Are your financials accurate and up-to-date?
One of the first questions we ask when working with clients is about the company’s financials, particularly their accounting practices. Why? Because so much of a business’ success ties to how much money they make versus how much money it uses to earn that revenue. All of this impacts a company’s profitability.
You may have heard that almost half of the companies who fail will do so during their first or second year. However, there are industry statistics released by the private sector and federal government agencies such as the Bureau of Labor Statistics (BLS), that say this isn’t necessarily the case. Statistics show that the failure rate is smaller for the first two years, and it jumps at year 5. Why?
Based on our experience, the five year mark shows increased or stable revenue, but cash flow is an issue. In many cases this is due to the company focusing on sales growth and not including infrastructure in the strategic plan, which can severely impact cash flow. So, where does booking fit into this and how does it help keep a business from failing?
Cash flow and bookkeeping
Bookkeeping isn’t just recording entries into the accounting system. Yes, the entries are, at the very basic level, creating invoices and applying payments to the invoices, and accounting for company expenses. However, it’s not done correctly and timely, then executive management doesn’t have a clear picture of the company’s financial status. All of this impacts financial decisions such as hiring and layoffs, securing new/additional office space, expanding the business to work in other states, and securing additional resources (computers, cars, furniture, trucks, etc). And if there isn’t a clear understanding of the company’s finances, then there isn’t a clear understanding of whether there is the need for additional working capital to keep the business operating.
Bookkeeping should be a priority
Staying up-to-date with bookkeeping should be a priority regardless of business type (corporation, LLC or sole proprietor), business size, or business age. Many times a sole proprietor or small business owner will try to do it themselves instead of outsourcing it because of cost. It actually saves money in the long run to outsource your bookkeeping as it’s done right the first time. This means the business owner can spend their time doing other things to grow or maintain their business.
Bookkeeping can’t be done haphazardly!
Bookkeeping isn’t a burden or a “I’ll get to it when I get to it” activity. It vital to the company’s operations and we probably say this to business owners and senior management on a weekly basis.
Accurate bookkeeping will tell you how well the company is doing almost at any given time, particularly after the end of a month. If you find you’re doing really well, then there may be additional funds to invest in resources such as additional staff, or pay owner bonuses/dividends and employee bonuses. If it’s been a particularly bad month, it will tell you what you need to do to get back into the black.
This is info that you need BEFORE the end of your fiscal year so you have time to address a negative net income or payout bonuses to reduce your tax liabilities.
“But bookkeeping is soooo stressful”
Why is bookkeeping so stressful when it is so important? Let’s be blunt – bookkeeping is tedious, boring and requires training, which may be why so many companies are behind on their bookkeeping activities. This can be the result of several factors such as:
- I’m too small to hire a bookkeeper. The company doesn’t have the funds to hire an internal or outside resource, so they try to do the bookkeeping themselves.
- I’m very busy and need to spend my time growing my business. The company views bookkeeping as a burden that is only done when absolutely necessary, i.e., when it is time to file taxes.
- I know it’s important but it’ll have to wait until I have time to get to it. The company understands that bookkeeping needs to be done, but puts it off until they have time because they are busy with what they consider to be more important activities.
- I have people who I pay to be responsible for this. Having an internal resource who does the bookkeeping doesn’t mean they understand where the entries go. Same for a hired outside resource. It’s great that they do the bookkeeping, but the company needs to ensure that the entries are not only done, but are correct, are appropriately recorded according to the industry accounting principals and the chart of accounts (if there is one). Entries in the wrong place result in inaccurate financials.
- I trust that the financials I’m given are correct. The company may be large enough to have an internal or external accounting resource, but leadership doesn’t have an accounting or financial background. This means they review financial reports without asking questions to ensure accuracy and completely understand the company’s financial health.
- I review my financials when they are given to me. The company’s leadership isn’t ensuring that the financial statements are reviewed monthly, and the books are closed monthly after the review and any updates are made.
Common issues from not using a bookkeeper.
Let’s talk about the two areas we consistently discover during our initial conversations with businesses:
- Even if they are behind on their bookkeeping, they ensure they are caught up when it’s time to do the annual taxes.
- They don’t close out their books monthly.
If this seems like it’s NBD (no big deal) then re-read this post. Because these two example scenarios have repercussions that are a huge time suck for businesses. If you’re not putting in entries in the month it occurs as it’s usually impossible to:
- Find receipts: receipts have a way of disappearing. Some credit card companies can provide a copy of the receipt, but again that is time consuming.
- Figure out what something is so it’s recorded to the right chart of accounts: We have a process that if there is a paper receipt then the chart of account number or name is written on it. We scan all receipts, take a photo of it or ask for an electronic copy. This way we don’t worry about the thermal copy degrading to the point it’s not readable.
- Reconcile multiple months of bank and credit card statements: If you think bookkeeping is a pain in general, you’ll really feel it if you’re trying to reconcile more than one month of statements. Plus, the individual transactions have to be associated with an expense, client payment or other deposits so you’ll need the receipts for cross-reference. Often credit card transactions have a different name than one the receipt (you may see this with restaurants and stores) so trying to figure out where to put the transactions will make your head hurt.
- Closing out the books monthly. If the bookkeeping is up-to-date then it should only take a few hours of work to provide the tax data to the accountant. Otherwise this becomes weeks of work (or longer) while everything else stops.
- Also, if the books aren’t closed monthly, then it may be necessary to go back and close each month before providing the books to your accountant. It takes a big bite out of your time to either do it or ensure it’s being done by an internal or external resource…and this is time that could be spent on other parts of the business.
So what do we suggest?
It depends on your company size, structure, and other factors. We will address some of them in the Do we need to hire a bookkeeper? blog post. Check out what this post for the second part of this 2-part series. You’ll definitely want to see what we have to say about next steps.
Questions? You probably have a lot of them!
Accurate and timely bookkeeping is important for a company’s financial health. We barely touched the surface in the first of a 2-part series. Perhaps after reading this post you decided that you either need help with your situation. Maybe you’re not sure of next steps, so check out Part 2 – Do we need a Bookkeeper. Maybe you have a bookkeeper who may not be the best fit. Or maybe you have some general questions. Reach out via the contact page and we can set up a call to talk. We can create a solution that works for you and your company.
If you have any questions about this post, feel free to leave us a comment.
