Running a successful business requires a fair bit of bookkeeping. Which, in my experience as a public accountant, is not always everyone’s cup of tea!
But in order to thrive and grow as a small business owner, it is important to know what’s going in and coming out of your bank accounts.
One of the questions I sometimes get in my accounting practice is: When do you need a full cycle bookkeeping system, and when can you make do with a simple spreadsheet?
So I thought I would expand on the question and share my insights with a bit of a wider audience. If you are in the first year or two of entrepreneurship, this one’s for you!
Just in case you are not familiar with the concept, we’ll start with some basic definitions to sift through any jargon that might raise an eyebrow.
Bookkeeping is the way in which you keep track of the financial records of your business. It’s a whole lot of data entry, generating invoices, and storing expense receipts.
When I refer to spreadsheets, I mean the ones that you might generate via Microsoft Excel or Google Sheets. They allow you to record information in an organized fashion. Those are pretty basic.
Full cycle bookkeeping is a little bit more advanced. To better understand the concept, let’s look at what a full cycle bookkeeper does. The job of a full cycle bookkeeper generally is to ensure your books are organized, record all relevant transactions, and ensure your tax returns are filed promptly and correctly. This is often done regularly within a set time frame. It usually involves:
● Posting transactions into a general ledger (an account that records all of a company’s transactions)
● Reconciling accounts payable and receivable
● Reconciling bank and credit card transactions
● Running payroll and ensuring all payroll compliance is taken care of
● Preparing, filing, and paying sales taxes and payroll taxes
● Creating month-end financial statements
● Supporting financial reporting and year-end preparation
Full cycle bookkeeping requires the use of some kind of software. Quickbooks Online (QBO) is an example of a software that is popularly used for small and medium-sized businesses for full cycle bookkeeping.
Now that we understand full cycle bookkeeping, let’s dive in a little deeper. These are a few things to consider to help you determine when you should start using full cycle bookkeeping or whether you can just stick to spreadsheets.
Is your business a sole proprietorship? Is it incorporated or a partnership? Each of these structures comes with different bookkeeping needs.
If you are a sole proprietor, then spreadsheets might be sufficient, and you don’t need to complicate your life by setting up a full cycle system (i.e. QBO account).
However, if your business is incorporated or a partnership, then it is absolutely necessary that you have full cycle bookkeeping. The simple reason is that you are going to need a balance sheet to file your tax return and, more importantly, to drive decisions.
Sole proprietors may be able to deal with their tax tracking with only an income statement, but as a corporation, you need a balance sheet.
I like to say that the best system is the one you will use. If you are already using spreadsheets, and you feel that it works just fine for your business, then stick with spreadsheets. If you feel as though you have a firm handle on your finances with that system, there is no need to complicate things or change what’s already working.
What types of assets and liabilities does your business have? Does it have loans or extensive equipment? Do you grant credit to your customers and therefore need to track accounts receivable?
Maybe your business has more complicated expenses like payment for high ticket items that fall into that prepaid category.
Maybe you are taking deposits from clients that will fall into the deferred revenue category.
If your business has complex details like these, you’re going to need to track them because they impact the health of your business. For that, you’re going to need a full cycle bookkeeping system like Quickbooks Online.
If you only need to track basic stuff (just revenue and current period expenses), then a simple spreadsheet to keep track will suffice.
Things like pricing & profitability, cash flow, and key performance indicators (KPIs) all contribute to your ability to achieve your business goals. A full cycle bookkeeping will more easily use these types of tools and analyze your business health.
But, you may think that all of this does not apply to you. It could also be that you just couldn’t care less about all the analytics. If that’s the case, and you do not have a ton of items to track, then there is less need for you to have a full cycle bookkeeping system.
There are no rules to this. You just need to think about how complex your business is and how beneficial a bookkeeping system may be for you. Also, you can choose to set up and modify your system as your business grows. So trust whatever is working for you and be open to trying something new if your business requires it.
If you have recurring activities in your business that take up a solid amount of your time (i.e. invoicing, payroll, and revenue collection), you may need to consider implementing a system that will automate some of these processes for you and save you some time.
You can consider all of these ideas to help you inform the decision on whether or not to set up a bookkeeping system. But in the end, the best bookkeeping system is one that is tailored to you and your business needs and the one you will regularly and consistently use!
If you’re looking for extra support in this area, feel free to join our free Facebook group, where we built a community of business owners in Canada where I can answer your questions about taxes, accounting or bookkeeping!
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