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Good bookkeeping essential to profitsBy Iain Macfarlane
Most business owners don't have a clear understanding of the difference between bookkeeping, accounting and financial management. Early-stage companies tend to be unknowingly weak in the basic mastery of financial knowledge. When the owner does not keep the books himself, it is usually handled by a spouse, a relative or a friend, with the owner probably receiving annual tax advice from an outside accountant. This scenario results in lax and delayed recording of information into the books. Bookkeeping is not given the same priority as activities related to selling and supporting the product or service of the business. Sometimes financial entries are only completed once per month and in some cases only once a quarter. These delays will almost certainly result in errors and with the consequence of looking at financial information only on a historical basis. In this situation, cash is typically slow in being deposited into the bank, accounts receivable fall way behind and sometimes don't even get entered. And it doesn't take long for cash flow issues to have an impact on the business. If you are not focused on creating cash flow, then you are wasting time working to build a business. Bookkeeping using a software package such as QuickBooks is certainly appropriate for early stage or smaller businesses. However, this bookkeeping function should always be under the guidance of an accountant or controller to make sure the right information is being recorded so cash flow can be controlled, to meet generally accepted accounting principles, to meet regulatory reporting requirements such as federal, state and unemployment taxes, and to maximize financing arrangements with banks. The accountant should routinely review the financial reporting systems as an effective way to minimize errors in bookkeeping. With a bookkeeper in the business as an employee, the accountant skills can be provided by a certified and reputable outside accountant to make sure the in-house bookkeeper follows required processes and systems. However, when a business has successfully grown to profitability with revenues in excess of $1 million, the business should employ an accountant or controller as the in-house employee. The quality and critical nature of the services from this accountant/controller will put the company in the best possible position to control the cash flow of the business and provide better opportunities to accelerate the business growth. This historical information is necessary and appropriate. But the business must also go one step further to maximize financial performance. Your company's annual budget is outdated the first day of the financial year. As every month of a financial year is completed and reported, the financial information for the balance of the fiscal year must be reforecast for each of the remaining months and by every revenue and every expense line. This is designed to change the business owner's mindset from historical accounting information to forward-looking financial management information. By reviewing your actual financial numbers at the end of each month - each revenue line and each expense line - you'll have more specific information and be better able to reforecast anticipated financial changes in the remaining months of the year. And the more accurate your forecast for each line item by month, the better able you will be to make decisions based on how the business will now look for the full year. For critical decision-making, constantly refining your financial forecast on a monthly basis will eliminate big surprises related to the full-year performance of the company. Iain Macfarlane is the president and founder of BizCOACHING & Associates in Madison, a franchise of Action International. He was named "Coach of the Year 2005." iainmacfarlane@action-international.com madison.com ©2009 Capital Newspapers. All rights reserved. |
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