How to Get Your Bookkeeping from Compliance to Bulletproof (and What that Means)

My wife used to ask me why so many clients would come in our door with their bookkeeping being a mess?

My first answer was, "be grateful, this is paying our bills!"

She knew I was kidding but then she would recount that when I started my business back in 2003 I toiled over spreadsheets, figuring out how many clients I needed and at what hourly rate to make sure it was enough to pay the bills.

I explained, "Not everybody is an accountant. They would either need to hire someone like me to do this, or have so much confidence in what they are doing / selling / offering that it wouldn't matter.

Most people go into business because they have something they love doing and they are really good at it.

I've discovered many more reasons later on. Not all of them so great.

You are passionate about something, and you want the freedom that comes with owning your own business. There is also the idea that the earning potential is "LESS" if not "UNlimited."

But you're not an accountant, so you don't have the background to plan a business with sophisticated spreadsheets.

Oh and they don't have to be ALL that sophisticated...

Sound like you?

So what happens with the accounting and bookkeeping?

I've seen this go a number of ways. To simplify and avoid writing a novel today, here are the simple versions of two extremes.

1. Business goes well and you make a lot of money. Now you owe the taxes, and you don't understand where the money went. How is it you can't pay the taxes?
2. Business doesn't go as planned, or it went well for a time and then turned south. Now cash flow is tight and you don't understand what is going on financially with your business.

The "Business goes well and you make a lot of money" Scenario

There are a number of reasons why this happens. They are all very easily explained by a good look at the income statement, the balance sheet, and the statement of cash flows.

BUT!

In order for those financial statements to answer those questions intelligently they need to be accurate and reliable.

That means bulletproof!

Bulletproof means you can verify every number on every report.

It means that years ago when I looked at my client's financial reports to answer the very question, "where did all of my money go?" I was able to show him that he took the money out of his business.

The client didn't believe me. He as much as told me that my bookkeeping work must not be accurate.

I gave him the benefit of the doubt and said, "OK let's take a look! Maybe I did make a mistake?"

When I drilled into his reports I showed him a list of the transactions. All of them were verified because the bank accounts and credit card accounts were all reconciled without a single plugged number. This means everything was accounted for to the penny. That means nothing was missing, nor was there anything in there that didn't actually happen.

The check my client wrote for $75,000 to repay a personal debt stood out like a bad stock in a bullish rally!

His books were bulletproof which made it easy to find and confirm "where the money went."

The "Business doesn't go as planned..." scenario

This is where my work gets scrutinized even more. It can't be that they didn't manage their business well. It has to be my fault! Bad accounting cause the business to fail. That's it!

The business might even have a good profit, but no money! How? Uncollected customer payments aka accounts receivable?

Or the income just isn't there.

Or you took on a lot of debt in the beginning. Now things are looking up but there's still no cash because all of your free cash flow is being used to service debt.

If your books aren't bulletproof you can't see what's going on, and then you can't fix it.

How can you go forward if you don't know which way you're facing?

What is Compliance?

Compliance is "good enough." Maybe you're ok filing a tax return on this basis. It's for people who don't care about managing their business well. They see the accounting and bookkeeping as a necessary evil, instead of an invaluable tool.

Here's an example. A client tells me, "yeah the books are ok I just need someone to keep them up."

"OK" I answer.

"Let me take a look and see what we've got."

Pretty quickly in my review I am going to get to the receivables. So I show it to the client, just to confirm. Then it starts...

"This doesn't look right. I know [this one] paid. We are all current with them..."

Long story short, here's what happens.

The invoice was posted which means income was recorded, and so was the receivable.

Then I dig in. Because the business owner is usually right about these things. What I usually find is that the payment was received and deposited as income (again) instead of being applied as a payment on the invoice.

The books will still be right for tax purposes. Here's why.

Most small businesses file taxes on a cash basis. Even though the income was duplicated, the income from the unpaid invoice won't be included on a cash basis.

From a compliance standpoint this is all good.

From a bulletproof standpoint, this is a disaster.

Income is overstated.

Accounts receivable (Assets) are overstated.

We have no idea how much money is owed us, vs what remains to be collected.

The business owner may know not to call that company to collect, but what happens when the business grows and that business owner isn't the one, or can't have eyes on everything?

You can't run a business on a cash basis, and you can't run a business with compliance based books. You need data, and it needs to be accurate and reliable.

Contact me for more help and information or click here --> Bulletproof Bookkeeping with QuickBooks Online