Bookkeeping or accounting: What small business owners need to know

As a small business owner, managing your finances is no small task. One of the main reasons businesses fail is poor cash flow management. If you don’t have a ton of experience with accounting/bookkeeping, there are some things you need to know. The money you will spend for these professional services is worth it!

Even though the terms are frequently used interchangeably, bookkeepers and accountants are NOT the same thing. They each provide distinctly different services for your business. Bookkeepers record transactions and financial activities of your business. Accountants use this financial data to help you make better business decisions, and are generally more well versed in tax rules. Bookkeeping is largely transactional, while accounting is more subjective.

Bookkeeping refers to the process of accumulating, organizing, storing and accessing the financial information of your company, known as maintaining the general ledger. The bookkeeper tracks the money going in and out of your business through sales, purchases, payroll, taxes, and all other relevant transactions. Bookkeepers may have two to four years of experience, or an associate’s degree.

In addition to filing requisite tax documents, accountants use the information generated by bookkeepers to generate reports, forecast trends and make recommendations to help keep your business on track. The accuracy of these reports is entirely dependent on the accuracy of the information provided by the bookkeeper. Reports from accountants provide a better understanding of actual profitability and create an awareness of cash flow in the business. Additionally, the accountant establishes controls to make sure the system is working well. These controls can help detect and deter theft, embezzlement, fraud or other dishonest behaviors.

Not all accountants are CPAs. Accountants with a CPA (certified public accountant) designation have completed a specific certification process, including a bachelor’s degree in accounting or finance, passed a certification examination, and have gained practical experience under the tutelage of other certified professionals.

These entities are not mutually exclusive. Businesses usually do best when the bookkeeper, accountant and owner work together to set goals and share information.

Frequently, the bookkeeping in a small business is done as an afterthought, by an employee who is no accounting knowledge or training, and who has multiple other duties. This can lead to haphazard record keeping. If you are going to use an employee, make sure they are properly trained in your bookkeeping system, and that they have regular communication with your accounting professional.

When do you call a professional? Bookkeepers are needed when your business is growing rapidly and you cannot keep up with the paperwork. Accountants are needed when you need help understanding profitability, cash flow, financial planning and business tax planning. Rule of thumb: The more complex your financial situation is, the more likely it is you will need an accountant.

Finding the right bookkeeper and accountant is important to your business. First, you need to understand your needs. Do you need simple data entry or higher financial analysis? You need to find someone who is familiar with and understands your business or industry. A used car dealer will probably not want to use someone who only has experience with restaurants.

Professional bookkeepers can provide additional services to your business such as accounting program set-up, payroll set-up, and sales tax set-up. Improper set-up in any one of these areas can lead to very costly mistakes in the future.

Paying bills online is easy, but are you entering these transactions in your accounting program? Writing paychecks in a timely manner is important to your employees. More important to your business is making sure proper withholding and tax payments are deposited in a timely manner. Not your forte? Then it is time to hire it done. Figure out what you don’t have the time or want to do, then pay someone else to do it.

Before you hire someone, ask questions. Do they have certification? Do they have experience in your industry? Do they provide local references? What accounting software do they use? What services do they provide? What is their billing structure? Does their software have security features? What is the best avenue of communication (e-mail, telephone, on-site visits)?

Can you afford to hire these professional services? The real question is, can you afford NOT to have them. One fine, accompanied by penalties and interest, can easily surpass the cost of professional services. Do what you do best, and hire a professional to tend to the details.

Cheri Hoffman is a volunteer business mentor with SCORE’s Tip of the Mitt chapter. She earned a master’s degree in business administration, and gained 35 years of management experience in multiple business environments, including medical office management, real estate development, oil and gas exploration and production and nonprofit management. To request SCORE's free, confidential mentoring service for small businesses, call the Petoskey Regional Chamber of Commerce at (231) 347-4150.

This article originally appeared on The Petoskey News-Review: Bookkeeping and accounting for small businesses