Bookkeeping & Accounting FAQ
Small Business Accounting Questions & Answers from the Giersch Group
Frequently asked questions about bookkeeping, accounting and other small business financial matters with answers provided by your Milwaukee small business bookkeeping firm. Don't see your question? Check out our online resources for in-depth small business accounting information or contact us for more information! We're happy to answer your questions or set up a free consultation for your business.
Many small business owners find producing financial statements to be a painful exercise. Often they are unsure why it must be done. Most common answers – in the order that we most often hear them are:
1.) To give to my accountant so he can do my taxes.
2.) To give to the bank when I want to open an account or line of credit.
3.) To give to the bank when applying for a mortgage or refinancing.
4.) To know how we’re doing.
It is the final answer that is the most important to the Giersch Group. We operated as strictly management consultants for 13 years prior to taking on our first bookkeeping client. In those years, our constant focus was always to stress to our clients the importance of timely accurate financial information. While most clients knew the importance of their P&L, few spent much time looking at their balance sheet, and even fewer spent any time looking at a cash flow statement.
We also found that most small business owners thought about their money in terms of “cash” rather than “accrual” accounting. This leads to many problems with cash flow, AR and debt. To remedy these problems, we decided to start a bookkeeping firm that would solve the lack of timely accurate financial information in the small enterprise world.
In doing so, we have made those bankers and accountants very happy. Now, when they get the financials from our clients, they know what they are looking at, and they are pleased with the timeliness and accuracy of the information.
There are many benefits to hiring a firm to manage your financials systems.
SECURITY: Small businesses and nonprofits are often the victim of fraud when one person has too much access and freedom with the books. Having adequate separation of duties is difficult at the small enterprise level due to the lack of staff. Hiring a firm to help you with your services solves this problem as the Giersch Group will assign at least two people to your account, along with a senior staff person who will do the monthly and quarterly reviews.
FLEXIBILITY: Whereas a single part-time bookkeeper may need time off or may not be able to provide more hours during busy seasons, the Giersch Group has the flexibility to staff up during the times you need us most.
COST: Hiring a full time bookkeeper can come with a great deal of overhead, benefits, and employer taxes. The Giersch Group’s fees are often equal to a bookkeeper’s base pay, with no additions for benefits, overhead, or employer taxes.
QUALITY: An individual bookkeeper is only as good as his or her training and experience. The Giersch Group has a team of professionals that will work on your books, and there will always be two senior staff who will review your books monthly, quarterly and annually. In addition, we will help you learn how to read your own financials and teach you the basics of managing from your books at no extra charge. In addition, we can provide many other in-depth services that can help you better manage your enterprise using the data provided by your financials.
The Giersch Group is more than an employee or a bookkeeper, we are a team that is here to partner with you on running your organization based upon timely and accurate financial data.
Basic bookkeeping services for a privately held, owner-operated business under $3M in annual revenue can cost anywhere in the range of $5000 to $40,000 per year depending upon the amount and types of services required. The most important variable is whether you need full time or part time bookkeeping and whether or not your bookkeeper is being hired as an office manager and administrator.
Part time bookkeepers range from $25 to $75 per hour, while full time bookkeepers who perform other office duties can range from $30,000 to $50,000 annual salary. Many entrepreneurs will outsource their bookkeeping because of the technical nature of financial accounting. Hiring an individual bookkeeper or using a temporary placement service is common, but turnover can be detrimental to the integrity of financial statements. In addition, low cost, hourly bookkeepers often do not have the technical expertise to handle more sophisticated issues like sales tax filings and certain audit procedures.
Learn more about pricing for Giersch Group bookkeeping services and why our approach to bookkeeping is better for small businesses.
When a bookkeeper is stealing from a company, it is often a result of a lack of financial oversight by the owner and poor separation of duties in the financial controls.
When your bookkeeper is stealing from you it is common to find the following conditions present in the company:
- Owner rarely asks for detailed financial statements
- Owner does not review the bank account balances on a regular basis
- Owner is not comfortable with "the numbers" and leaves it all up to the bookkeeper
These conditions constitute a lack of oversight and do not guarantee theft, but addressing these three items alone can usually prevent theft and embezzlement in a small business.
