Whether you’re starting up a new business or already have an established one, accounting is the backbone of your daily operations. After all, why else would you be in business but to earn an income?
For many entrepreneurs, accounting can be daunting. So much paperwork! You could produce thousands of invoices or receipts per year. You might have to think about payroll and overhead costs. What about business expenses? And then there’s the dreaded tax time. Many small business owners spend upwards of 1.5 days per week dealing with accounting matters. That alone isn’t cost effective.
Keeping organized will be your savior, and that includes keeping track of all your accounting matters. By getting your accounting set up correctly from the start, no matter how small your business, it will not only save you a lot of headaches as you grow but help you save money. And that means business growth.
What’s the difference between bookkeeping and accounting?
Bookkeeping and accounting are both important parts of managing your finances. At first glance, the two can seem quite similar, but there are a few main differences. Bookkeeping focuses on recording and organizing financial data. Accounting is the interpretation and presentation of that data to business owners and investors. For your business to run smoothly, ideally you need both people. You’d hire a bookkeeper to look after the day-to-day work. And you’d hire an accountant to handle official reporting and high level business advice.
Bookkeeping
Bookkeeping is an old term that literally means “keeping the books.” In the days before data entry, it would involve recording all financial transactions in a ledger. Not much has changed since then—except everything is digital now.
Bookkeeping is the day-to-day financial operations of a business. It is a fairly monotonous and laborious task, which can become a bit boring for those who need variety in their days. That’s when hiring a freelance bookkeeper might be in your best interest, particularly if bookkeeping is taking up a lot of time you could spend building your business.
A lot of business owners use software like Excel for bookkeeping. This is the digital form of a general ledger where all income and expenses are tracked, including money owed to the company and debts of the company. These are called accounts receivable and accounts payable, respectively.
Banks offer bank statements, which are a type of bookkeeping. Keeping track of bank statements (all of which are available online now) and credit card statements (yep, all online too!), will help you detect any discrepancies in your bookkeeping.
Accounting
Accounting is what comes of bookkeeping. The bookkeeper simply records the information, but the accountant makes sense of that information.
Accounting involves making financial statements, forecasts, and helps secure funding in the future. It also gives business owners the ability to make informed decisions about business growth and opportunities. Accounting is beneficial come tax time, so business owners can get the most out of their tax returns.
Accounting is also needed to create or update a business plan. A business plan is a business document that provides key information about the business, its owners and integral members, target market, operation and business structure, and financial planning. This last section of the business plan will include the accounting portion of your business. If you are looking to secure funding, whether from investors, grants, or credit, you’ll need a business plan.
All financial matters related to your business stem from accounting and bookkeeping, and works like a house of cards. If your bookkeeping isn’t up-to-date or accurate, your accounting won’t be either, and that’s not good for anyone.
Why are bookkeeping and accounting important?
It only makes sense that business owners keep their financial records in order. Here are a few reasons why:
Bookkeeping
Bookkeeping is a regular practice that helps you keep track of all your financial transactions. It helps you track performance so you can see if you’re spending too much or not enough, which is part of cash flow management. The other aspect of cash flow management is alerting you to delayed payments, both incoming and outgoing.
Bookkeeping is the backbone to making tax time simple. Tax time can be a huge headache, but with accurate bookkeeping, it should be fairly easy to file your business tax returns. It will also be your saviour if Canada Revenue Agency (CRA) should ever come knocking on your door with an audit.
Accounting
Accounting is important for your financial big picture. It’s like an advisor who can help you plan and strategize your business’s financial future, whether that’s investing or seeking out funding. It helps you determine if you can hire help, retain freelancers, invest in larger equipment, or branch into research and development of a new product or service.
Without accounting, you won’t be able to secure a business loan or credit, which can be a lifesaver during dry periods. It also helps you keep ahead of taxes, and can even help strategize a beneficial tax return.
How to choose the right tool for the job
It might be tempting to use a spreadsheet for your accounting data, but spreadsheet programs weren’t designed to be a substitute for accounting software. You can quickly run into difficulties if that’s the way you’re using it. Here’s why:
- It’s hard to see an up-to-date picture: Spreadsheets don’t automatically update – they show you the static numbers, and not the meaning behind them. Accounting software helps you see your cash flow in real-time. Reports and graphs give you clear information and a sense of the big picture.
- Spreadsheets can be riddled with mistakes: It might be easy to start with a simple spreadsheet doing manual data entry and simple sums. But if you want your business to run efficiently, manual copy and paste techniques are no way to thrive and grow.
- There’s no audit trail: Accounting software keeps track of every entry and who made it. This is called an audit trail and it’s a vital part of accounting. But anyone can change a spreadsheet, leaving no record of what was done or who did it. This leaves your business open to fraud.
You’ll know from running your own business that it makes sense to use the right tool for the job. So get this right the first time – and avoid problems later.
How to get started
Using cloud accounting software can be helpful in managing your business’s finances. Now that you’ve got a handle on what bookkeeping and accounting are, and why they’re important for your business, here are a few steps to help you find the right package for you.
- Ask for recommendations: You need software that’s been proven to work well for your type of business. So talk to other people in your situation. Network with other entrepreneurs, online and in the real world. Find out what accounting software they use, and if they’d recommend it. Ask your bookkeeper or accountant for suggestions too.
- Pick what you need and check costs: Decide which capabilities and features you need. Choosing software that’s based on a subscription model will allow you to pay as you go, instead of a lump sum up front. For businesses just starting out, this is a real cost saving. This also allows you to choose a plan to suit your business with room to grow.
- Plan ahead: If your business grows you may need additional apps to level up your business. For example, you may not need a full payroll solution or time tracking today. But next year, who knows? So try to find software that will grow with your business and integrate with third-party apps to automate tasks and save you time.
- Try before you buy: Companies that believe in their products are often willing to offer a free trial. See if you can sign up to online accounting software for free. Test it, get used to it and see if it will work for you. Learn more about Xero accounting software, and try it out free for 30 days.
When you choose to incorporate your business with Ownr, you’ll unlock exclusive perks with our accounting software partners. Head over to our Perks page to learn more about that and the other great offers we have to help you start, manage, and grow your business.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.