How to Open & Operate a Financially Successful Bookkeeping Business

How to Open & Operate a Financially Successful

Bookkeeping Business

By Lydia E. Clark

How to Open & Operate a Financially Successful Bookkeeping Business

Copyright © 2011 Atlantic Publishing Group, Inc.

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Library of Congress Cataloging-in-Publication Data

Clark, Lydia E., 1983-

How to open & operate a financially successful bookkeeping business : with companion CD-ROM / Lydia E. Clark.

p. cm.

Includes bibliographical references and index.

ISBN-13: 978-1-60138-277-1 (alk. paper)

ISBN-10: 1-60138-277-4 (alk. paper)

1. Accounting firms--United States--Management. 2. Bookkeeping--United States. 3. Small business--United States--Management. I. Title. II. Title: How to open and operate a financially successful bookkeeping business.

HF5628.C53 2010

657’.2068--dc22

2010054431

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A few years back we lost our beloved pet dog Bear, who was not only our best and dearest friend but also the Vice President of Sunshine here at Atlantic Publishing. He did not receive a salary but worked tirelessly 24 hours a day to please his parents.

Bear was a rescue dog who turned around and showered myself, my wife, Sherri, his grandparents Jean, Bob, and Nancy, and every person and animal he met (well, maybe not rabbits) with friendship and love. He made a lot of people smile every day.

We wanted you to know a portion of the profits of this book will be donated in Bear’s memory to local animal shelters, parks, conservation organizations, and other individuals and nonprofit organizations in need of assistance.

– Douglas and Sherri Brown

PS: We have since adopted two more rescue dogs: first Scout, and the following year, Ginger. They were both mixed golden retrievers who needed a home.

Want to help animals and the world? Here are a dozen easy suggestions you and your family can implement today:

Adopt and rescue a pet from a local shelter.

Support local and no-kill animal shelters.

Plant a tree to honor someone you love.

Be a developer — put up some birdhouses.

Buy live, potted Christmas trees and replant them.

Make sure you spend time with your animals each day.

Save natural resources by recycling and buying recycled products.

Drink tap water, or filter your own water at home.

Whenever possible, limit your use of or do not use pesticides.

If you eat seafood, make sustainable choices.

Support your local farmers market.

Get outside. Visit a park, volunteer, walk your dog, or ride your bike.

Five years ago, Atlantic Publishing signed the Green Press Initiative. These guidelines promote environmentally friendly practices, such as using recycled stock and vegetable-based inks, avoiding waste, choosing energy-efficient resources, and promoting a no-pulping policy. We now use 100-percent recycled stock on all our books. The results: in one year, switching to post-consumer recycled stock saved 24 mature trees, 5,000 gallons of water, the equivalent of the total energy used for one home in a year, and the equivalent of the greenhouse gases from one car driven for a year.

DEDICATION & ACKNOWLEDGEMENTS

I would like to dedicate this book to every bookkeeper and bookkeeping business owner who has the passion and dedication for the work involved in this growing profession.

I would like to thank and acknowledge everyone who made this book possible. I would like to thank Atlantic Publishing for giving me the opportunity to write this book. Special thanks are in order to Amanda Miller, who first presented the opportunity to me. I want to thank my editor, Amy Moczynski, who had the patience and insight to help me guide this book to its completion. I would also like to thank all of my case study participants who helped me with their professional inputs on bookkeeping as a profession. Finally, I would like to thank the several small businesses that helped me in this endeavor and allowed me to use their expertise and work to improve this book as a whole. I could not have done this without any of you. Thank you!