Regarding financial controls, companies that experience theft often have the following symptoms:
- Bookkeeper has control over all financial data input
- Bookkeeper has control over the financial reporting (or there is no reporting)
- Bookkeeper has access to cash
- Bookkeeper has permission to make transactions to your account through online banking or in person
- Bookkeeper is in control of who has access to financial information, including bank statement
These conditions constitute a poor separation of duties. The separation of duties is a common issue in small businesses and difficult to overcome. However, these conditions do not prove that your bookkeeper is stealing, they just make it very easy for that person to do so.
Signs that you may currently have an embezzlement problem include:
- Difficulty getting reports from the bookkeeper on the financial state of the company, and/or receiving reports that are confusing and unclear
- Resistance by the bookkeeper to allowing any outside access to the books, such as bringing in consultants, switching payroll providers, hiring an audit firm, etc.
- Difficulty in getting a bank statement from the bookkeeper, no longer seeing them come in the mail, etc.
- Complaints from vendors about late payments, incurring of late fees, missed payments, etc.
- Frustration with the bookkeeper by other members of the company, often because of their dictatorial control over all things financial.
With this last point, this is something that the owner can often see as a positive, feeling that the bookkeeper is keeping a close watch on the money. This is okay, as long as the owner is also keeping a close watch on the money. The surest way to avoid embezzlement is to ask for a full set of financial statements every month (P&L, Balance Sheet, Cash Flow Statement) along with the bank statements.
It is easy enough for the owner to get daily bank account balances sent to their inbox or to review them online periodically to make sure that they match with the numbers on the Balance Sheet. Finally, a working cash flow forecast that ties to the bank every Monday is an excellent way to manage cash levels and prevent fraud.
Contact Milwaukee's best small business bookkeeping firm for accounting services you can trust.
A company makes a profit when their revenues exceed their expenses. Profits are usually measured at certain fiscal periods, such as monthly, quarterly and annual profits. Profits are listed on the bottom of the Profit & Loss Statement (hence the term "bottom line"). Profit should not be confused with money in the bank, even in a purely cash business or a business that makes its money at the point of sale. This is because the receipt of revenue and the payment of expenses are rarely matched chronologically due to the nature of business transactions.
When a company is unclear about the amount of profit it is making this is usually caused by weak financial data and poor accounting practices.
Confusion over the amount of profit a company is making can also be due to the different types of profit that are possible. Gross Profit is known as the amount of money left over after direct costs for the production of good or services (aka, costs of goods sold) have been taken out of the company. Gross Profit is not pure profit because it does not take into account overhead or fixed expenses.
Once fixed or overhead expenses have been taken out, what remains is Net Operating Income. This is the amount of money left over after all costs to operate the business have been taken out. However, some costs, such as refunds, interest, or owner draws may come out below the Net Operating Income line. Once all of these additional costs or revenues (often called "other income/expense") are taken out, the bottom line is Net Income. This is considered by most to be the only measure of pure profit.
The surest way to track if your company is making a profit, and what cost structures are impacting that profit, is to make a business model for your company. A business model is a Profit and Loss Statement representation of your company with % of revenues tracked on major cost centers. The following business model represents the different kinds of profit and how ABZ, Inc. turns a dollar of revenue into a dollar of profit.
It is important to first decide why you are in business. There are some business owners who are focused mainly on top line revenue and who want to have big companies that employ many people and allow them to have Board Seats at the local symphony and standing in the community. These people may or may not take home a lot of money, but they have built large enterprises. Remember, the size of the enterprise is not correlated to profitability. It is not uncommon for very, very large companies to lose money or even to go out of business. The amount of money made on the top line does not determine if the company is "making money" on the bottom line.
Other business owners don't care what the top line is, as long as the bottom line meets their profitability goals. There are many <$3M companies whose owners are in the top income tax bracket.
