Welcome to the In The Clear podcast. I’m your host Justin Recla, and today we are talking to the founder and CEO of Dollars & Sense Bookkeeping about financial due diligence, and the 10 accounting mistakes that business owners commonly make. Elmer, welcome to the show.
Thank you for having me.
So Elmer, you’ve been in the accounting world for a while now, and in full transparency Elmer is our bookkeeper as well. His firm manages our books, and he’s by far one of the best that we have found. You can find his profile in the Clear business directory as well. So you can look into Elmer. He has been vetted. He is definitely a trusted resource of ours, and I’m super excited to have him on the show talking about this topic today.
So Elmer, tell me a little bit more … I know that you’ve seen a lot of various businesses with all the different clients that you have, and the different clients that you serve. I mean, I know that you serve everything from lawyers, to small mom-and-pop businesses, to multimillion dollar businesses. What are some of the things that you’re seeing as with regard to financial due diligence? What are some of the common mistakes people are making?
They’re not doing it. You know, a lot of people don’t do due diligence in any area with the business, and that includes the finances, which is, I think, the most important piece to do due diligence about. So people hire somebody that they referred from a friend, or from another business relationship, or they just find them on the web, or in a business directory. Then just because they’re out there, and they have a business people just assume, “Okay, well they’re legit. They’re good at what they do,” and whatever. So they hire them as their bookkeeper to do accounting. That’s the area that I see a lot of mistakes are, especially with CPAs. All of sudden the CPA’s like, “Oh, I can do bookkeeping,” and in reality they probably can’t.
But they’re good at being a CPA.
They’re good at doing the accounting piece, but I’ve noticed that there’s a disconnect between accounting and business. If they don’t have that connection, and they don’t have the background in handling accounting software, they try to apply CPA strict very into the business world and the bookkeeping, and it just doesn’t correlate. They’re all about journal entries, and QuickBooks is designed not to have journal entries. So I come in, and I see tons of journal entries. So it’s not that they’re bad at what they do. It just doesn’t fit in the bookkeeping world, and so a lot of times I find I have to come in and kinda clean up the books to make them more usable from a business perspective.
Well, and that’s what’s really unique about what you do is that you’ve been an entrepreneur and a business owner for quite some time now. Your accounting firm’s not the first go ’round for you. You’ve been in the business world, so you bring an entrepreneur business mindset to the books, and it’s not just an accounting mindset. You’re looking at it from what’s gonna best benefit the business owner. Not just from a, “Hey, are you gonna be cool with the IRS?” but from a, “How do you best manage your finances on your day-to-day transactions?” Where your spending is, and all those kinds of things that you need to be taking into account of as a business owner. So outside of not just doing the financing, because I know there’s a lot of people out there that don’t do their books-
That just they know they got money coming in. They got money going out, but they don’t really understand the ins and outs of where, how, or who, or when that stuff’s coming in. What are some of the other things that you see?
Just to speak a little more on that. CPAs are more on that financial accounting and financial reporting piece. Where I focus not only on that but also on the managerial accounting, which is what the information that managers need. Not necessarily what needs to go out to the IRS, or what needs to go out to investors, but what do managers need to see? That’s different information than what a financial report looks like, which is what the IRS needs to see, which is where the CPAs focus on, and it plays into that. Not only can I give you the reports, and a lot of people I have had a recent connection. I asked them what a bookkeeper does, and it’s, “Yeah, they crunch the numbers, and give me the reports and that’s it.” They don’t explain what does that mean?
A lot of people in bookkeeping and accounting don’t know what that means because that’s the world they work in, which is just the accounting world. So there’s no crossover, and so my phrase is, “Seeing beyond the numbers.” I don’t only want to give you the numbers. I want to explain “See beyond them.” What does that mean? What does it mean for the business, and how can we make your business more profitable?
Yeah, well that’s a big, big difference with what I see, and it’s a matter of really bringing a bookkeeper in, like yourself, that understands the businessy side of things. That’s really what you do in the bookkeeping world. What I really see that differentiates what you’re doing, and I know because we’ve had these conversations, right? Because before we hired your firm we were one of those people that had money coming in, money going out, but we really didn’t see any of that. And folks, I gotta tell you when we brought Elmer onboard it really up-leveled our business because one of the beautiful things about hiring a bookkeeper is you don’t have to worry about the numbers.
