I often get frustrated with business owners who don’t place any value at all on the bookkeeping/accounting function. They look at it as just another expense that they have to pay. Many only think of it as it relates to taxes, therefore they equate the accounting with how much tax they have to pay. This creates an attachment of negative feelings toward accounting, which is entirely the wrong way to think about it.
Bookkeeping and accounting, when done properly and in a timely manner should provide the business owner with useful information. He or she can then use that information to make informed decisions. Assuming they make the right decisions, the business should be better off as a result of all this. But I see many people running their businesses by the seat of their pants. They focus on sales and little else. They call the bank every day to see how much money they have. They don’t pay attention to the details and the minutiae that need to be taken care of. They have no controls over spending and have no idea until the end of the year whether they’ve actually made a profit or incurred a loss.
Accounting matters because without it, you’re flying blind. You’re working without a net, you’re playing the game but don’t know the score. (How many more cliches can I fit in here?) I’ve heard it said that business is a game and accounting is how you keep score. I like that saying and have used it often when trying to emphasize just how important it is to maintain an accurate set of books.
What kind of “useful information” can good bookkeeping and accounting provide? Here are some examples:
- Which products or services are making you the most money?
- Which sales rep is the most profitable?
- What is the profit or loss of the business (you should be able to answer this at just about any time, not just at the end of the year)
- How does this year compare to last year and what’s different?
- Which customers aren’t good payers? Who still owes us money?
- How much is left on those loans? How much is our line of credit?
- What can I do before the end of the year to minimize taxes?
This is just a quick list of some of the questions that can be easily answered by a well-maintained set of books. Instead of the business owner having a vague idea of how well the company is doing, they can know for sure. Instead of having to remember who owes you money, you can know for sure. When you don’t need to worry about those types of things, it frees up your mind to focus on what’s really important – running your business and making it better.
Not all businesses need the same level of accounting. Some should have a full-time accountant/bookkeeper on staff while others only need once/week or once/month. But in my opinion it’s never a good idea to only do the accounting once a year. There are too many bad things that can happen in that scenario. Even having your books brought up to date on a quarterly basis is better than that. Without a clear picture of where your business stands throughout the year, you have no opportunities to make changes before the end of the year.
What you mind, you measure. And what you measure, you can manage. That’s another saying that I’ve heard before and it illustrates my point perfectly. If you care about your business, you need to measure it (that’s done by doing the bookkeeping). Once you have the measurements (profit/loss, cash flow, A/R and A/P agings, etc.) then you can use those measurements to actually manage the business. You can see what needs improvement and make changes that will make those improvements happen. But if you never have those measurements, it’s like plotting your course across the ocean before your trip, setting sail and never monitoring where you are during your trip. You’ll end up somewhere, but it may not be where you wanted to go!
If you’re a business owner, hopefully I’ve convinced you that the accounting does matter and you’ll get it done on a regular basis. If you are a bookkeeper/accountant I hope that you can use some of these arguments to convince your boss or clients. No matter who you are, I hope that you’ll leave a comment down below and let me know what you thought of this article.
One last thing. You may be wondering what make up “a well-maintained set of books”. Well, if you are stay tuned! That’s the type of information that I’ll be posting about in the very near future. If you have any specific requests about what to cover you can either leave a comment on this post or use the contact form to send me a note.