Perhaps the best answer is that your company should make the most possible amount of profit with the least possible amount of effort. In order to do this, the company will have to focus on sales and marketing to drive revenue as well as internal operations, administration and systems to achieve efficiencies that reduce effort.
If you are just starting your business, a full financial model can forecast revenue, expenses and profit in a way that takes into account the amount of capital you will need to hit your revenue needs.
There are three fundamental financial statements which every small business should utilize:
- Income Statement
- Balance Sheet
- Cash Flow Statement
Read more about how to use basic financial statements to help your business grow.
Some things can be enjoyed anytime, and some things have to wait until they are done. You can pour a glass of milk from the carton anytime, but if you’re heating up a frozen breakfast sandwich in the microwave, you have to wait until the bell rings, otherwise it will be cold in the middle.
Financial statements are like frozen breakfast sandwiches. They’re no good until they’re done. Did you ever peek into QuickBooks mid-month and panic until you realized that the monthly billings hadn’t gone out yet? Or been overjoyed at the profit until you realized that the second payroll of the month was not yet entered?
Your financials have to done before you look at them. And they’re not done until they’re closed. What does “closed” mean? Well, in bookkeeping, closing the books is a technical term which means that the numbers have all been tied out to the bank account, all economic activity is accounted for, and all transactions are classified correctly, or nearly enough.
You should close your books in this way every month. If there’s one discipline to really practice in your business, it’s closing the books and reviewing them every 30 days. Sure, there are a lot of excuses to keep them open: you’re waiting for information on a job, you have more billing to do, you’re tracking down receipts. There will forever be reasons not to close your books. But if you commit to closing them sometime between the 10th and the 20th of the following month, then you get into a rhythm in which you receive reasonably accurate numbers at the same time every month and you can use these figures to make better business decisions, which will lead to more profit.
When you close your books every month, the numbers you receive may not be perfectly accurate, but in the battle between timely and accurate, timely has to win. If accuracy wins, the books are never closed, or they’re closed when it’s too late to make a difference anymore, and then there’s an excuse not to look at them, and not looking at your financials is bad.
So best practices (and the Giersch Group) insist that you review your financial statements every month. This allows you to spot trends and issues that need immediate attention. In a small business or grassroots nonprofit, for example, cash management is extremely important. The bank account balance does not tell the whole story. Only a full set of financials in accrual accounting will give an accurate picture of the cash situation of your organization.
The other value of doing the monthly financial review is that it allows you to fix problems with your financials slowly, over time -- and that’s the way most problems are solved anyway. Say your chart of accounts on the Income Statement is redundant and has too many accounts, and your balance sheet has some mysterious long term assets and short term liabilities which you have no idea about, and perhaps there are some bank accounts listed on your books that have been closed for a year. Those issues are there because they never quite rose to the top of the “important stuff” list, and they never will. But when you review the books every month, you find that you can just take one or two issues at a time, and make a little progress each month. If you do this, by the end of the year you will have clean and clear books that you really understand, and don’t need your accountant to explain to you.
It’s your money -- why not get a good grasp of what you have? Reviewing your books every month will help you do this.
Giersch Group bookkeeping services guarantee you will receive your books by the end of the following month, with a summary dashboard, or you'll receive that month's books at a reduced price! Call or contact us online today and start reviewing your financials on a monthly basis.
Once monthly financial statements are created and used, it is crucial to identify and utilize Key Performance Indicators (KPI) to grow your business. These performance metrics help clarify your level of success based on your key business goals. They are specific, actionable, and measurable indicators that help your business move forward incrementally.
A KPI helps management determine their current operating status in relation to long-term goals. Management can also use a KPI to spot a negative trend early on; then it is possible to act before the trend becomes detrimental to the business. Additionally, a KPI can help individuals track their progress based on their priorities and responsibilities relative to their participation in the larger picture.
For more information on KPIs based on industry/function and displaying KPIs on a dashboard, check out our resource.
In trying to determine a new price point, it is important to establish a break-even point for the business. The break-even point is the number of units at a given price that produces sufficient revenue to cover all of the costs to operate the business.
