Many people wait too long to bring in professional support for their business, because they think they should wait until things get complicated. Really, learning alongside professionals as the business ramps up can save time and give you confidence in the foundation of your business.

Here are some first steps to establishing a business and the professionals that can help.

Step 1: Entity Setup (Often with a Lawyer’s Support)

• Research and select the best legal entity type for your business

• Register the business with your local Secretary of State

• Draft and sign an operating agreement

Step 2: Entity Setup (DIY Tasks)

• Purchase a business website domain

• Setup a business email address using a hosting provider or Google Workspace

Step 3: Financial Gameplan (Often with a Tax Accountant’s Support)

• Elect a tax treatment for your entity

• Apply for an EIN. (This can be DIY if you want!)

Step 4: Financial Gameplan (DIY Tasks)

• Open a business bank account

• Link up business payment methods, like PayPal or Venmo

• Choose a bookkeeping system or provider

A bookkeeper keeps an accurate record of what money flows in and out of your business. They do this by:

• Establishing a consistent system to track income and expenses

• Helping keep business and personal finances separate

• Making sure every dollar coming in is recorded once (and only once!)

• Reconciling bank and credit card accounts

• Producing financial reports that explain it all in common accounting language

Business owners that have never had bookkeeping may be using spreadsheets or notes to keep track of their expenses and report these on their taxes. They usually reach a point where maintaining and updating the spreadsheets and answering questions from their tax accountant becomes tedious or overwhelming. That’s when it’s time to bring in a bookkeeper!

Experienced bookkeepers can quickly see the trends in your numbers. They use this understanding to make sure income isn’t counted twice and expenses aren’t missed. That results in reliable financial reports based on correct numbers and stops you from paying more taxes than you owe!

When bookkeeping isn’t accurate, the most common result is overreported income and overpaid taxes. This happens more often when the bookkeeping system is insufficient or when users do not understand the functionality of the bookkeeping system. A couple of real-life examples:

• A sale is recorded as income once using an invoice. Once paid, cash hits the bank account in the same amount. And instead of the bank transaction being matched to the invoice in the bookkeeping system, it is categorized as revenue and inadvertently recorded as income for a second time.
  

• Business expenses are paid on a personal card and never manually added to the books. Now profit margins look higher than they really are, and the business owner loses out on a tax deduction for the business expense.
  

Since these errors are buried in the details of transaction data, they may not be caught by a tax accountant at year end, but they can cost business owners thousands of dollars in unnecessary taxes.

What about opportunity costs? Inaccurate books also make it hard to:

• Understand and project cash flows

• Price service packages correctly

• Establish marketing budgets and make other strategic decisions

Most solopreneurs should stop doing their own bookkeeping when the business outgrows simple tracking and requires more accuracy and consistency. Common signs include:

• Monthly transactions increase beyond a small handful

• Personal and business finances occasionally overlap

• More than one business bank account, credit card, or payment processor

• Multiple invoices at a time outstanding from clients

• Unsure whether income is being recorded once or twice

• Taxes feel confusing or higher than expected

DIY bookkeeping often works in the earliest phases of a business, especially when income is sporadic and expenses are minimal. It may break down as invoicing software, payment processors, bank feeds, and other systems start to layer on top of each other.

That’s typically when income starts getting double counted and expenses start getting missed. The books may look organized, but they’re no longer accurate. If you’re questioning whether your numbers reflect reality, you may need a professional!

A bookkeeper focuses on your finances throughout the year, while a tax accountant focuses on filing tax returns, usually once per year.

Bookkeepers take the data from your bank statements, credit card activity, and other commerce platforms and organize them into meaningful financial reports, like the P&L.

Tax accountants use those reports to prepare your tax returns. If you bring a tax accountant a stack of bank statements, receipts, or platform printouts, they will probably send you back to a bookkeeper!

Bookkeeping is about accuracy and insight. It answers questions like:

• How much did I actually earn?

• How profitable are each of my services?

• And how have my business expenses evolved over the years?

Tax accounting is about compliance. It answers questions like:

• What is my taxable income?

• Is this expense tax deductible?

• How much do I owe the IRS in quarterly payments and at the end of the year?
  

A tax accountant uses the information from your books to prepare and file tax returns. If the books are wrong, the tax returns will be wrong too!

Most business owners only check their bank account to see if there’s enough cash to run this week’s operations. The truly high achievers may review the year-to-date Income Statement (also called the P&L).

In my work with small business owners, I’ve discovered that most benefit from substantially more reporting. Check out the reports that I recommend for all business owners below:

• Income Statements, Balance Sheets, and Cashflow Statements on each of the following bases:

  • Annual

  • Year-over-Year

  • Quarterly or Monthly - Depending on seasonality of the business

• Cumulative Year-over-Year Revenue

• Accounts Receivable Aging - For businesses that issue invoices to clients and do not receive immediate payment

• Loan account activity detail - For businesses with any debt or credit card balances

• Detailed reports of specific expense categories

  • Categories depending on the nature of the business

  • Both independently and as a percentage of gross revenue

  • Commonly useful categories include marketing, administrative, interest expense, and recurring software subscriptions

Seem too complicated? Ask if your bookkeeper can present these in a visual or graphical format. That can make them a lot more digestible and useful!

There isn’t one right answer for every business, but your books should be updated often enough to catch mistakes early and to support agile decision-making in the business.

For many solopreneurs, monthly bookkeeping is ideal because it prevents income from being double counted and ensures expenses aren’t missed. When books are only updated once or twice a year, small errors can compound and lead to overstated income and higher taxes than necessary.

Monthly bookkeeping also provides real-time data to make decisions with. Just had your best month ever for sales? Now might be the time to book that industry conference you’ve been considering!

Yes, of course!

Financial reports are only useful if you understand what they’re telling you. A good bookkeeping relationship includes explaining:

• Where your profit is really coming from

• Why numbers change month to month

• Whether increased sales actually means higher profit

• Which trends are normal variations versus red flags

• How closely your business is approaching its stated goals

You don’t need an accounting background to understand your own business, because your professional partners already do!

Clear explanations are part of excellent bookkeeping, along with visual management dashboards, coordination with your tax accountant, and answers to your financial questions. The more you work with a skilled bookkeeper, the more empowered you should feel to speak expertly about the financial side of your business.