23. Selecting the Right Bookkeeping System for Your Business

There is one thing that absolutely every business needs: bookkeeping.

You need it not just to report taxes properly, but to understand the finances of your business.

Selecting your bookkeeping system is one of the earliest decisions you'll make in your business.

But, let's face it, you are not an accountant and may not know what you need or understand your options. And selecting a system with those is like throwing darts blindfolded. Not every business has the same needs.

In this week's episode of Purposeful Profit, I'm going to take the blindfold off and help you figure out the best system for YOUR business (or evaluate whether your current system is the right one).

You'll learn:
- The primary purpose of a bookkeeping system
- The difference between single and double entry accounting (and why you care)
- The major bookkeeping options in each category and advantages and disadvantages of each

Mentioned in this episode:

• Get your Simple Financials Bookkeeping template
• Continue the conversation and book a free call

For the full show notes, including the transcript, go to www.carlamoats.com/podcast/episode23

DISCLAIMER: The information in this podcast is for informational purposes only and does not constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, we assume no liability or responsibility for any errors, omissions or regulatory updates.

Transcript

Welcome to Purposeful Profit, where I help you take your business to the next level. I'm Carla Moats finances and strategy coach and fractional CFO for high achieving female entrepreneurs. I'm here to empower women to build wildly profitable businesses that give them the freedom to live their dream lives. I'll use my more than 30 years of finance and consulting experience to take the mystery out of your finances and help you make more money, and go after your next big thing. 

Hello and welcome back to the Purposeful Profit Podcast. I'm Carla Moats, I'm your host, and I am a financial accounting expert. And I'm really glad to have you here. And you are in the right place. If you are ready to take control of your business finances and put more money in your pocket so you can have real financial freedom. 

Back in episode 21, when I will drop the link for that in the show notes, I talked about ten habits to build so that 2024 is the year you finally get those business finances in order. You might want to go back and listen to that first, but one of those habits we talked about was establishing a bookkeeping system. And there are a lot of choices out there. And for a lot of business owners, they just automatically either don't do anything or they automatically go to QuickBooks online. And there's actually a lot of options in between. And I actually see a lot of people using QuickBooks online that don't really need it, don't know how to use it. So it's not the right choice actually for everybody. Just because you have a small business, it's not always the right choice. So really when you pick your system, you need to understand your needs before selecting a bookkeeping system because if you are selecting your system without really understanding your needs or understanding the features and the pros and cons of the different systems, then you're really putting the proverbial cart before the horse. Since the bookkeeping system is really one of the first foundational items you need. And you can change systems. And often you will. I mean, if you start out as a startup and depending on what your goals are, you're building up to ten, 20 million USD. You're probably going to change systems somewhere in there. But by evaluating your options upfront and making a good decision based on where you're at now and where you want to go in the future, it can help save you frustration and time down and as well as cost down the road. 

So in today's episode, you're going to learn what the primary purpose of a bookkeeping system is. I want to make sure you have an understanding of the difference between single and double entry accounting. This is a bit of an accounting terminology word, but systems out there are either single or the double entry. And they have pros and cons. And you want to understand those before you make a selection. And then I'm going to go through the major bookkeeping options in each category and talk about the advantages and disadvantages of each. 

All right. So let's dive in. First let's take a step back and clarify with the goal of your bookkeeping system. it's not just to get your taxes done. It's really to systematically record, organize and track all of your financial transactions. it's going to provide you with the correctly. It's going to provide accurate and timely information for decision making, tax and other compliance and overall financial management. One of the things I'll see a lot of times people have, say QuickBooks and they'll use it for tax. They're actually not using it to make any of their decisions. They're not using it for any of the reporting. If you're not going to use it for those features, then really, take a simpler option, then don't go. Don’t really use QuickBooks because your QuickBooks has a fee every month, which we'll talk about. 

So if you're not going to use those features, you're not ready for those features,then there are some simpler options for you. So let's talk about those two things that I said, there's really three words that I think are key to understanding systematic. Just a synonym for methodical. I mean, there is a system for how it's being done, whether it's a spreadsheet or it's QuickBooks. It has a system behind it. Your shoebox is not a system. A bunch of file folders is not a system because it's not methodical.