Table of Contents

TABLE OF CONTENTS

Introduction: The Realities of Starting a Business

Chapter 1: Evaluating Your Knowledge and Experience Before You Begin

Chapter 2: Basic Blocks to Build your Business

Chapter 3: Managing Your Bookkeeping Business

Chapter 4: Creating a Formal Business Plan

Chapter 5: Exploring Financing Opportunities

Chapter 6: Getting your Workplace in Order

Chapter 7: Get the First Client

Chapter 8: You are the First Client

Chapter 9: Controlling Your Costs

Chapter 10: Tracking your Time

Chapter 11: Communicating with the Client

Chapter 12: Confidentiality and Client Information

Chapter 13: Common Journal Entries

Chapter 14: How Clients DoBusiness: Sales and Inventory

Chapter 15: Payroll

Chapter 16: The Price of Success

Chapter 17: Where to go From Here

Conclusion

Appendix

Glossary

Bibliography

Author Biography

INTRODUCTION: The Realities of Starting a Business

Beginning a new business is exhilarating and overwhelming. In reality, the success of your bookkeeping business will depend on your drive, determination, and the resources you have available. According to the U.S. Small Business Association, 66 percent of all small business startups survive the first two years and less than half survive four years. The time it will take your business to succeed will vary and could be seen in a period of months or years. Based on research done by small business experts, it will take three to five years to achieve full success. The day-to-day activities you perform to help your business succeed, and the time you invest in your business venture are not to be taken lightly. A business requires serious commitment and drive. It will take months to get cash-flow systems, market research analysis, and financial revenues running properly. Guidance from professionals such as accountants, financial advisers, lawyers, and bankers will provide you with valuable resources during the startup phase.

The bookkeeping profession is on the rise, with the industry expected to grow 10 percent within the next decade, making it one of the fastest growing professions in the economy. The first step to starting a bookkeeping business is to know the basics of the business. You need to have the knowledge and skills associated with general bookkeeping, as well as familiarity with financial management. Working capital, as well as tangible and intangible assets, will serve a purpose in this process. Working capital is essential in running any business successfully because it determines the amount of cash or assets you will need to operate and grow your business. Tangible assets includes anything your business has that is composed of a physical substance or can be touched. Tangible assets include cash, equipment for your business, inventories, and location of your bookkeeping business. Intangible assets do not have a physical substance and consist of your business’s intellectual property along with definite and indefinite assets. Intangible assets include intellectual property, such as copyrights, patents, trademarks, and how your business brand will be established. Consider the following questions when evaluating working capital, tangible, and intangible assets:

Working capital:

• Are there any legal fees or other licenses associated with owning a bookkeeping business? If so, how much will they cost?

• How much will it cost to rent or own your business space?

• What about equipment for the business? How much will this cost? Will it be new or used?

• What will be the cost of advertising, salaries, and every other expense until your business is making enough revenues to cover them?

Tangible assets:

• Do you have any cash on hand for running your business?

• What type of office equipment will your bookkeeping business have?

• Will there be any company vehicles used for the business?

• Will you operate the business in an external office that you rent or will you have an office in your home?

• Will you have inventories? What will they consist of?

Intangible assets:

• Will you trademark or service mark your bookkeeping business?

• What about trade names? Will you use those?

• Will your business have a website?

• How will you develop brand recognition and goodwill for the business?

As you work to make your bookkeeping business succeed, strive to understand everything related to accounting. Set up an accounting method, either accrual or cash basis. This will be explained in Chapter 1. Understand assets, liabilities, owner’s equity, debits, credits, and how these all affect your bookkeeping business. Use a chart of accounts to know where the business transactions go. Maintain a general ledger and relevant journals. Make sure the paper trail in your business is accurate by installing a computerized accounting system. Having paper records is always necessary and serves as an excellent backup system for businesses, but also having electronic copies will make them easier to follow and report on for accuracy purposes.

Because of the risk that all businesses take when they are just beginning, eliminate factors that will prevent you from accomplishing a successful bookkeeping business. These factors include the following:

• Poor leadership — Lack of vision, creativity, and ambition to implement goals result in poor leadership.

• Unclear goals — Goals without detail and inconsistent time lines for completion are vague.

• Lack of planning — A poorly written business plan that includes inaccurate information and unrealistic projections and budgets for the future will severely hinder your business’s chances for success.

• Bad advisers — Failure to select and use professional advisers leads to input from an array of individuals who lack the credentials to help guide and direct your new business. These bad advisers could be friends or family, unqualified bankers, accountants, lawyers, or financial advisers who lack the knowledge of how to steer you in successfully operating your bookkeeping business

• Insufficient capital — Lack of capital leads back to inadequate planning and budgeting for the costs associated with starting your business.

• Underestimating competitors — Overestimating your business’s quality and services compared to your competition is a sure way to lose clients and business within your community.

• Bad location — Choosing a location that does not best serve your business leads to no business at all.

• Procrastination — Putting off important business decisions until it is too late causes the development and growth of your business to suffer in the long run and reduces profits.