At break even, profit is 0; gains are equal to losses, and revenues are equal to expenses. When sales exceed break even, fixed and variable costs are covered, and the business gains a profit.
To calculate break-even in units:
- Calculate contribution margin
Unit Selling Price – Variable Costs = Contribution Margin
- Calculate Break Even in Units
Fixed costs/CM per Unit
To calculate break-even in dollars:
- Calculate contribution margin ratio
Contribution margin/unit selling price
- Calculate Break even in Units
Fixed costs/CM ratio
Through your business model, your company can determine how it turns revenue into profit.
Your business model is best viewed as an Income Statement in a percentage of revenue format. Your business model should set a target % of revenue for all the major expenses categories that it takes to run the business. Additionally, your business model can also warn you where you are underspending.For further information, check out our example business model.
QuickBooks™ Online puts your company’s financial security as a top priority. Therefore, Intuit has put in place many security policies, procedures, and controls to protect your financial data. The following measures are taken:
- Risk Assessment. Intuit conducts quarterly check-ins to address any business risks. Bottoms-up risk assessments are conducted on a continual basis.
- Authentication. Multi-factor Authentication (MFA) strategies are put in place to protect against inappropriate account access and to validate your identity.
- Access Control. QuickBooks™ Online allows you to determine who can have access to your data and what level of access they can have.
- Security Awareness Training. All Intuit employees must complete a training covering general security topics, IT security controls in place at Intuit, and privacy best practices.
- Data Security. QuickBooks™ Online uses a strategy called “defense in depth” which includes multiple security measures to ensure your data including securing your browser and encrypting your data.
- Information Protection Processes and Procedures. Intuit follows strict policies, processes, and procedures that maintain your protection of information systems and assets.
- Protective Technology. Intuit has data centers that include high physical security, redundancy, and backups for power and cooling.
- Security Monitoring. The Security Operations Center (SOC) is in place to monitor for intrusion, unauthorized access, unexpected file changes, unplanned spikes in activity, and to assess the protective measures.
- Business Continuity and Disaster Recovery. QuickBooks™ Online runs in asymmetric “active-active” mode, meaning if something happens in one data center, the next data center is ready to take over within moments.
Read the QuickBooks™ Online Security White Paper for July 2017 to learn more about these security controls in place to protect your financial data.
QuickBooks™ Online supplies you with an array of integrated apps and Intuit products that provide solutions for sales management, billing and invoicing, customer management, and commission management.
These apps include:
- TSheets allows your employees to track hours, simplifying payroll, invoicing, and job costing.
- QuickBooks Payments allows you to email invoices with a Pay Now link and accept online and mobile payments.
- Bill.com allows you to pay bills online and automatically syncs with QuickBooks.
- Over 400 more apps are available for your use.
Read “Move Your Business Forward” to learn more.
One of our trusted Quickbooks™ Online Certified ProAdvisors will work with your business to select a plan suited to your needs. Whether you’re an appointment based business, you manage a retail or ecommerce business, or you focus on professional and field services, the Giersch Group will identify the plan to suit your needs.
Having complete control of your finances, access to simple billing, and flexible options for financial planning helps you in understanding your business’s financial position.
At the Giersch Group, all of our associates are trained to effectively convert your existing financial data for use in Quickbooks™ Online. We have a plan to identify which data to convert, prepare the data for use in Quickbooks™ Online, and finally convert the data, ensuring utmost accuracy along the way. Upon completion of data conversion, we will run tests before setting up payroll, check inventory reports, and run reports to compare data between Quickbooks™ Online and Quickbooks™ desktop.
We help our clients with the process in an efficient manner, and are available for any questions along the way. Quickbooks™ Online is not just a useful tool for your trusted advisor, but we strive to deepen your understanding of the software and your financials along the way.
For more information, read more about Quickbooks™ Online data conversion.
A Profit & Loss Statement, also known as an Income Statement, is one of the most underutilized statements, but perhaps the most important. The P&L Statement allows a company to know where they stand financially, if the company made money, and what their product mix looks like.