The bookkeeper handles that and manages it for you, but at the end of the day you’re armed with a lot of information that you can use to leverage where the money’s coming in. Who you’re getting from, and so forth. So with that what are some of the other things that you’ve seen mistakes being made?
Well, to speak more about the … I did a Ted article called 10 Most Common Accounting Mistakes That Business Owners Commonly Make. One of them was hiring the wrong accounting person, bookkeeper. Let’s say the business owner makes the right step, and be like, “Okay, I really shouldn’t be doing this. It’s not my forte, and I can better spend my time growing the business and doing sales,” or whatever it might be. But then making that step, it’s just the first step, you know? You can actually make yourself in a worse situation if you hire the wrong kind of person and/or bookkeeper. It can not only lead to creating financial problems, which then have uneducated decisions being made about the business. But, you know, you can end up having audits and/or penalties from IRS, state agencies, federal agencies if it’s not handled right. Hiring yourself or an inexperienced office person to handle it. Even family members. I’ve seen that happen before. It can create issues that can haunt you and your business for years to come.
The wrong person won’t know how to invoice properly. You may not know tax laws, or how to properly classify expenses, and journal entries. There’s just so many things, little things that if you don’t do right you’re not gonna have the proper information. Without the proper information you make the wrong decisions.
Well yeah, and I love the fact that you bring up hiring right because we see this in the employment screening sector. The cost to onboard a new employee is like $7,000 if you’re paying them minimum wage, right? Bringing on a bookkeeper, or an accountant, or somebody … if you’re bringing on someone that’s hiring your books that can add up over time because it’s not just the initial cost because by all means it becomes a business expense. By the way Elmer can probably tell me if I’m wrong or not. You can write that off, right? Because it’s somebody that’s managing your books, so it becomes a business expense that you get to write-off. However, if you don’t hire right the first time, if you don’t bring in the right bookkeeper the first time now you have to go back and recreate the wheel. Especially if the new bookkeeper that you’re bringing on does things a little bit different than the person that you were having to do clean up with.
Yeah, recently, it was last year or the year before, the IRS came out with a new safe harbor for deducting of equipment. A lot of business owners were saying, “You know, if I go out and but a computer, if it’s over $500, and all of a sudden now I have to depreciate it over five years,” or whatever the life of a computer’s gonna be. I try to keep up on all these things, and so I saw that, and I started mentioning it to some of my clients. They were like, “Oh, well let me run it by my CPA,” and the CPA was like,”I didn’t even know that.” It’s like that’s something you should know, and that’s a lot of money that you could deduct now instead of having to depreciate it over-
Over five years, or whatever it is.
-over five years or whatever. Yeah, hiring the wrong person even though somebody who’s knowledgeable if they aren’t keeping up to date on what’s happening everyday then you still could be losing money, or just spreading out the money.
Yeah, and we’ve had experiences ourselves with CPAs that we’ve worked with in the past who don’t focus on those day in day out things. Things that you can benefit from now, and having a bookkeeper onboard, such as yourself, is extremely valuable. Especially with what you are doing with Dollars & Sense Bookkeeping is staying up to date on what benefits your clients. Whereas a CPA or an accounting firm is not necessarily looking at all the new changes and stuff that affect business on day-to-day stuff that’s gonna save you money now. A CPA’s mindset might be more concerned about what’s gonna save you money on taxes-
-and it’s two different strategies. Two completely different strategies, and I know from experience when working with you the savings that we’ve had in our business. Stuff that people in the past told us, “Well, you can’t deduct that,” but no, you can. Or like you said the depreciation stuff is huge, and just those little tweaks in your business changes the numbers so drastically that it’s so important. So we’re gonna take a short break, but before we do we’ve been talking to Elmer Howard of Dollars & Sense Bookkeeping about financial due diligence, and the 10 most common accounting mistakes that business owners make. So stick with us. We’ll be right back after this break.