How Bookkeeping Improves Profitability for Small Business Owners: S7E3

Your numbers should work harder. Our favorite Bookkeeping Mensch, Paul Rosenblum, has a simple message: your books should help you think.

In this episode, Paul answers a listener question from Jenny and walks through what good bookkeeping is actually meant to do. Create clarity. 

When bookkeeping is done well, it shows how a business really makes money, where it quietly loses money, and which decisions affect profitability over time. By comparing years side by side, organizing income and expenses with intention, and reviewing the numbers regularly, business owners can move from reacting to planning. This episode is about using bookkeeping as a practical tool, not an abstract report.

Transcript

Season 7 Episode #3

 (How Good Bookkeeping can help business owners be more profitable)

Here Ye, Here Ye! I have the best news (so far) of 2026!  1099 Season is officially over by the time you hear this episode!  There are always late filings because of either missed information or W9 forms coming in late from subcontractors or from business owners who email their bookkeeper late, but it IS February and it’s time to move on.  And I’ve been doing just that -- moving on to the next phase-- which is entering all the credit card data that needs to be entered and finalizing all the books that I put together for tax filings. More about that in future episodes. We will be talking about that process.  But this season is your Q&A season -- so here we go!  I’m Paul Rosenblum

A question from Jenny --- a simple question, with a somewhat lengthy answer.  Go ahead Jenny! 

As a precursor to this conversation, let’s back up and go over the definition of bookkeeping vs accounting, since the answer to this question pertains to the bookkeeping part and not necessarily the accounting aspect.  There are bookkeeping processes and an accounting process, which are interrelated--- however Jenny is asking about the bookkeeping part for sure.  

A bookkeeper is responsible for entering financial transactions into the bookkeeping system that happen daily during the operations of a company. Bookkeepers work and usually get paid by the client or the taxpayer.  The books should reflect what the company owner or their internal accounting department should know about how they are making money and how they are spending money. Traditional bookkeeping is responsible for money in/money out and entering each transaction in the correct category on the chart of accounts. Debit card transactions, ACH’s, ATM’s, transfers between accounts, (company or personal accounts) and credit card transactions (expenses and payments).  The bookkeeper is also responsible for credit line transactions and loan transactions, as well as payroll. In other words, any monthly or annual statements that the business receives. 

Accounting quite simply is taking those numbers and categories and making changes to conform to the IRS’s tax code.  Sometimes that means making small or even large changes from the bookkeeper’s work. And in many cases, after the tax preparer gets done with the books, the profit and loss could be very different -- but for tax reasons only.  

I have several clients who like to have zoom calls with me at the end of the year to go over their (almost) completed profit and loss reports, or even in the first week of Jan of the next year to go through the full profit and loss report category by category.  What I do, Jenny, is run a profit and loss report for (in this case as of the writing of this episode), 2025 AND 2024.  This way, we can compare the two years by just looking at two columns.  We go over every category on the profit and loss.

  So, even though I could just have one income account, with many clients I have several income accounts to show specifically how they make their money from year to year. If I do just have one income account, then I will create “items” that are line-items that are entered on customer invoices, and even though all the items are routed to post to one income account, I can get a report of all the different line items that are on invoices. For an example, my own books have items for monthly bookkeeping, consulting, cleanup of books, Year-end work, 1099 filings, and even zoom calls.  So, I could run a report of all of those items together for the client to see from year to year specifically what categories of income are making their company more money than others. This helps with making business decisions for the next year. 

In terms of expenses, I go over with the clients who want to or request – every expense category and compare it to last year, the same as what I mentioned in the income section.  And we can see how each category affects the net profit.  The more money that is spent (given the same income over two years), the lower the profit is.  

By analyzing where money is going, the business owner (or in larger businesses) the owners or CFO can make decisions to either concentrate on specific income categories to make more revenue and discontinue services that haven’t been doing well recently. In terms of expenses, if a company has a COGS section, to compare the last two years of the cost of goods costs in all the categories really show you a lot.  In the case of a restaurant, where every ingredient and/or food is a cost of goods, looking at the cost over a period of two years is very helpful to the restauranteur to see what specific cost of goods have gone up and which could have gone down, and that could lead to menu changes and pricing. 

Payroll costs are very important too -- that’s a large category by itself! You could see the number of employees, the total hours worked by pay period or by the month, how many people are being paid per shift, and you can also analyze the kitchen staff and bar staff.  You might need to cut costs moving forward (or hopefully) not. 

Rather than creating a category for ‘Dues and Subscriptions’, if you, Jenny, are taking care of the books for a law firm or an architectural firm, you might want to also have a category of ‘Professional Dues’.  Dues and subscriptions would be for maybe networking dues (could also be put into advertising), and newspapers or magazine subscriptions, and professional dues would be the State Bar annual dues for lawyers, or dues to a particular organization that an architect might need to belong to. 

The software subscriptions should now be a subaccount of Office Supplies, as the IRS does not want to see online subscriptions in the dues and subscription category. Rent is not only for the office rent or rent for a store location -- but rent should also have subaccounts so that you are showing storage units, cold storage, and any other companies who clients pay monthly rent to. This way, Jenny, you can go over very specifically at the annual meeting with clients exactly what they are spending money on. 

I have a client who gets two totally different Electric/Gas bills for his restaurant.  It’s just the way the building is wired and can’t be changed.  Under Utilities, I have two Electric/Gas subaccounts by location of what is being covered.  In this case, it’s a basement and the street level -- two separate accounts, hence two separate bills. 