The P&L Statement takes the business’s revenues and subtracts the expenses and costs of goods sold to determine the net income for a specific time. The overall categories on a P&L Statement are known as the product mix. This allows a company to determine which products are most profitable and refine their business strategy.
Read the Giersch Group’s resource on Profit & Loss Statements for more information.
Liquidity and Solvency Ratios allow you to determine the available money your company has and to better manage that money.
Liquidity Ratios include working capital, the current ratio, accounts receivable turnover, accounts receivable days sales outstanding, and inventory turnover. All of these equations allow a company to determine their capacity to service debt in the short term.
Solvency Ratios include the debt ratio, equity ratio, and debt to equity ratio. These equations allow a company to determine their capacity to service debt in the long term.
Read our resource on Liquidity and Solvency Ratios to learn more about utilizing these ratios and what these equations look like.
Our financial packages include:
- Income Statements (otherwise known as the Profit and Loss Statement)
- Balance Sheet (Beginning and Ending of the Period)
- Cash Flow Statement
- Income and Expense Graph
- Accounts Receivable Aging Summary
- Accounts Payable Aging Summary
- Dashboard highlighting key financial ratios for your business
By monitoring these statements and ratios, it is possible to see the financial position of your business based on benchmarks or prior statements.
For more information an an example, read our resource on Monthly Financial Reporting Packages.
Internal controls help protect your company’s assets and reduces the risk of fraudulent activity. They also help ensure financial accuracy, aid in obtaining recommendations from outside financial advisors, help solve present business problems, and reduce opportunities for fraud.
Read our resource on Internal Controls for further information.
1. Income Statement
The Income Statement shows a company’s profit or loss over a specific period of time. Also known as the Profit and Loss Statement (P&L), the Income Statement is usually measured on a monthly, quarterly, or annual basis. The calculates Gross Margin: revenues less discounts and cost of goods sold. Operating expenses are then deducted from Gross Margin, resulting in Net Income (or Loss) before taxes. After taxes are removed, we are left with Net Income (Loss), or a company’s “bottom line.”
2. Balance Sheet
The Balance Sheet shows a company’s overall financial position for a specific point in time, including the following headings:
- Assets (listed in order of liquidity)
- Liabilities (listed in order of when commitments are due)
- Equity (including any dividends and retained earnings)
The Balance Sheet Equation:
Total Liabilities + Equity = Total Assets
3. Cash Flow Statement
The Cash Flow Statement shows cash inflows and outflows for a specific time period; it also shows the sources of cash. The statement is divided as follows:
- Cash from Operating Activities
- Cash from Investing Activities
- Cash from Financing Activities
For more information, read our full resource on financial statements.
The cash method records revenues and expenses as they are received or paid. This method is useful in continually monitoring a company’s current cash position. However, it does not give insight into how profitable your current business activity is.
The accrual method accounts for transaction as they occur, regardless of when cash is exchanged. Revenues are recorded within the billing cycle, as the invoice is created. Expenses are entered as bills are received. The accrual method gives management increased visibility pertaining to the financial position of the business.
The Giersch Group recommends using the accrual method because it gives management a clearer, forward-looking financial statement to assist in decision making.
For more information, check out our resource.
One major difference is that financial accounting is for users outside of a company and managerial accounting is used for users inside of a company.
Financial accounting uses statements that are helpful for external users (including regulators, banks, the IRS, and shareholders. Financial accounting is the process of recording all economic activity that happens in a given period.
Unlike financial accounting, managerial accounting is targeted to internal users. Identifying, measuring, analyzing, and understanding a firm’s financial placement is crucial for decision makers. Managers can then use this information to develop budgets and plan for the firm’s future.
For more information, read our Accounting resource.
Most small businesses spend anywhere from 5-10% of revenue on bookkeeping and accounting services.
If your firm reaches $100,000 in revenue per year, you should be spending $5,000 - $10,000 on bookkeeping services annually.
At the Giersch Group, we go beyond basic tax preparation and encompass a variety of needs, including payroll, bill pay, and invoicing. For more information, click here.