Small Business Bookkeeping – What is that really about?
Many business owners ask: “Why do I need an accountant? I already have someone who does my books. Besides, we have QuickBooks.” Small business bookkeeping has always been viewed as basic and unavoidable, but I don’t think it has been used as a tool it can truly be for the business owners.
Having “someone who does your books”, or “having QuickBooks” may not be enough. It is certainly a beginning of what I would call a small business bookkeeping function, but having a software tool and someone who knows the basics about using it is not the optimum, if you want to be successful. It is like having a nurse and a bandage when you also need a surgeon and the skill of his hands.
This economy is really proving this point to me. In the last year or so I have unfortunately seen many businesses fail. The sad part is that I feel it could have been averted.
The red flags were all there – the poor cash flow, the raising level of debt, growing disorganization and most of all – lack of transparency. Bookkeeping was also the weak link in all those cases.
In order to succeed, you need two things:
1. Know your numbers
2. Act on them
Knowing your numbers
Small business bookkeeping is all about no. 1 above. Ideally, a small business needs a bookkeeper and a part-time accountant or Controller to review all the postings, make various adjustments as needed and to produce monthly financial statements.
The accountant or part-time Controller should then periodically review these financials with the business owner and discuss ways to increase profitability, avoid possible traps, optimize tax position, etc.
What does it mean to know your numbers? Knowing and understanding every line on your P&L and Balance Sheet, knowing your break-even point, knowing your margins, your loss leaders, if any, your overhead, your balance sheet ratios.
If you have a budget or a forecast, it’s important to know whether your actual results are in line with those expectations. If not, what are the reasons for the discrepancy?
Acting on the numbers
The second point above is what small business bookkeeping should enable the business owner to do with more confidence. With timely and accurate numbers he will feel much more confident when making the needed changes. He will also have the right instruments to gauge the success of those changes.
If some of his inventory items aren’t generating large enough margins, why not get rid of them? Or change the pricing structure, if the market allows. Perhaps sourcing a cheaper material is an option? He may need to look at changing vendors, redesigning the product, cutting his shipping costs, offering discounts on larger orders, etc.
And well-functioning bookkeeping process will tell him reliably and accurately whether he is making the right decisions as he goes along.
So What is Small Business Bookkeeping About?
Small business bookkeeping is not only about having your numbers for the tax preparer at year-end. Small business bookkeeping is about providing a business owner with timely, accurate and relevant financial tools so he can run his business intelligently and open-eyed.
I truly believe that every single problem has a solution, if we know exactly where this problem comes from and are willing to find and apply the solution. Sometimes what it takes is several attempts at a solution until the problem is gone, but that’s what great managers and business owners are all about – patience, perseverance and persistence. Small business bookkeeping helps us identify the problem and often points to the solution.