Keeping good books is an essential part of running any business, including an insurance agency. While every agency should maintain a good set of books, this is especially vital if you plan to sell your agency in the next four years. With this in mind, how do you know if your bookkeeping system is good enough? If any of the following apply, then your system is probably in need of an overhaul:
- You are commingling your personal and business funds in the same checking account.
- You use a spreadsheet for bookkeeping instead of a dedicated bookkeeping or accounting application.
- You save all your check stubs and receipts, then hand them to your tax preparer at the end of the year.
- You go by your 1099s and estimate your expenses.
Establish Better Bookkeeping Practices
Unfortunately, if your bookkeeping system is not up to par, you are probably not getting accurate data on your agency’s financial performance. If you are unable to produce an accurate profit-loss statement or balance sheet and can’t accurately compare your current and previous years’ performance, you will not know where you stand financially at any given time. In addition, if you don’t have separate personal and business checking accounts, you are in danger of confusing your personal and business expenses and, potentially, being audited. To avoid these hazards and run your business as a legitimate business, you must immediately change any outdated or inadequate practices and get your books in good working order.
Bookkeeping and Selling Your Agency
Prospects seeking to acquire your agency will want to see three to four years of side-by-side profit and loss statements. Acquisition professionals audit your data against your bank statements and tax returns, so your books need to be as clean and accurate as possible to ensure they match your other records. Clearly, this is impossible if you are commingling your personal and business checking accounts. If potential buyers don’t see precise, transparent records of your business activities, they will quickly lose interest in buying your business. The bottom line is that if you don’t have good accounting records, it will be harder to sell your agency, and you will be unlikely to get what your agency is worth even if you manage to sell.
Bookkeeping Systems to Use
Many agency management systems have built-in bookkeeping systems. Some are designed for larger agencies and are challenging to use, while others designed for smaller agencies can be more user-friendly. It is up to you to do your research and decide which accounting system is best for the needs of your business. The drawback of using your management system’s bookkeeping app is that finding an experienced bookkeeper who knows the system may be challenging. However, you can learn it yourself or delegate it to a staff member. Alternatively, you can consider one of the more approachable systems available for small businesses, such as:
Hiring a Bookkeeping Professional
Bookkeeping is not for everyone. If you don’t want to do it, hire someone who will. Outsourcing your bookkeeping to a professional is often the best way to ensure the work gets done correctly, but you should also bear in mind that it’s not unusual to pay $500 or more monthly for this service. However, there are options to hire professionals in other countries at a fraction of that cost. Given that almost all systems can be accessed remotely, it is rarely necessary to find someone local. Here is a list of sites where you can find a bookkeeper:
Bookkeeping, Tax Savings, & Your Agency Entity Type
Bookkeeping can save you tens of thousands of dollars annually by helping you determine what business entity type makes the best sense for your agency. Many business owners unknowingly pay more payroll taxes than they should because they lack the knowledge or the structure to run as an LLC or an S-Corporation. With these two options, you can pay yourself a salary, take the remainder of your income as dividends, and not have to pay payroll taxes on these dividends. Most importantly, if you are interested in moving to a new entity type, you will need an effective bookkeeping system in place to make the transition easily and successfully.
Conclusion
Sound bookkeeping practices are essential for numerous purposes: for your own management needs, for tax purposes, for the future sale of your agency, for loan consideration, for your own financial planning, and for establishing business relationships. If you are not running your business as a legitimate business entity with the books to prove it, you are limiting both your business potential and your ability to take advantage of opportunities to reduce your tax liability. Don’t shortchange yourself or your business. Start improving your bookkeeping system today, and enjoy reaping the many significant benefits for years to come.