The more specific your chart of accounts is, the more fruitful this annual meeting can be with your clients.  However, remember that you can get the details of transactions that are in accounts even if you don’t have subaccounts, but it’s easier to compare side by side, year by year, each category and get a track record of each. 

Now let’s get into a different line of thought. One that most bookkeepers don’t even think about. There are actually, in my mind, too main buckets of expenses.  

There are soft expenses and hard expenses. Some clients look at only ‘hard’ expenses. These are rent, storage costs, insurance, payroll, cost of goods if they have any, travel which are all business related, repairs, and utilities, just to name a few. Soft expenses would include business meals, entertainment paid for by the company (even though they are non-deductible), such as taking a client out to a Broadway show in NYC, even personal car expenses or a home/office expense. “Hard” Expenses are necessary expenses that have to be paid to keep your business going.  “Soft Expenses” is outgoing money that isn’t actually needed to keep your business going but are tax deductible in many cases. 

Like I said earlier, the books are designed to be put together for the client. Not for the tax preparer unless the tax preparer is paying you directly to put together books for his or her client. I hope that answers the bulk of your question, Jenny. A great question! Thanks!

Now, most people who know me, or have listened to several episodes of this podcast know that I go a little further in answering this kind of a question. 

Accounting, as I mentioned, is taking the books that are put together by the bookkeeper and changing them for tax code purposes. The tax preparers are responsible to make adjustments to the books using general journal entries to be compliant to tax laws by the IRS.  The books that the bookkeeper creates and the finished tax return in most cases, look very, very different after all of the adjustments that the tax preparer makes.  So, at one point, the bookkeeper should get a list of all the adjustments that the tax preparer made to the books and make sure they are entered into your (or the clients) books so that it matches the tax return. The question then becomes this:  If adjustments in the form of general journal entries are dated on 12/31, and you have real credit card, debit card or any other transaction dated 12/31, then when you run a profit and loss report after taxes are done, the numbers won’t be the same.  What I do is not use 12/31 as a date of a transaction.  I’ll use 12/30, so that I can run a profit and loss report from Jan 1 – December 30th, not showing the tax-based adjustment entries to the client.

Traditionaly, (since the 1990’s, when software for bookkeeping and accounting became popular--- all desktop editions, by the way), the bookkeeper would have their copy of the books for their clients, and the tax preparer would have their copy of the books, usually called “Workpapers” or “Work product” for audit purposes that would match the tax return prepared. However, today, that traditional process is a bit skewed--- NOT to my liking at all, by the way. The ‘bookkeeper’s books’ won’t have the adjusting entries done by the tax preparer in them – only the copy that the tax preparer has will have those.  And online editions of accounting software should not even allow a tax preparer to make changes.  Those books belong to the client, not to the tax preparer.  So, everything now is more intermingled for my personal taste. 

So, let’s talk specifically about Jenny’s question.  I have many clients who will do a zoom call with me each quarter to go over the profit and loss report. We compare the categories to the last year to the same dates of the current year, to see where they are as of a certain date.  Clients can see that they have spent more money on rent this year, and maybe less money on website promotion and advertising, for one example. They can look at payroll numbers from one year to another. And obviously, they can look at sales from one year to another. 

 However, sometimes it’s not that easy.  I have to explain to clients that there is a cash method of accounting and an accrual method.  Most of my clients are on a cash accounting method, so that when they look at sales from one year to another, I have to remind them that this is the amount of money that they have received from clients, not how much they have actually earned. That can skew the numbers a bit. And the same with expenses.  The expenses paid, rather than including the expenses that are not paid as of December 31. So, if your client made a lot of money in November, but many people didn’t pay in December (they’ll pay in Jan.), the profit and loss will show less income on a cash basis. 

With all of that said, as bookkeepers, after we explain the hard and soft expenses, and the cash basis or accrual accounting to our clients, we can look at the actual numbers. As bookkeepers, we can recommend lowering some costs, if possible, in particular categories. Sometimes that could just mean changing vendors if it’s the same exact product purchased. Payroll is a popular category to talk to clients about. Rent might be another one to talk about.  Not to lower rent, but if they have any space that isn’t in use, maybe they can rent it out to make some of the rent being paid out back.

 I, in some cases, have looked at the phone bill for the VOIP phones, to see if they were in the average range or if the client was paying too much for the monthly bill. There are categories that can be talked about in the cost of goods section, if the client has one.  You should always compare the total sales to the cost of goods to make sure there is enough profit made. In the clothing industry, for one example, the cost of goods could be between 30 and 40% of total sales for a successful company financially.  Above 50% isn’t as healthy as you would like it to be. 

Each category should be analyzed and talked about so that the client understands totally which transactions are in what category so that they can make adjustments relatively easily.  Part of bookkeeping is also to educate clients about it. The goal is to help business owners understand their own books and what the process is.  (((Disclaimer – That last statement is MY opinion)))

Also, something that us bookkeepers can really help with -- Budgets. We can set up within the bookkeeping software ---budgets for each category on the chart of accounts and export that grid on Excel and send it to the client.  They can fill in the budgets for each category, and then we, as bookkeepers, could enter them.  I know Jenny, MORE work!  (Sorry about that)!   Using budgets, the clients can see the budget numbers in each category right next to the actual numbers for each category.  That can help a lot. 

With all of that said, it’s time for me to get back to my tax season work.  Time for another cup of de-stress tea. 

I hope your tax season is going well, Jenny, and all bookkeepers listening to me right now.  And for you business owners, remember, treat your bookkeeper with respect  (TYBWR) --- we work very hard for YOU.  Keep those questions coming in! 

I’m Paul Rosenblum