How to Embrace Lean Methodology: 5 Tips for Small Businesses
Want to optimize business processes and boost your bottom line? Here’s why small businesses should consider adopting lean methodology and how to get started.
There’s a lot of confusion surrounding bookkeeping and accounting. Are they the same thing? Which one do you need? Should you hire one person to do both?
In this guide, discover the three major differences between bookkeeping vs accounting and settle once and for all who you should hire based on what's happening in your business.
Bookkeeping tracks your income and expenses so that you’re always in the loop of what’s happening in your small business.
For example, if you want a clearer picture of your income and expenses over a specific period, create a profit and loss statement (a.k.a. income statement).
Accounting is a level above bookkeeping.
It aims to help you understand and optimize the financial health of your business based on your bookkeeping records.
Using the same example above, an accountant can identify cost-saving opportunities from the profit and loss statements created on a bookkeeping software.
Bookkeeping is administrative in nature.
Common tasks include:
Unlike bookkeeping, accounting is an analytical process.
It involves complex tasks, such as:
Accountants may also perform bookkeeping tasks.
Bookkeeping keeps your business finances in check.
When you maintain your books daily, you’re better informed about the money going in and out of your business.
More importantly, you can accommodate for slow periods and set the appropriate budgets for expenses (e.g., hiring contractors, enrolling in a course, upgrading to a new web hosting plan).
Now, what about accounting?
Without bookkeeping, it’s impossible to draw insights and improve the financial health of your business.
Accountants offer valuable tax-related advice, hence the hefty price tag (more on that later).
The advice can be as simple as identifying the tax deductions you’ve missed or as complex as advising you to switch from LLC to C-corporation and pay yourself a fixed salary to save on taxes.
And yes, in case you’re wondering, using a bookkeeper software or hiring an accountant is fully tax deductible!
DIY bookkeeping is easy thanks to its administrative nature and the abundance of affordable software.
For instance, upload your receipts via the FreshBooks and MMC Receipts integration if you want to record your expenses. Both tools cost $15/month each.
It certainly beats saving these PDFs in Dropbox and digging through dozens of sub-folders to access them when tax season rolls around.
Unlike bookkeeping, you need to hire a professional to do your accounting. There’s just too much complexity involved!
Depending on the city you’re in, a skilled accountant can cost at least $70-$100 per hour (or $300-$800 for a flat rate).
Bear in mind that the more messy your financial transactions are (e.g., coded to the wrong accounts), the more expensive it will cost to hire an accountant to clean them up.
Our recommendation?
If you have few transactions, manage your own books using a bookkeeping software (or spreadsheet) and hire an accountant to file your tax annually.
However, if you have an avalanche of transactions and work with multiple employees or subcontractors, you’re better off hiring an accountant every month or quarter.
As a solo freelancer who works with a maximum of five clients every month, I use a spreadsheet to stay on top of my clients and income. Whenever I book a new project, I update it immediately.
Note the columns below that show my project and invoice status. These grid boxes indicate the money that goes into my business and what else needs to be done. The chart on the right helps me gauge my best and worst months—valuable information that helps me plan my workload accordingly.
For expenses, I record them on a separate spreadsheet.
This approach might not be feasible if you’re a business owner with mountains of expenses spanning across different categories.
In this case, use a bookkeeping software that codes your transactions automatically. Tools like Cratoflow separates each transaction by category and assigns it an account general ledger code without you doing the leg-work.
It also instantly categorizes your deposits and withdrawals and reconciles payment entries to invoices, gaining you back time to run your business.
Whatever your decision is, don’t skimp on hiring a professional for a fresh pair of eyes!
Did this bookkeeping vs accounting guide clear up the confusion?
Bottom line, whether you hire a bookkeeper or accountant, avoid managing your financial records at the last minute.
For small business owners, commit to maintaining your books every month and use a bookkeeping tool like Cratoflow to code all transactions correctly. When tax season approaches, hire an accountant and grant them access to your tool to review them. That way, they can unearth opportunities to optimize your savings and revenue.
Sure, it might set you back at least $300 annually, but you’ll end up saving hundreds and thousands of money in the coming years.
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