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October 19, 2023

Bookkeeping… How Hard is It?

Bookkeeping in its simplest form is fairly straightforward.  It comprises of two overriding themes that dictate the flow of funds in and out of your business.  So, forget the debit and the credits and the liabilities and the equity and all the other accounting jargon you would have come across over the years.  That stuff was invented to track organisations as they evolve into more sophisticated systems. 

No doubt as you grow, employ staff, and move beyond the small or micro business level you’ll have to upskill yourself as your role moves more into a management function.  At that point you’ll probably need to move up the intelligence pyramid and get the next engaging book, Bookkeeping for Dummies, or something similar.  But for now, you’re stuck with me, the all-encompassing guru of doing as least as possible to get what you need done.  Effectively and simply.

Two Common Sense Bookkeeping Themes

Now let’s talk about those two overriding themes.  Put simply they are Money In and Money Out.  Let’s get creative and imagine we have two simple writing books; one is blue for boys, and one is pink for girls.  The blue book is for you to write down all the times that your money leaves your business (money out) and the pink book is to record all that money coming in (money in).

Over time your books will fill up with all the transactions you are recording and if you make the effort, you can add up each book and work out the total Money In and total Money Out and hey presto, you’ll either be ahead or, worst case, you’ll be behind.  And when you’re recording your transactions, let’s not forget to include all those transactions that automatically come out of your bank account.

That wasn’t too hard, was it?  In its simplest form that’s it.  You’re now a bookkeeper, congratulations.

Ok we’re done, but for those of you that need some more advanced knowledge, then we’ll expand a little bit more on the Pink and Blue books…. welcome to Advanced Bookkeeping.

The Pink Book

Let’s start with the Pink book.  That’s the Money In book.  The contents of your Pink book should be broken up to give you a bit more information.  So go grab a ruler and draw some vertical lines to create a couple of columns.  And on top of those columns, you’re going to write:

  • Date
  • Amount
  • From whom
  • Income/Sales
  • Other (Not income/Sales)

As you get Money In, you simply record the transaction:

  • 15th May 2023
  • 2345
  • Bob Smith
  • $2345

And repeat and repeat and repeat, every day and at the transaction level you require.  It could be per sales transaction (depending on the business) or it could be a daily total.

The “Other” is for non-Sales stuff, like loans.

When comes time to check your results, just add up the columns to get your totals.

The Blue Book

Now that you’ve successfully navigated the Pink Book, it’s time for the Blue Book and the challenges it involves.

Again, we need our trusty ruler to get those vertical lines going. Get creative if you want and add some nice scribble pics to the top right corner.  Now the hard part starts.  And for many it’s harder than you think.  I’ll explain the tricky bit in a moment, but for now starting on the left-hand side, you’ll need to draw 4 vertical lines, then head up your columns:

  • Date
  • Paid To
  • Amount
  • For what

The Money Out transaction will read:

  • 23rd May 2023
  • ABC Plumbing
  • $545
  • Fix staff toilet

Now picture all those transactions listed on a page.  You’ll come to realise that apart from listing everything and having a total, the information provides little insight into your expense patterns.  You’ll need to have some awareness of these expense patterns as an input to your management decision making.

Then we have to get a little creative and start to add a few more columns.  You should not need more than ten columns, so we can allocate your expenses into functional groups that we can start to relate to.  Now the tricky bit, how do we put all those expenses into only ten columns?

People seem to dwell on this dilemma infinitum.  And the simple answer to this would be the frequency of the transactions.  No use creating an expense column when you only put one transaction in it for the year.  So, you’ll be looking to create columns for those expenses that you pay for the most and assign them into logical categories.

Then you’ll have one final column for expenses that are not in the previous nine headings and call them “Other Expenses”.  These with have an appropriate description for later understanding.

Why do this?

If you have an endless list of transactions, all under one column, it’ll be very difficult to get meaningful information without further effort.  And you’ll need more meaningful information for your bank, for you to make management decisions and for your Income Tax Return.  Potential investors will also need to something more than just a couple of numbers.

Management

With expense column totals, you are actually laying the foundations for base level business management.  For example, an often simple but useful number would be your Purchases.  Once you know your Purchases total, you can compare that with your Sales total and determine if your pricing is on track or not. That number, usually measured as a percentage, is effectively a Key Performance Indication (KPI) of your business and a very useful measure.  You’re now on your way to becoming a business manager.

There you have it, bookkeeping at it’s finest, albeit a simplified approach without the accounting jargon.

Now for a few more engaging words within the context of small, micro businesses.

Bank Reconciliations 

Are they necessary? The answer is No.  If you are meticulous with your transaction entry, then it’s a fair bet you’ve got everything covered.  Run your eye over your bank statements to make sure that you haven’t missed anything.  If you can do a bank reconciliation, then go for it. 

If you’re a novice, then why waste your time unless you have no confidence in the contents of your cashbook.  Sometimes we need to look at the cost effectiveness of undertaking some of these controls.  To labour endlessly to find those missing dollars begs the question, “to what end?”.  It certainly won’t make any difference to your business decision making and will only have nominal position in respect of taxation.

Accountants

Yes, most businesses need them, but be specific in your terms of engagement.  Accountants are trained to create the perfect set of books including reconciliations, Profit and Loss Reports and Balance sheets. That obviously incurs a cost to you.

The accountant then hands you your Financial Statements and they either expect you to understand them or they try to explain them to you.  At best the information is months old.  In terms of usefulness, those reports add little value other than the compulsory reporting of your tax obligations.

And, if that’s all you need them for (your tax obligations) then you really don’t need all the fancy attachments.  A Balance Sheet is hardly a practical report that most small businesses need.  Save yourself some money just get a tax return done.

Summary

At the end of the day, you need information for your income tax return and some level of business management for your business.  You’ll find at the small, micro business level that a simple bookkeeping system will suffice.

Most small businesses run by the seat of their pants with only a few key numbers that they can relate to.  Those key numbers give the business owner an idea of how things are travelling.  If that’s sufficient for you then stick to your guns.  The other way requires time, effort, and cost, which most times can be better spent marketing or creating operational efficiencies for your business.

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