Learn everything you need to know about bookkeeping services for a home service company. Discover tips and advice about daily operations and common challenges and whether to perform duties in-house, outsource, or use automated software.
Thinking about bookkeeping services can seem intimidating for a new small business owner. However, it's easier than you might think. There are several approaches to consider, such as hiring a bookkeeper, outsourcing, or managing daily financial accounts yourself.
This article clearly and effectively describes how bookkeeping for home service companies works. You'll learn about best practices, challenges, accounting software, and whether it's best to outsource a bookkeeper or hire one in-house.
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What Is Bookkeeping?
Bookkeeping services involve keeping accurate records of day-to-day business costs and expenses. A bookkeeper tracks all money coming in and going out in an easy-to-read, consistent way. This helps measure a company's profitability and keeps track of the general ledger and account records required for filing taxes each year.
As an essential element of every business on the planet, there's no escaping bookkeeping. By getting the basics right, you improve your chances of growth and success. Clean, regularly updated records can be the difference between a thriving home service contractor business and one that struggles.
Depending one the size of your home service company, skill set, and preferences, you might choose one of the following three bookkeeping methods:
- DIY: If you have a very small business and a firm grasp of figures, you might opt to do your own bookkeeping. Advanced accounting software makes the process easier than ever, with free and paid options available. Although many elements are automated, you still need exceptionally strong tech skills and attention to detail to manage your own financial records.
- Outsourced: You can hire a remote bookkeeper or bookkeeping agency to help run your home service contracting business. Records are managed by experts who don't exclusively work for your company.
- In-House: Another option is hiring an in-house bookkeeper or assigning bookkeeping duties to a manager within your small business.
Why Is Bookkeeping So Important?
Small business bookkeeping must be handled properly to maintain your operation's financial health. Strong records form the foundation of your accounts and help you spot opportunities and issues.
Reasons strong bookkeeping is so important include:
- Identifying mistakes: Closely managing transactions and reconciliation helps prevent financial issues later on.
- Simplifying finances: You can save money and streamline operations with effective bookkeeping.
- Separating personal and business finances: It's important you're not held liable for issues or debt related to your business.
- Organizing records: Strong bookkeeping makes tasks such as buying new equipment and applying for loans easier.
Bookkeeping Vs Accounting
Bookkeeping is the process of maintaining your company's daily records of payments, sales, receipts, and purchases. Accounting is the discipline of organizing and analyzing this data to glean insights about your business's financial health.
In other words, bookkeeping generates data about a company's financial activities, while accounting turns that data into actionable information. Traditional bookkeeping tasks include:
- Recording transactions
- Generating invoices
- Posting debits and credits
- Managing payroll
- Maintaining and balancing accounts and ledgers
A ledger is a document that records expenses and sales, and it can be as simple as a sheet of paper. However, nowadays most operators use automated bookkeeping software to track credits, debits, and entries. All transactions are recorded in this ledger, and some entries require additional documentation.
On the other hand, an accountant is more focused on the bigger picture. They analyze financial data to offer advice and insights about a company's financial health. Common accounting tasks include:
- Verifying and analyzing bookkeeping data
- Performing audits, generating reports, and preparing records such as balance sheets, income statements, and tax returns
- Offering insights such as financial forecasts, business trends, and growth opportunities
- Adjusting entries
- Helping the home service company owner make logical financial decisions
How Small Business Bookkeeping Works
Bookkeeping is much easier for small business owners due to the advent of automated software. Nonetheless, you must be able to accurately set up and maintain records. Plus, it's crucial to have a firm grasp on the records you input so you can spot any glaring issues or successes as soon as possible.
Set Up Bookkeeping Software
For the most part, setting up bookkeeping software is simple. You'll need to connect bank accounts, reconcile transactions, and perform data entry. It's also necessary to manually check for errors and learn about the software you choose in elaborate detail to allow you to make the most of it.
Choose An Entry System
As a small business owner, you need to choose between single- and double-entry accounting. If you're a very small operation with minimal equipment or inventory expenses, single-entry is usually sufficient. Under this type of system, all transactions are recorded once, either as income or as an outgoing expense.
With double-entry accounting, transactions are recorded twice, as a credit and as a debit. This increases the chance of balanced books and can prevent errors and fraud. Most companies use a double-entry system to keep track of liability and asset accounts, plus it enables accurate profit and loss calculations and makes preparing financial statements easier.
Choose A Method
You'll also need to choose between cash- and accrual-based accounting:
- Cash-based: Transactions are recorded when money is exchanged. Records aren't made until invoices or bills have been paid.
- Accrual-based: Bills and invoices are recorded even if funds haven't yet been exchanged.
Service-based companies almost always use an accrual-based system, as invoices are usually sent in advance of completing a job. What's more, the accrual system gives a more accurate reflection of performance, makes it easier to calculate profit margins, and includes more actionable data.