I remember one of the first presentations I did when I was pivoting into the finance space. I was doing a presentation and first a small business owners, and I asked him what bookkeeping system they were using. And, a couple of them, one of them held up a shoe box. I think one of them was like Google Drive count. And that's really the difference. 

This is what we're going to talk about today. Everything I'm giving you today is much more methodical than your shoe box. You're just collecting things in a Google drive. The second word in there was accurate. Transactions are being categorized correctly and in a meaningful way and transactions are complete. Reconciling is one of the ways we make sure everything is complete. I've talked before that when I'm accounting for clients, how I categorize something for one client may not be the exact way I categorize it for another client, because I want it to be meaningful to you. Now, I wanted to support you, tax preparation, but I also want it to be meaningful to you. And then timely. One of the things that,I really encourage business owners to do is you should be, allocate hour a week is finance hour, hour a month is finance hour. Kind of depends on your volume. What I see a lot of business owners, especially service business owners doing is they're actually not doing their books at all during the year, and they're waiting until the end of the year. We've talked about that in a couple of the last episodes. 

Everybody's waiting until this year's over. Now I have to prepare my taxes. And so now I'm going to go do my books. You really want to have meaningful information coming to you on at least a monthly basis and in some cases, it can be daily. I mean, if you have a business with a lot of volume again, and a lot of orders, a lot of accounts receivable, you may need data, on a daily basis. So now that we've established the goals of your bookkeeping system, let's understand some accounting terminology. By the way, these systems will not use this terminology in their marketing because most people don't understand what it is. But I want you to understand double entry versus single entry bookkeeping or accounting. So double entry makes two entries for every transaction. It's called debit and credit. You really don't need to know debits and credits but basically a double entry accounting system debits have to equal credits. This is the basis of accounting. You go to get an accounting degree. That's what the first thing you learn in accounting 101 or is debits must equal credits okay. QBOis a double entry system Xero which is XERO if you don't know Xero is a double entry system. 

A double entry system can generally do both cash and accrual basis. And you don't really need, accrual basis and cash are just two different ways of recording your transactions. Cash is what most people, most small business owners will do. it's acceptable for most businesses, they can file their taxes this way. If a business has inventory, or various other conditions, then you want to do a cruel and it's just a different method of accounting. But double entry is what accountants are doing. It's the basis of accounting standards. It's pretty much a must if you have inventory, payroll contractors, fixed assets. I would not use a single entry accounting system if you have those things.

Accounting, some accounting knowledge can be helpful in using a double entry accounting system. Double entry accounting systems are usually more complicated to understand. But you do not have to have accounting knowledge. There's tons and thousands and thousands of people who are using QuickBooks and they're DIYing it. There's varying degrees of how well they're doing it. It can help to have a little bit of accounting knowledge. It’s not required, but it is more typically a little more complicated than a single entry, which we'll talk about in a second. But the softwares that is out there, they're using double entry. I mean they're marketing to the masses. And they've done their best to make it much more intuitive. I think QuickBooks online, I used QuickBooks a few years ago. And what it is like now compared to what it was like a few years ago,it is very different. I think it's much, much more intuitive now.

Single entry. You just make one entry.. Think of your check register. And you have a checkbook or a spreadsheet that you're entering. Or if you're using Ynab, you need a budget. These are all single entry systems. You're basically just making an entry for the offset to your checking account. So if I spend 1,000USD on my attorney this month, I'm only making an entry for the legal fees. This is a single entry. What you know about this is it just represents your cash flow. It doesn't represent a true financial picture of your total financial health. It doesn't require accounting knowledge. It's as if you can keep a check register. If you can enter data into a spreadsheet, you can do a single entry accounting system. 

