If you’ve owned your own small business for any length of time, you know how important it is to keep accurate financial records. Not only is it wise to know how well your company is doing overall, but it’s the only way to stay legally compliant with industry and tax laws.
In order to stay on top of your money, you may have looked into hiring a bookkeeper or an accountant. But are they the same? How does each one fit into your overall financial wellness goals? And what can you do to ensure you’ve made the right choice?
Here’s what you should know about the various types of financial professionals that work to keep your money records clean and tidy.
Bookkeeping vs. accounting
At first glance, there seems to be very little difference between these two professions. In practice, however, there’s more to them than meets the eye. Do you know the real perks to using accounting and bookkeeping pros?
“Bookkeeping is about recording transactions whereas accounting is about analysis and insights,” explains Jo-Ann Yuen, a Chartered Accountant with 20+ years experience with multinational corporations and start-ups and the VP of Finance for Nav. “Business owners, at a minimum, would want to ensure that they have adequate record keeping (eg. for tax purposes) and upgrade to accounting as their business grows and they want to identify opportunities for growth and improvement.”
Bookkeepers, as their name implies, handle basic keeping of the books. They are responsible for recording income and expenses, balancing the budget, and keeping everything recorded. They need to know enough about finance to know what details to record and be accurate in their work. They don’t have to have any educational credentials or certifications, but many professional bookkeepers will have an associate’s degree.
You could have anyone who seems qualified do your books, as many bookkeepers work part-time for a number of different clients. They may even report to an accountant or certified financial planner or tax expert.
Accountants, on the other hand, usually have formal schooling. Accounting is a bachelor’s degree at many colleges, requiring a four-year education and opening doors to do on to master’s level work. If someone didn’t specifically earn a degree in accounting, a finance degree with extra training or certification could easily stand in.
Since accountants focus on the longer-term goals of a small business, beyond just the books, they may continue to get specialized training beyond the degree. It’s not uncommon for an accountant to get their CPA (Certified Public Accountant) license, which requires them to pass an industry-standard exam and keep current on finance matters to keep their license. (There currently isn’t a certified bookkeeper equivalent to the CPA.)
What do Bookkeepers do?
As we mentioned before, bookkeepers – at a minimum – keep the books by recording business transactions in a meticulous fashion. Other specific duties may include:
- Creating and sending invoices
- Organizing and issuing receipts
- Issuing payroll to employees and contractors
- Sending payments to vendors
- Posting debits and credits, usually in two separate accounts, as part of double-entry bookkeeping and maintaining the balance sheet
All of these transactions are documented in the general ledger, the business “books” that keep an accurate count of every credit and debit to the business. This can be done through a paper book, Excel spreadsheet, or – more commonly – software. Well-kept books will present an accurate picture of the business finances, as well as act as supporting documentation for tax filings. (While actual methods may vary, in today’s bookkeeping, single entry method is not viewed to be as thorough as double entry.)
What do Accountants do?
Once the bookkeeper has done their job, the accountant can do theirs. Using the ledger, they can do things like make projections, set goals, and create recommendations for moving the business forward financially. Unlike a bookkeeper, who simply documents what’s happening, an accountant adds a level of consulting to the role. They can use their best judgment to present a financial case for a business owner, rather than just state the business facts.
Financial accounting duties may include:
- Preparing financial statements, cash flow reports, income statements, and earnings projections
- Helping with accurate budget planning
- Preparing and filing taxes, including income tax, sales tax, and payroll taxes
- Acting as a financial counselor for how actions like consolidating debt or investments will affect the company overall
- Demonstrate overall profitability and growth through reports and models
It’s also common for accountants to act as advice-giver for changes that happen in the tax and finance arena. If new tax law is passed, they can help a small business owner adjust their strategy. A minimum wage increase or new health care regulation might require the advice of an accountant to measure the overall impact and create new goals for meeting company cash needs.