• Failure to research — Not researching everything pertaining to the success of your business will lead to inaccurate data and numbers projected when starting, which will therefore cause your business to lack capital and substance.

• Failure to market — Inconsistent advertising and a lack of available resources to sell your business will cause the failure of your business brand and recognition. Your market must know about your business in order for it to succeed.

• Fear — Being afraid of failing before you even start your business is one way to crush your dream before it has the time to flourish and will cause you to miss out on an unknown possibility of success. You have to know that starting your own bookkeeping business will entail barriers dealing with cost and operational structure, but fear of these barriers will only hinder you from achieving success.

Understanding What it Takes to Make Your Business a Success

Making your bookkeeping business a success requires hard work and tenacity. Be willing to go the distance to reap rewards. Know the target audience for your services and appeal to these people and businesses to draw new clients. Engage with potential clients and clients that you already have to find out their specific needs and how to solve them. Work closely with your clients and try to understand what they need from you so you can retain their business. Learn how to attract clients who will be most profitable to your business, and ask for their assistance in finding new clients. The main success of a business is its clients. You need to sell your services with a professional, strategic, quality-based, and cost-effective approach, and this book will help you do that.

A successful bookkeeping business is based on so many components. If you have ambition to operate a bookkeeping business, you are part of the way there. Design and outline your ideal business structure. Oversee and implement the exact practices that will be used in the business. This is a continuous process, and you will need to do routine assessments to help keep the business competitive and successful.

The following are a few of the attributes you will need to make your bookkeeping business successful.

Passion for the work

You must possess a passion for your business; this is the main ingredient for true success. To be able to go to work every day and love to be there is a gratifying feeling. If there is no passion for what you are doing, it will show in how your business runs. An owner’s business is more than a business: It is a way of life.

A documented plan

A clear business plan is necessary to start any business. The business plan contains a detailed, documented plan that lays out the future of your business with a series of steps. One of the reasons so many businesses fail is poor planning. Your business plan will contain specific objectives and how you will achieve them. It also lists a timeline for these goals. Employees, lenders, investors, and clients are the power players who will review your business plan.

Excellent, reliable services

Having excellent and reliable services makes a business stand out. This is how you obtain business partners and referrals. Be on time, know your services thoroughly, and be prepared to deliver quality results to the client. Be accessible to clients so they are able to contact you when they have a problem. Join professional and/or local organizations, send out mass mailings, and use word-of-mouth to advertise your services. The best advertisement for your business is the good review from a satisfied customer, so make sure the services you offer your clients leaves them satisfied.

Competitive product and pricing

Provide a list of services that your bookkeeping business offers, and establish a pricing system for what you will offer clients. There are a number of ways to price competitive services. Pricing for the business can be cost-based, competitive-based, value-based, or market-based. These options will be discussed in Chapter 2 in detail. Present your business and services to any prospective client in a way that will separate you from your competition. When selling your services to clients, be sure to include the prices for your services and a detailed description of what they entail. This gives the client insight on what they are receiving in return for their payment.

Flexibility

Flexibility is a trait that business owners must possess. The unexpected happens often, and there are many trial and error phases when establishing a business. You must be ready to adapt to changes in the market, industry, and technology. Consider making your business a one-stop service provider and offer several different areas of assistance. By doing this, you are opening your business up to new ideas and unexplored areas of profit, making you flexible to all the possibilities your business can achieve. Diversify your services so they cater to your clients’ needs. These services include general bookkeeping to tax and audit preparation, along with payroll and bookkeeping consulting. This boosts revenue and retains and obtains new clients. Flexibility is discussed further in Chapter 1.

What You Will Learn

This book will teach you how to open and operate a bookkeeping business successfully. It will show you how to build, manage, and expand your business. You will learn first-hand knowledge of the bookkeeping business from the owners of successful bookkeeping businesses. This book will also help you learn how to do the following:

• Evaluate your strengths.

• Recognize what your clients are looking for in a bookkeeper and how to make them happy.

• Learn the steps you need to take to make your business succeed.

• Understand how to work with bookkeeping programs, such as QuickBooks™ and other accounting software.

• Finance your business.

• Expand your business and hire employees.

Starting your own business will be one of the most challenging experiences you will face, but it can also be one of the most rewarding. Now that you know a little about what opening a bookkeeping business will entail, you should carefully weigh your options and evaluate your past experience to ensure this is the right business venture for you.