Single entry accounting systems are cheaper to implement and maintain. They're definitely much more DIY. Definitely a DIY solution. You may hire somebody to make your transactions like a VA, but you're typically not, outsourcing your bookkeeping on a spreadsheet. You may have a member of your team that helps you with it, but where you're much more likely if you're using QuickBooks Online or Xero. And there's a few other systems that can give you examples of you're more likely to outsource those. The thing about single entry systems is they're not really scalable over the long term. They're a really good option for people who are starting out. If you're not six figures yet, they're a good option if you don't have a lot of volume. But if you're going to scale up, you're going to add a team, you're going to add employees, you're going to be adding a lot of volume. You're going to have multiple revenue streams. They're not as good of an option because they're just not scalable. Again, I would not use these systems if I'm a business that carries inventory. And even if I have payroll on contractors, because you have a payroll, you need a payroll processor and even contractors, you have 1099 requirements for contractors. I probably wouldn't use a single entry accounting system for those. 

So keep that in mind. Double entry and single entry.

So the first decision you need to make or at least consider when you're picking your bookkeeping system is do I want to DIY it? or do I want to dumb for your solution? Now, like I said, you can, for all of these options, you can do both of these options. So there's every option I'm going to give you. You could DIY it or you could DFY, but some solutions lend themselves more to one or the other. So if I wanted to DIY it, I mean I could do QuickBooks and there's a lot of people that can, but it's going to require me to invest some time in my own learning and my own, because there's a learning curve. It's going to invest, requiring me to invest a little bit more time where if I want to opt to go with, say, a spreadsheet, there's not a whole lot of learning curve there. So when you're thinking about do I want a DIY or DFYservice. A couple of things to ask yourself is do you want to spend your time on finance or do you want to focus time on growing your business? What kind of volume do you have? Those are big things. How many accounts need to be tracked? 

A spreadsheet solution is a good solution when you've got, maybe a credit card in a bank account and that's it. But if you've got multiple bank accounts or you've taken on any kind of loan, you start to get into a lot of volume. It's not a very good solution. Another thing to ask yourself is to have accounting knowledge. Do I have time and do I have a desire to learn? Because like I said, you can go to QuickBooks or Xero and you can DIY it, but a little bit of accounting knowledge is going to help you. You're definitely going to have to invest some time in learning the tool, and you have to have that desire to learn. A lot of people that they just don't. There’s a lot of things that are interested in, learning how to do accounting isn't one of them. Some things to keep in mind about dumb for you, most accountants or bookkeepers that you're going to go out and hire, we'll have a system they use typically only one. There are some out there that will support two systems, but typically clients are either going to be a QBO or they're going to be Xero. And I would say the most prevalent one is going to be QBO. Particularly in the States, if you're listening and you're calling in from Canada, Europe, you'll find that Xero is much more prevalent than it is here in the States. Why do they do this? Because one tool provides efficiency. It allows them to standardize their processes and become efficient. Bookkeeping is particularly at the price point where you really have to be efficient,  to be able to build a solid business, which is what these bookkeepers are running their own businesses. Your exception here, again, would be if you've got somebody on your team who is going to do this work for you, maybe you have somebody who has done some bookkeeping in the past and they're going to do that, plus something else, then you've got more ability to to pick the system on your own. But often if you're going to a bookkeeper, they already have a system, and they're either going to migrate you to that system or you're going to pick your bookkeeper based on which system you want. QBO or Xero do have a learning curve. So again you're going to have to invest some time in that. If you're doing dumb for your services,I talked about this last week, probably 500 or more a month. So what you should probably plan is if you only want to spend 100 USD a month for your service, certainly within outside bookkeepers generally not going to be an option. I would be leery of anyone, I was telling anybody if you got a book, your brother's only charging you 250-300 USD a month. Run the other direction because there's a minimum charge, there's a minimum amount of work, even if you don't have any transactions. If I'm doing your books, there's a minimum amount of work, reconciliations that I have to do every month, so there's basically a minimum fee just to, just to show up. 

All right. Conversely, some things to think about for DIY. I said, you can DIY QBO or Xero. But I really encourage you, if you're going to do that, to at least invest in having someone set up Kubo for you, because they will set up your chart of accounts, they'll get all your bank feeds set up and automated. They can also do depending on the package you negotiate, they can show you how to categorize transactions, perform reconciliations. If you're going to do invoicing in QBO, which some people do, some people don't. Some people use other tools. They can show you how to do that. There's a lot of apps that you can integrate with QBO, so they can help you with that. So even if you, long term, you want to DIY it, investing in the setup can be huge. I've helped some people with cleanup where they were doing doing doing it DIY for a while and they hadn't had things set up correctly. And if you again, if you don't have a little bit of accounting knowledge,  you'll get it set up because QBO will kind of walk you through that, but you probably aren't setting up in the optimal way. 