While each accountant may have a specialty (tax law vs. labor law,) most can handle the basics of each category or recommend an expert who can get into a more detailed assessment for those important business decisions. Their services may also be referred to as “management accounting.”
Does my business need a bookkeeper or an accountant?
Depending on the size and goals of your business, you may find that you need both professionals to keep your small business afloat and doing well. It’s not uncommon for a larger corporation to have an accountant and bookkeepers on staff or hired as consultants or independent contractors. If you find that you can’t afford to have both, it’s possible to do some of the functions of each on your own. Whether you actually do these functions, or your hire out for just following tasks, you can get around having a dedicated, full-time hire.
Here’s a list of the most common tasks that financial support professionals can assist with, and how to handle them even without accounting and bookkeeping assistance.
A reputable accountant should be able to do your taxes. Based on the records you keep, it should be no problem for both of them to file your state, local, federal and sales tax documents, as well as advise on things like paying quarterly estimated taxes. That doesn’t mean that an accountant is the only way to get it done, however.
Filing taxes is one money responsibility that is often outsourced to professionals that only do taxes. You might hire a tax firm a few times a year to do the work. It’s also likely, depending on how robust your small business, that you do your own taxes. Tax software has made it possible to track, estimate, and file your own taxes electronically, for a lower price than hiring a professional.
The downside to this strategy is that you don’t get the full support and advice of a human. For a very small business, new business, some independent contractors, and many sole proprietors, however, a DIY approach is feasible. For everyone else, getting a tax professional on your team can free you up hours of time and confusion, especially when dealing with the complicated tax laws surrounding employee health insurance and recent corporate tax cuts.
Accounts Receivable and Accounts Payable
This is a job best-suited for bookkeepers. They can keep track of vendor bills and payments coming into the company, as well as do payment onboarding functions like issuing PO numbers and creating the proper payment channels, such as setting up electronic funds transfer arrangements. In addition to recording, approving, and making payments, they track everything so that they can match expense reports and tax filings.
Is it possible to do this without a bookkeeper? As in our tax example above, the answer may be “yes.” Depending on the size of your business, you could use a software solution to manage and track vendor bills and keep the expenses paid on time. You will still need a person to oversee the bookkeeping process in your business, however, whether that be someone that already works for you, an independent contractor, or someone in a combined bookkeeper/accountant role. How involved the position becomes is dependent on how many vendor bills your regularly pay as part of your operations.
Since we live in an electronic world, we no longer depend solely on physical paper ledgers to track our transactions. A good bookkeeper needs to match the payments and deposits they write down with those that are documented electronically by bank statements and credit cards. Most of this is done through bookkeeping software, but even with some of the most real-time technology around, there will be discrepancies.
What happens if you have extra transactions showing up on your own records that haven’t been cleared through the bank yet? Likewise, is it a problem if the bank shows a payment or debit that you didn’t document? These odds and ends transactions need to be reconciled, a financial term for making sure that one side of the books matches the other.
Whether the transaction was forgotten, was a duplicate, or it was recorded on your end on one month but didn’t show at your bank until the next, making records match and be compliant is key. Once the account has been adjusted or “reconciled,” it’s closed out or marked as final. No one, even bookkeepers, can make changes after they are finished adjusting entries. What’s on the books is the formal financial record for that period.
Can you do this on your own? Yes, but it’s time-consuming. It’s best for bookkeepers to handle, even if they work for you part-time or you hire a service. Like taxes and accounts receivable (AR), many small business owners are perfectly capable of doing these tasks, but they can eat up a lot of your precious time. At the point in your business where you find many hours a week dedicated to these functions, looking to a accountants and bookkeepers makes sense.
Best Financial Software
Whether you handle your financial duties yourself, or you’re transitioning to having help around, the right financial software can help keep everyone on the same page. These tools have changed a lot over the years, starting as simple electronic ledgers similar to spreadsheets that have now morphed into full-service solutions that can pay bills, track payroll, and create the vital tax spreadsheets and calculators needed to make filing a breeze. By utilizing everything included in these top software products, you can be sure that when the time comes to hire or change your bookkeeping and accounting support roles, everyone will be on the same page.