Throughout the book, you will get to see through the eyes of professionals who are bookkeepers, CPAs, and other business consultants who have years of experience in bookkeeping. They will give thoughts on how to be a successful bookkeeper while operating your bookkeeping business. Their professional outlook and advice will be at the end of the chapters. There also are several forms you can use when starting your business, including IRS forms, new hire documents, and a sample business plan.

Table of Contents

1. Evaluating Your Knowledge and Experience Before You Begin

Evaluating your knowledge and experience will help you recognize the benefits you will bring to a business and how you can help it succeed. The following are a few questions you should ask yourself before starting a bookkeeping business:

• Do you have what it takes to start a bookkeeping business?

• Are you proficient in the bookkeeping sector?

• Do you have the proper education or certificate to operate this business?

• How many years of experience do you have in this field?

• Do you have a passion for bookkeeping?

What is Your Experience Level?

What type of professional experience would you bring to starting a bookkeeping business? Have you done bookkeeping services for companies or consulted and trained people in bookkeeping? Even though most bookkeepers are not required to have a college degree, extensive experience in bookkeeping and a certification will help you sell your services to clients. If your skills are not there, consider bringing in a partner with the experience until your skills are worthy of operating the bookkeeping business solely. With guidance, training, and time, experience will come.

The level of experience you can bring to a business affects the business’s future. Here are some questions to ask yourself regarding your previous bookkeeping experience:

• Does your experience level qualify you to run the business?

• Would you be willing to get additional training to operate the business?

• If you do not have enough experience to run the business on your own, do you know someone you can work with to establish a professional-level bookkeeping business?

Having only minimal bookkeeping experience, which generally describes less than a year of experience, will set you back if you want to start a bookkeeping business because there is so much involved in the bookkeeping process. Everything from general bookkeeping knowledge to operating the bookkeeping business will play a major role in the success of your business, especially if you plan to offer a broad range of services. Basic bookkeeping skills are necessary; so make sure you grasp this basic knowledge. If you lack knowledge or experience, get training, a mentor, or consider opening another business.

Write-Up Work and Bookkeeping

Are you experienced in write-up work or bookkeeping? It is important to know the difference between write-up work and bookkeeping. Write-up work is one of the many services that a bookkeeping business can engage in. Write-up work consists of using the client’s bookkeeping records to adjust the balance sheet accounts to the actual value reflecting the market. Write-up work entails entering and supporting accounting transactional data and forming general ledgers and financial statements. The main function of write-up work involves increasing an asset’s book value to correctly reveal its current price in the market. However, if the amount of the asset is recorded too high, write-up work places an extremely excessive value on the asset, and it can be overstated and inaccurate, leading the business to write down the asset by reducing its book value because of overestimated worth compared to the market value. When write-up has made the asset value too high, write down to reduce the asset.

Write-up services will help your business manage its finance and accounting needs. Write-up involves maintaining all of your business’s transactional data by creating financial statements, accounts payable and receivables, and the general ledger. The management of fixed assets, account reconciliation, tax filings, and payroll are all influenced by write-up because it helps to ensure the accuracy of your financial reports and records.

Write-up work has software such as the following:

• Accounting Relief is software program by AccountantsWorld®. Its accounting system includes a comprehensive write-up and trial balance system for your business and an extensive and detailed bookkeeping study guide for your clients.

• CaseWare Working Papers offers software that prepares, reviews, and audits financial statements, tracks time and billings, and consists of a complete write-up package.

• ProSystem fx® Write-Up has software that offers quality and profitable write-up services, including data entry options that save on time, an integrated suite of products for your business use, and user-friendly controls that create financial statements and reports.

• ATX® Client Write-Up offers software that speeds data entry, offers flexibility and customization of financial statements, and a Spanish feature for Spanish-speaking customers. ATX is an easy to use and affordable application made to improve your business’s productivity.

• TaxWise® Client Write-Up software offers an extensive write-up system that handles the most complex tasks. It converts chart of accounts, creates financial statements, speeds data entry of client data, tracks and codes transactions, and serves Spanish-speaking customers.

• QuickBooks Accountants edition by Intuit® offers software that combines write-up, bookkeeping, and financial reporting with one program that includes all QuickBooks programs — Simple Start, Pro, and Premier. This software offers client data review that finds and corrects client entry errors and multi-currency support for clients