We’ll talk in a second about actual solutions, but the easiest DIY solution is just a spreadsheet and be as easy as a Google Drive spreadsheet. DIY makes sense when you don't have inventory or payroll. When you have a really simple business model, you are a service business solopreneur, maybe with only one revenue stream. You have some time to put in place a spreadsheet system if you're creating it from scratch. I would consider advanced DIY when you're ready to bring bookkeeping in-house so you can actually hire it out until you're hitting a million, 5 million. And then maybe at that point, you're actually ready to bring in an in-house bookkeeper, on a part time basis. And so that's,  it's kind of a more advanced DIY at that point. You’re already big enough to support the salary of an in-house person to do your bookkeeping. This is typically done by companies that have invoicing and bill payment, payroll, accounts receivable where they really need an in-house finance function. 

So we've talked about double entry and single entry. And then we talked about some considerations between DIY and DFY.. So now let's talk about your actual options. So you have a full feature double entry bookkeeping system. And there's basically two biggies out on the market QBO QuickBooks online and zero, which is spelled Xero. QuickBooks has about 85% of the small business accounting market and Xero has about 10%. So between the two, you're 95%. So, 95% of your small business accounting market is controlled by these two. 

Now what's the difference between the two? They're going to have basically the same general functions. How you get to do things, how you do things, the interfaces or what's different they both have are going to have thousands of apps to do everything. They're going to allow you to import your bank feeds 99% of the time. There are issues sometimes if your banks are, if you have if you bank in a credit union, there have been some issues with getting bank credit union feeds. And this isn't a QBO or Xero issue. There’s a software or a company that provides the interfaces between QBO and Xero and the banks, and they've had issues for whatever sometimes with credit unions. But generally speaking, you're going to get your bank feeds important. They're going to have lots of resources available. They have their own certification programs. They have lots of training materials. They will have monthly fees in different versions to serve different needs. I'm much more familiar with QBO. I've never actually used Xero. For various reasons, I use QBO, but just as an example in QBO, you basically have an essentials version, a plus version, an advanced version. And this is one of the things I do with my clients, if they're not already on a version. And, we're going to QuickBooks from the beginning, I'll work with them to figure out which package they want. But, just as an idea for essentials, you're going to be paying about 60 USD a month. Plus you're gonna pay about 90 USD a month. Very few people are going to need advanced, which is 100USD a month. That’s going to be for much more complicated, advanced businesses. Most of you are going to get away with essentials or plus, but you're going to pay 60 to 90 USD a month for the service. It is highly scalable. These are highly scalable. I mean, you can use them. You could set up QuickBooks at 50,000USD and you could still use it at 5 million USD. They have pretty robust reporting and it will suit most business owners. They're both cloud based. There are by the way specifically for QuickBooks if there are non cloud versions. But the direction it looks like you know QuickBooks is going it's definitely two phases out. I don't use QuickBooks desktop. I used it with a client a few years ago and I hated it. It's very different. it was much more clunky than the current cloud based solution that they have. So the nice thing about cloud based is it, it's out in the cloud, they have bank level encryption. So it's very secure information. It'll handle your invoicing, and I'll handle accounts receivable. And I want a bill payment. So again, if you're six figures now and you're trying to scale up to a half a million, to a million, to 5 million, it's definitely scalable for you. So that's what I call your top end of your market, full feature, double entry bookkeeping systems. You have other double entry systems though. There's a system out there called wave. It's a double entry system. It's a lower price point. It actually has a free version. Your functionality is just much more limited. If you wanted a DIY and you wanted a double entry system, you wanted more of a traditional accounting system. This was what I would call an entry level DIY. I know a few people that are doing DIY on wave, accounting and bookkeeping firms generally are going to support this. there's not near as much, they don't have near as good support or training. That's one of their other limitations is, they have pretty limited customer support and training. You won't find the vast number of videos or help articles that you'll find with QuickBooks or Xero, much more limited reporting. QuickBooks reporting actually can be kind of overwhelming for a newbie. One of the things I'm doing with my clients is trying to take those reports and filter them down to the ones they really need. You can run a report for just about anything in QuickBooks. Wave is much more limited to the reports that are the basic things you need. 