Here are some of the top industry picks for accounting and bookkeeping software.
One of the most popular and established bookkeeping and accounting software tools available, the company boasts millions of users worldwide. It’s highly recommended by a number of businesses because it works for a wide variety of industries. It’s extremely adaptable, working well with hundreds of third-party integrations and currently gives you the most functionality for a program that offers both desktop and mobile solutions.
Many bookkeepers are familiar with QuickBooks, as it allows them to easily create a number of financial reports, including cash flow, budgeting, and expense categorization. QuickBooks is also recommended for new companies who expect to experience rapid growth. Since QuickBooks is made to grow with you, it can be maintained for the entire life cycle of your businesses and not require you to “trade up” when you outgrow the most basic accounting and bookkeeping needs.
The QuickBooks interface is widely accepted, as well. You can use reports to directly import into other solutions, give to your tax professional, or even create unique reports for your internal teams and consultants to access. It’s one of the most developed offerings on the market and can be adapted to fit your unique needs.
Another contender for the top spot is the FreshBooks solution. While it does offer most bookkeeping functions, its ability to give you full-featured accounting insights is somewhat limited compared to QuickBooks. Of course, the pricing reflects this. It does give small businesses, including sole proprietors and independent contractors a very professional way to invoice, make payments, and track expenses. It even provides select financial statements and reporting capabilities. For the smaller businesses who don’t expect to scale to a multi-million-dollar endeavor, this software is a sure thing that bookkeepers from any background can easily learn to master.
While these two choices make up a big part of the market, they aren’t the only solutions bookkeepers have for tracking finances. Many smaller software companies offer the things you need most in bookkeeping tasks, as well as handling accounting principles like cash flow reporting and goal-setting. Among other choices that businesses hold in high regard are:
- Sage Accounting
- GoDaddy Bookkeeping
As new companies enter the market, there will be more added to the list. Before you transition your records to any new solution, consider the reputation and longevity of the company running it. You want to give your financial data to only the most trusted brands!
When Should I Hire a Bookkeeper or Accountant?
As we discussed above, there is no hard line to when you must hire an outside professional. It’s a deeply personal question that depends on your small business structure and situation. Here are a few questions you can answer that will help guide your decision:
- Does my business have a more complicated structure, such as an LLC?
- Do we or have we received funds from angel investors or others that require us to step up reporting and projections to meet the requests of investors?
- Do we have many employees, issue complicated benefits, and have an increasing responsibility to document our efforts?
- Has a mentor or respected industry colleague suggested you could benefit from bookkeeper and accountant services?
- Are you often faced with mounds of data, but don’t know how to put them into readable financial statements, projections, or reports?
- Am I, or one or more staff members, spending an increasing amount of time doing bookkeeper or accounting tasks? Would their time be best spent elsewhere?
- Are we at risk of audit?
- Do we frequently bump up against industry regulations for hiring, staffing, tax returns, payroll compliance, or other matters? Would growth in any area put us in new reporting territory?
- Have I been finding errors in our financial records? Do things feel messy, not standardized, or out of control?
- Do small businesses of similar size and in similar industries to our have these professionals?
- Does the idea of handling finances cause me stress or distraction?
As you can see, there often isn’t a certain size a small business must get to know that hiring a bookkeeping and accounting professional is necessary. Often, it’s a gut-feeling. If you’ve been on the fence about making a move, but you aren’t sure, a good sign that it’s time to explore this avenue is that you feel increasingly uncertain about the integrity of your books or records. Most people don’t address issues until they become a problem.
With something as important as your financial records, however, it’s best to get ahead of it and not wait until the integrity of your books is a problem. Being proactive about the addition of accounting and bookkeeping support is the only way to address the growing needs of any company. You can then decide if it’s something you want to keep in-house, or if outsourced bookkeeping and accounting is best.