What is Bookkeeping and Why is it Important?

You know you’re supposed to be doing bookkeeping for your business because everyone has said so, but why is it so important and what the heck is it?

Bookkeeping doesn’t rank high on coaches’, course creators’, or other online service providers’ to do list.

It isn’t technically a money making task so it regularly gets pushed to the bottom, but after reading this article I think you’ll have a better understanding of why it’s so important!

Why Bookkeeping is Important for Your Business

In Case You Get Audited

Let me take you back many years to when I was around 11 years old. My dad has owned an auto body shop since I was 9.

We had a real book for our bookkeeping; software wasn’t super common back then. My parents thought they were doing the bookkeeping correct.

So imagine their shock when they got audited and ended up getting slapped with a $13k tax bill. This hurt our family because we didn’t have the money to pay it, so we had to get on a payment plan.

If our bookkeeping had been correct, we might still have gotten audited, but we wouldn’t have owed that big, unexpected tax bill.

Understanding Your Numbers

So many business owners have no idea what’s going on with their money. Many coaches and course creators do track their income, but not their expenses, net income (income - expenses = net income), and certainly not their cash flow.

Why is this bad?

Well, if you’re only looking at money coming in and spending without concern, it’s likely your net income is going to be pretty low.

See we have this weird tendency as humans.

We have more money coming in and we increase our spending.

Less money comes in and we start restricting our spending.

(I have some tips on how to combat this I’ll be sharing soon!)

We do this with more than money too. Think about how you use toothpaste liberally when you have a new tube and you go to a pea size amount when you’re down to the last bit.

So if we aren’t tracking this, our money is going to be all over the place!

What is Bookkeeping?

Bookkeeping is Tracking Your Income, Expenses, and All Other Financial Transactions

Most people think bookkeeping is just tracking your income and expenses.

And yeah, most of the time that is exactly what it is. But more than just coming up with a total, you’re actually categorizing those expenses for:

a) you to be able to see exactly what you spent money on

b) your tax return - so you get all the business tax deductions you deserve

In addition to income and expenses, you are also categorizing other financial transactions like paying your credit card or loan, paying yourself (watch this one if you’re a sole proprietor or LLC - it is not a business deduction!), buying equipment or other assets that are more than $2,500 (these will need to be depreciated - get help with this!), etc.

Bookkeeping is Reconciling Your Accounts

After you’ve categorized all your transactions for the month, you need to reconcile your accounts to make sure the balances of your bank accounts, credit cards, and loans match the balances on your statements from the bank.

This is how you make sure you haven’t accidentally missed or duplicated anything.

Luckily, QuickBooks Online makes this pretty easy with their Reconcile screen. You can easily see if the balances match and if they don’t, you can do a line by line comparison until you find the problem.

Bookkeeping is Payroll and Paying Your Bills

You might have heard the words Accounts Payable before and your eyes immediately glazed over. Accounts Payable, or AP for short, simply means paying the money you owe.

If you have employees, this means running payroll on a regular schedule. If you have contractors, you will be paying them on a regular schedule as well. And of course any other business expenses that are due, you will need to pay - though most online businesses have many of their bills setup with auto-payments so they never have to think about it.

Bookkeeping is Sending Invoices & Getting Paid

Again with the accounting words; sending invoices and getting paid is also known as Accounts Receivable, or AR.

If you like sending invoices out that’s fine, but you’ll definitely want to decide on a schedule for when these will go out if you have clients on a recurring payment plan.

However, we’ve found that most online businesses like to automate as much as possible, using software like ThriveCart, SendOwl, Ontraport, Teachable, or similar. These softwares will often handle most of your AR duties.

Bookkeeping is Filing Receipts

Many online business owners completely forget about receipts because most of their expenses are online so they never see a physical receipt.

Even though those receipts are being held in your online accounts, it’s still important to download them from time to time and file them away in your receipt banking system. If you cancel an online subscription at some point, also be sure to download any receipts before you lose access to the software.

Creating a receipt filing system is as simple as creating a few folders in Google.

Option 1: A folder labeled Receipts with folders inside for each year.

Receipts > Years

Option 2: A folder labeled Receipts with folders inside for each year with folders inside for each month.

Receipts > Years > Months

Option 3: A folder labeled Receipts with folders inside for each year with folders inside for each vendor (the business you spent money at).

Receipts > Years > Vendors