What every entrepreneur should know about bookkeeping

Let me kick off this article by stating its conclusion: Bookkeeping is simply so important, that it must be done right. And doing the books a little wrong is still that: wrong. If you don’t know enough about bookkeeping, leave it to someone who does.

Basically bookkeeping is important for two reasons. Reason one is the taxman, banks, investors and the like. In short: other people. They want to know how you are doing by using objective quantifiable data. The second reason is you, as an entrepreneur. In Good to Great, author Jim Collins states that to survive, a business owner must confront the brutal facts. Good bookkeeping gives you exactly that: brutal facts. Entrepreneurship can be a costly hobby. It is really easy to make mistakes, and lose, instead of make, money. By knowing reality, you can make an informed decision where to take your business next.

Bookkeeping is a well-documented ancient discipline. And to no surprise, there is plenty of software that can help you. The problem is that vendors advertise their software as ‘easy to use’, so ‘you can do it yourself’. It is true that conceptually, bookkeeping is not that hard. It consist of two parts: first you record financial facts and then you create various financial reports. Don’t be fooled, the devil is in the details.

In a business, a lot of financial facts happen: stuff is purchased and sold, invoices are received and sent, wages and taxes are paid, loans are received and paid off. And in the end, you, as a business owner, take money out of the business to feed yourself (and your family). These are all examples of financial facts that need to be recorded meticulously. Recording financial facts is not something you want to do in a hurry, or when you are stressed. If there are not enough hours in the week, then you will not find the time to properly sit down and do what needs to be done diligently.

The financial facts form the basis for your reports. The most famous one is the Balance sheet, followed closely by the Profit and Loss Statement. The point of this article is not to explain what these are. I leave that to Wikipedia, or better: a formal training course. If these terms appear foreign to you, then this is a good indication that you should not do your own bookkeeping. Even if you know what they are, but have a hard time understanding them, then do yourself a favor and leave the books to someone who does. Reports can only produce accurate data if the financial facts are recorded correctly. And trust me, most bookkeeping software makes it is extremely easy to do it wrong. Especially if bookkeeping is not your strong point.

As a business owner it is hard to delegate work. But think about it. The financial facts are the foundation of your company, and reports allow you to confront your brutal facts. They are simply too important to screw up. Hence, the one thing that every entrepreneur must know about bookkeeping: if bookkeeping is not your forte: don’t hesitate and hand it over!