about this approach is that it's free. The downside is it does take longer than using accounting software. And if you make mistakes like forgetting to record a transaction or entering the wrong dollar value somewhere, it has the chance to completely throw off your books for the month and sometimes the year. Basically, bookkeeping using spreadsheets is a little bit like looking after a really sensitive houseplant.
If you've got the green thumb already, you'll be fine. But if you know nothing about houseplants and you forget to do things like watering, you are going to end up with a dead plant. Let's look at option number two. Accounting software does cost more than using a spreadsheet but does come with features that make bookkeeping a lot easier. The most popular accounting software for small business owners can link up directly to your bank account so transactions get automatically imported.
You don't have to enter them yourself. And if you've got some experience of bookkeeping already, you'll be able to create rules for the software to follow. For instance, each time the software imports a purchase from the office supply store, it can automatically categorize that as office supplies expense. But here's the drawback. If you make a mistake categorizing something or let's say you get paid in cash and you forget to enter it manually, your books are still going to be out of whack.
It doesn't matter how advanced your bookkeeping app is. You still have to make the right bookkeeping decisions to ensure that everything is accurate and up to date. And also, if you're a little bit new to bookkeeping, an app can take a while to get the hang of. Expect it to go a bit slowly at first whilst you're learning the ropes. Prices for bookkeeping apps can vary from about $10 to about $70 a month.
All depends on the size of your business and what features you're going to need. Now when you're getting ready to set up your bookkeeping, no matter if you're using an app or using a spreadsheet, you'll have two important decisions to make. Are you going to use accrual accounting or cash-based accounting? And are you going to use single-entry or double-entry? Don't worry. These sound pretty complicated, but they're actually quite straightforward.
First accrual accounting versus cash basis. These are two different types of recording transactions. And you're going to have to choose one or the other to make sure your books stay consistent. There's no jumping backwards and forwards between the two. With accrual accounting, you're recording transactions as they occur. So if you invoice a client and you're still waiting to be paid, you record that amount as money earned under the category accounts receivable.
Even though you don't have the money yet, it's still considered as an asset on the books. The good thing about accrual accounting is it gives you a clear picture of how much you made over different periods of time. And this makes it easier to spot long-term trends in your business and so you can make projections for the future. The alternative to accrual accounting is cash basis. And with cash, you only record money when you have the cash in hand.
So if you invoice a client, you don't record it until that client actually pays you. When they do, then you enter the transaction on the books. Accrual accounting does take a little more effort to manage. If you have a bookkeeper, you're going to have to provide them copies of all your invoices, as well as extra information on transactions, so that they can go in and match when you earn the money and when you get paid.
Unless there's major delays between when you earn money and when you get paid, cash basis is the more straightforward method. But every business is different, and both cash and accrual accounting both have their own benefits and drawbacks. The other choice you'll need to make is whether you do single-entry bookkeeping or double-entry. With single-entry you record money once as it goes into an account.
For example, if you're using money from your cash account to buy $20 worth of lemons for your lemonade stand, you'll enter $20 spent from the cash account on ingredients expense with a note saying that you spent cash. With double-entry bookkeeping, you'll record that $20 leaving the cash account. Then you'll record $20 going into the ingredients expense. So now you know that you spent $20, and you have $20 worth of new ingredients.
Single-entry bookkeeping is good for small businesses, like if you're a freelancer. You only have a few clients and not that many expenses to keep track of. But as your business gets bigger, double-entry bookkeeping is important because it makes it easier to check for errors. The money leaving accounts always has to match up with the amounts going in. They need to be balanced. That's what balancing the books comes from.
By balancing the books at the end of every month, you're making sure that everything matches up. So there's no missing funds and no money in places it shouldn't be. This is handy when your business is big and there's lots of transactions flying back and forth. OK, so we've covered the main reasons why bookkeeping is important and gone over what you need to do each month to get your bookkeeping done.
But what if you don't want to do your own bookkeeping? If you find the whole process of getting your books done overwhelming or if your schedule's already really packed and you just don't have the time, you may be better off outsourcing your bookkeeping. In that case, you've got two choices, hire a local traditional bookkeeper who you visit in person or sign up for an online bookkeeping service like Bench.
Now a traditional bookkeeper will typically be from your city or town. And they'll either be independent or part of a larger bookkeeping or accounting firm. In either case, before you hire them, they should be able to give you a free consultation so you can decide whether or not to use them. Traditionally, you'll deliver records of all your transactions to your bookkeeper, who will then enter and categorize them.
So those could be receipts from the cash register at your brick-and-mortar store or copies of receipts that you've issued to clients. They should also include receipts for purchases you made for your business. Many bookkeepers now use software to automatically import transactions from your bank. In that case you may need to use the same software in order to be able to work with your bookkeeper. If they're ever unsure on how to categorize a transaction, they'll have you log in and do it yourself.
Traditional bookkeepers charge by the hour, often with a minimum monthly fee. So the more transactions you have to record, the more hours it's going to take and the more your bookkeeper is going to charge you. Be prepared to pay $30 to $50 an hour for a trained bookkeeper. Traditional bookkeepers make sense if your business does a ton of cash sales and you're using paper receipts to track transactions. Since you're meeting them in person, it's a lot easier to hand over the paper documents.
One more option-- some businesses have in-house bookkeepers. Now these are people that you hire to work in your office as permanent bookkeeping staff. An in-house bookkeeper makes sense if you have a large business that's doing millions of dollars a year in transactions but isn't feasible for most small businesses. If your business is based online or you mostly handle transactions using credit, debit, or services like PayPal, you're probably better off with an online bookkeeping service.