It doesn't have a great reconciliation process. People complain that the reconciliation process is just complicated or clunky. And reconciliation is basically reconciling your bank account, comparing your bank account. What's on your statement to what is in your system, just like you would do for a check register. The only difference is, now you're reconciling to your system. It's got fewer options, so it can make setting it up easier, but it's less flexible. It's less scalable. It doesn't have as many things that will integrate with it. If your goal is just to have, say, a 200,000USD business, it's kind of like staying at that spot where you can be a really good solution. But if you're sitting out there listening to this and you're trying to get your finances in order and you're sitting it, you know. You know, 5000. 200,000. But your ultimate goal is to grow your business. 

I probably don't know the ways probably solution I would go to. I would probably look at wave if I wanted a bookkeeping solution. I did want to pay the broker Xero fees and I wasn't really scaling wasn't one of my big goals. You also have some CRM tools out there. So these are tools that primary job is to be a CRM. But they have built into it an accounting feature. Some examples of this is Honey Books and Zoho. For this if you wanted to do done for you, you're going to have to go out and find somebody who knows those CRMs who could also do the accounting piece. You're generally not going to find an accountant who's just going to do your honey books. And so you're just going to do your books and honey books and Zoho, you're probably going to have somebody, whether it's an OB or a VA or somebody who you're probably. using them to do other work in that system. And they're also going to do your accounting. It's very similar. It's kind of similar in many ways to wave and that it's got limited financial reporting. It's basically a CRM where we've added accounting because it's something that people have asked for. But the accounting piece is very basic because that's not the tools primary job. It does provide you an all in one tool. It's not when I say it's not hugely scalable, I mean, I know people, who use it. It's just, you’re going to limit what you can do from a financial perspective. I actually just worked with a client who uses Zoho as a CRM. She actually did. They were using QuickBooks desktop and and their QuickBooks desktop was such a hot mess. We actually opted not to migrate our data from from desktop. And she wasn't using books. They didn't even really know it was there. They were using bits and pieces of it, but they weren't actually using it for any accounting. And we put them on QuickBooks online. But again, it kind of depends on your goals. if you want to just hire somebody to do some basic accounting for you, this could be an option. You also have industry specific solutions. So there's industries out there that have that. Waukesha County is rolling cash basis accounting is not applicable or they have very specific accounting standards around them. Construction is a good example. So as software as a service they have very specific requirements. From an accounting perspective they have revenue recognition issues because there's often you know there's special accounting rules around revenue recognition software as a service. Often these are companies that are getting outside funding. So they need more sophisticated accounting. So if you're in a specialized industry, there are some industry specific solutions you can look at. But a lot of times, the people who ultimately use those industry specific solutions, they are migrating from something like QuickBooks. You could be a construction company who works on QuickBooks for five years and then gets big enough. Now you're ready for a system like Dell Tech. And then you can migrate from QuickBooks, to something like Dell Tech. You can use QuickBooks. They are for these specialized industries, but QuickBooks is really built on a mass market. It's meant to appeal to serve the greatest number of customers. So if you have a specialized industry, you can kind of jerry rig some things or customize some things. But, QuickBooks isn't built for a specific industry. And then single entry solutions really have two things out there. You have something out there that's called Ynab. Which is why you need a budget. It is really a budgeting software tool. But there are a lot more coaches, not so much bookkeepers, but coaches who help you use Ynab. You can actually self use Ynab yourself. I use Ynab for budgeting. I do not use it for accounting. I think part of it is just its way. My brain is wired. As an accountant, Ynab is a single entry system in my brain from 30 years of experience. And four years of college is training. Then I need a double entry system. So for me, Ynab just doesn't cut it with Ynab. I also, I hate their reporting. I think their reporting is really abysmal if all you want to do is see your cash inflow in your cash outflows, it's probably adequate. But if you actually want to do any type of analysis or you want to scale, it's not a good solution for scaling. And then you have a spreadsheet, good old spreadsheet. If you're doing nothing today, this is where you can start, which is to have a spreadsheet that keeps track of all the expenses in your business and including your credit card transactions. You can either create your own or I actually have a tool that I call Simple Financials. It's basically a spreadsheet bookkeeping system that I created actually for some some friends a few years ago that were in the very early stages of their business, still trying to learn how to sell. They didn't need QuickBooks and but they were, doing everything at shoebox or waiting until the end of the year. So I created a basic spreadsheet solution where they can have a transaction register and then it automatically creates some reports for them so they can actually see how they're doing on an ongoing basis. So I will drop the link if anyone's interested in that I will drop that link in the show notes. 

