Transcription
If you're relying solely on your business bank account to keep track of your finances, we need to talk. Now, while banking platforms have come a really long way and have some amazing features, they aren't a replacement for true bookkeeping software, and they were never designed to be.
So, this video, we're going to talk about why that is, and why it's important to have both. So stick around because I'm going to tell you exactly what banking platforms can typically do, what accounting softwares can typically do, and how to bridge that gap. Hi everyone, I'm Jamie Troll, CPA and financial literacy coach. And if you want to stay more organized, informed, and profitable in your business finances, make sure to hit that subscribe button.
Okay, let's talk about banking first. Now, modern banking has come a long way, especially with the advent of fintech companies, which can do a ton of different things on top of being associated with an FDIC insured bank. And the cool thing about banking platforms these days is that they may have additional features beyond just your typical banking. So, I'm talking about things like invoicing, expense management, some things that typically used to be reserved just for accounting and bookkeeping software. So, as these features roll out, it makes sense to think, well, do I really need a bookkeeping software when my banking platform can do all of these things for me?
And the banking platform that I use is Relay. And it's a really great example of this where it has tons of features that I've been utilizing within my business to do a lot of the work that I used to do solely in my bookkeeping software. My favorite thing about Relay though is the fact that I can actually take the money coming into my business and separate it into multiple different buckets that are actual separate accounts, but I can do it with the click of a button. So, if I want to have a separate account for tax savings, I can do that. If I want a separate account for reinvesting back into my business or for paying myself, I can do that. I can set up tons of different accounts and I can even automate transfers to and from those accounts.
Now, if you're interested in finding out more about Relay, you can definitely check out this video here and also check the link in the description to find my specific partner link for Relay. And as always, there are typically going to be special perks when you sign up using my partner link.
So, do I adore banking platforms like Relay? Absolutely. I really think there is some amazing things that you can do in these platforms these days and I do think it is critical that you do have a separate business bank because we definitely do not want to be co-mingling with our personal expenses. But here's the thing. Banking is all about cash flow. That's the point. It's cash coming in and cash going out, which is not the same as bookkeeping. It may be the same 80% of the time, but it's not the same 100% of the time. And that's where a little thing I like to call accounting funny business comes in.
The cash that came in minus the cash that went out should be your change in cash. And you might think that that's the same as your profit on your P&L. But you might be surprised that because of the fact that accounting rules treat things differently, it means that often times there is a mismatch between cash in the bank and profit on paper. And remember that profit is what we are using to report for tax purposes. And that's where bookkeeping software really comes in because it can do a few things that typical banking platforms and business banks do not do.
So, when I'm talking about the things that bookkeeping software can do that banking can't, I'm typically talking about things related to double entry bookkeeping. What double entry bookkeeping really is is the only true acceptable method for bookkeeping. Sometimes I'll hear people refer to something as single entry bookkeeping, and that's not really bookkeeping. What that really is is a laundry list of expenses, right? It's just listing out your income and expenses, which is not double entry at all. Double entry bookkeeping is really about debits and credits. So every time cash let's say changes hands, right? If there's a cash transaction coming in or coming out of your business, there is another side to that equation, right? So cash coming in, maybe the cash coming in is revenue to your business, right? Maybe the cash coming in is an advance on something or uh something that's being prepaid. Maybe the cash coming in is a loan, right? There are many different things that that cash could be. And so, we don't want to just be looking at the cash side of things. We also need to remember that there are two sides to every transaction. And that's what double entry bookkeeping is really meant for.
So that means that if you're doing double entry bookkeeping, you can both pull a profit and loss, which has your income and your expenses, and you can also pull a balance sheet out of the system. And this is especially critical if you are in a business that has assets, if you are in a business that has any debt, if you are in a business that has multiple owners, a balance sheet is going to be really important. And if you're in a business that is maybe taxed as an S corporation or a C corporation, you absolutely need to have a balance sheet. And that's one of the key limitations of something that is a banking platform, right? That they aren't going to have double entry bookkeeping behind the scenes. And therefore, there's no way for you to generate a balance sheet out of the system. And you probably can't even generate an accurate P&L from a banking system alone. It's your bookkeeping software that's going to give you those reports that are going to be tax ready. And you're also going to be able to do things like reconcile your accounts in a bookkeeping software that you typically aren't doing in a banking software.
Now, like I said, there may be some overlap, right? Your bookkeeping software may have invoicing capability and your banking software may have invoicing capability, in which case you need to just look at the different offerings and see what's right for you. Maybe one of them charges fees and the other doesn't, right? You can decide where it's going to be easiest and most convenient to send your invoices. However, you're still going to want to have that banking platform that is going to hold your cash and that bookkeeping platform that is going to be in charge of making sure you have accurate reports come tax time.
Now, if you've been doing all of this out of a banking software, maybe using an Excel spreadsheet or something like that, and you're just now looking at bookkeeping software for the first time, I recommend FreshBooks as a great starting point, especially if you are a service provider, a creative, maybe you're a solopreneur, maybe you're self-employed. It is really built specifically for people like you.
Now, if you're looking at an accounting software like FreshBooks, one of the things that I want you to take a look at is making sure that the plan you go with has double entry accounting. Otherwise, it's really more of just a glorified spreadsheet and your banking system can do something similar. With FreshBooks, that means looking at at least the Plus version, which is above the Lite version, because you want to make sure that you get those double entry reports and you can do account reconciliations. And let me tell you, your accountant will thank you for that. If you want to check out FreshBooks, at least for now and for a limited time, I do have a code down below that you can use to get 90% off for four entire months. And you can check out even more accounting recommendations at jamtroll.com/accounting.
So overall, where there may be some overlap in features between bookkeeping software and banking software, they aren't the same thing, and they aren't intended to do the same thing. And accounting software just has a lot more going on behind the scenes to make sure that it's doing proper debits and credits when it comes to accounting for your transactions.
Now, if you're wondering if there's ever a situation where you don't need accounting software, the answer is actually yes. I talk a little bit more about that in this video and I talk about how you might be able to get by with just a spreadsheet, but it's only in really specific circumstances. So, that's a great video to check out next.
And if you happen to be a little bit intrigued as to why cash flow and profit aren't the same and want to dig a little bit more into this and understand the mechanics, I talk about that actually in the first part of my book, Hidden Profit. So, the entire first part of four talks about the basics of finance and accounting in a way that actually makes sense and isn't boring. And don't worry, we're not going to be talking about EBITDA or anything crazy, but hopefully it will help give you more of an understanding of how the P&L works, what a balance sheet is and what it's used for, how some basics of accounting mechanisms actually work. So, if you haven't ordered your copy of Hidden Profit yet, please go do so. I put a lot of time and effort into this book and I really think it'll be helpful for small business owners just like you who are trying to get a better handle on their finances and find hidden profit in their business.
Thanks for joining me and I'll see you all next.