Record And Manage Transactions
The daily process of bookkeeping is all about recording and managing transactions. This includes accurate data entry, reconciliation of transactions, and ensuring records are completed according to the correct accounting method and entry system.
Accounts Receivable And Payable
Accounts receivable keeps track of goods and services your company gets paid for, while accounts payable ensures you pay invoices and bills on time. With small businesses, accounts payable and receivable are elements of bookkeeping.
Set Up Payroll
Depending on the accounting or bookkeeping software you use, payroll might be part of that process. However, it's also possible to get stand-alone payroll software to manage this key element of your home service business.
Budget For Tax
Keeping an accurate record of payments and potential deductions makes tax calculations as seamless as possible. When it comes to filing business taxes, keeping strong, accurate records streamlines the process for you or your accountant.
Financial Statements And Documents
As a small home service business, more elements of accounting are included in your day-to-day bookkeeping procedures than a larger company. You should manage and maintain transactions, assets, expenses, and income as a matter of course. Most software lets you streamline daily documents into major financial statements to use for your records.
7 Bookkeeping Challenges For Home Service Contractors
One of the most important elements of any business is its financial health. Having excellent processes and procedures in place to record and manage your accounts gives you a competitive advantage and has a knock-on effect on the efficiency of your entire operation.
Below is an outline of seven top challenges a home service business owner might encounter.
1. Cash Flow
Cash flow problems are one of the main reasons small businesses fail, particularly when it comes to contract work. Accurate bookkeeping is vital to give you the information necessary to effectively manage cash flow. To ensure you're always operating within your means, you must pay close attention to your:
- Checking account balance
- Breakeven point
- Accounts payables
- Accounts receivables
- Inventory audits
What's more, it's crucial you always have a reserve of extra cash in case of emergencies and actively monitor cash flow.
2. Delayed Payables
It's crucial that you avoid delayed payables wherever possible. A reputation for making late payments could hold you back from reaching your potential and cause problems such as late fees or withheld deliveries.
Often, payments are delayed due to an ineffective bill tracking and paying system. Strong bookkeeping can prevent issues related to delayed payments, which are just as important as invoice collections.
3. Delayed Receivables
Just as making payments is crucial to your company, so is getting paid for the work you do. As a contractor, payments are often made after you've completed a job. As such, falling into a cycle of going into the red until clients pay can be fatal to your business.
By meticulously tracking accounts receivable and establishing best practices when it comes to invoicing, you can avoid issues. Including due dates on all invoices, imposing late fees, and following up unpaid invoices are just a few ways to manage receivables. Bookkeeping software can usually perform billing and follow-up duties.
4. Irregular Financial Reports
If your financial reports aren't balanced, your small business can get into serious trouble. Not only that, but you won't have an accurate picture of performance and might not be compliant with financial regulations. Having good habits and strict processes with regards to bookkeeping is vital for financial health.
5. Payroll Management
Making payroll errors can lead to issues with your workforce and incur fines from the IRS. Most contractors can't afford a dedicated payroll department, so you need to keep a close eye on it yourself. Most bookkeeping software has payroll management built in.
6. Tracking Expenses
Digital invoices, paper receipts, and recurring expenses must all be documented. Without an effective, standardized system, tracking expenses is impossible. Input expenses as they're made and use technology to simplify the process of expense tracking.
Bookkeeping should take place on a daily basis, and reconciliation should happen at least once per week. Mistakes happen as a matter of course, and reconciliation helps you track and fix them as soon as possible. Inaccurate financial reports due to not balancing your books can impact future business decisions and be off-putting to investors and lenders.
Should You Outsource Bookkeeping Services?
One of the most important decisions to make is whether to outsource bookkeeping services or conduct them in-house. Outsourcing can be more cost-effective than hiring in-house and often gives you access to the expertise of a team of bookkeeping and accounting professionals as opposed to one person.
On the other hand, remote bookkeepers are less engaged in your day-to-day operations and might miss smaller details someone in-house would catch. However, if you're in the process of growing but can't yet afford to hire someone in-house, outsourcing is a great option.
Managing Employees In-House
Having someone in-house provides an extra layer of support when it comes to the crucial matters of finances and admin. You don't have to wait on the phone or manage your questions around a third party. If you're large enough to require daily access to a financial expert, hiring in-house is an excellent idea.
Your own bookkeeper or accountant knows your company inside out, so they'll be loyal to you and offer specific, targeted advice with you as their sole focus. The main drawback of hiring in-house is the cost, which includes salary, office space, equipment, benefits, and retirement.
The Best Free Bookkeeping Software
There are a number of free and paid bookkeeping software platforms contractors can use to track and manage incomings and outgoings. When it comes to free software, HubSpot lists the top eight as:
- Zoho Books
Bookkeeping: Play To Your Strengths
Deciding how to conduct bookkeeping services within your home service company is all about playing to your strengths. If your company is very small, you might be able to do everything yourself with the help of bookkeeping software. As your business grows, you might need to either outsource or hire an in-house bookkeeping professional, depending on your needs and budget.
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