So some of the things to think about when you're selecting your package are your volume and transactions. How many bank accounts do you have? How many credit cards? The more bank accounts or credit cards you have, the more likely I'm going to go with something like that's going to allow me to do automated bank feeds. Do you have payroll? If you need payroll, you're going to need a payroll processor. I've said before, I use I recommend gusto for payroll. Gusto integrates with QuickBooks. I'm presuming it integrates with Xero as well. Do you have contractor payments? If you're doing contractors, you've got some implications for doing 1099. With most double entry systems, you're going to automate all your feeds. You're going to create rules to categorize transactions. So that's something to think about is how much do I want to do manually. How much I can do manually. And you know how much I want some automation. One of the two is QuickBooks and Xero will automate your bank reconciliation process. It creates a tool, makes bank reconciliations pretty easy, where if you're using a spreadsheet and use a spreadsheet, you should still reconcile your bank statements. But that's going to be a manual process. Obviously, the more volume you have, the more time it's going to take. and the more sense it makes to outsource it to someone and or to take advantage of the efficiencies you're going to get from automation using technology. 

Another thing to think about is the complexity of your business. How complex is your business model? Are you single? Do you have a single revenue stream or multiple revenue streams?  Are you specialized in industry? Do you have W-2 employees? Are you selling in multiple countries? And certainly if you're dealing in multiple currencies, then you definitely want to go to something like QuickBooks or Xero. What kind of reporting do you need? am I going to scale? and because it's more extensive reporting becomes more useful as you're trying to scale. You're trying to actually really understand your numbers. I hope this helped you today. All right. Again, you have a lot of options out there. Please don't go out and pick QuickBooks just because everybody else is doing it or just because it's the solution you hear about the most. What I really want people to take from this is there's a system for everybody that is a step up above your shoebox or your Google folders. So you've got solutions from spreadsheets, and a spreadsheet is the right solution for certain people out there. I wouldn't be selling a spreadsheet solution if I didn't think it was a solution for certain people in certain circumstances. So, think through what it is you need if you are ready for some dumb service. I have three spots right now in my executive accounting services.

I am using my 30 years of finance accounting experience to give business owners a high touch accounting service. This is for you if you are ready to get your finances in order, but you don't need CFO services yet, you are probably making six figures already, so you're ready to outsource it. But you're not at the level CFO services typically kick in in the high six figures. You can book a free call at http://www.carlamoats.com/workwithme And on this call we will do a quick financial assessment. And then we will discuss your accounting needs. If you've listened today and you are not sure what option is best for you. And you want help making a decision, I encourage you to go ahead and book a call and just tell me that up front. We can talk about your business, and I can take you through your best options and give you some recommendations on which system it is. You know what? What I would do. Like I said, I've had clients come in multiple times and I was like, you don't need QuickBooks. Quite a few people have come to me wanting me to implement QuickBooks or wanting help implementing QuickBooks. I was like, you don't need QuickBooks, and I will see you next week.

Thanks so much for listening to the show. Remember that your finances deserve some love. Finance doesn't have to be complicated or overwhelming, and you do not have to do it alone. I'd love to talk to you about your business, so please come on over to www.carlamoats.com to learn more. Or if you're ready for financial and strategy support that will upload all your business, go to http://www.carlamoats.com/workwithme to book your free financial assessment and the last favor I'll ask is for you to help me get out the word. Tell your friends about this podcast and share it on your favorite social media. Until next week, go create some Purposeful Profit.