Bookkeeping is likely not the first thing that pops into your head when thinking about your business’s growth. Yet, every report and trend you review for your business is available or, as too often is the case, not available, because of your bookkeeping quality.
Have you ever noticed on your AR aging report amounts a few years old, small outstanding balances, and even balances with customer names you do not recognize? These could be signs you have a problem.
Every business of every size has bookkeeping and has its growth tied to the quality of their books. If you achieve superfine bookkeeping, you can gain a competitive edge over your competition just as poor bookkeeping can cost you money and limit your growth.
Bookkeeping is the granular collection and organization of the details that become your financial statements. Every action of your business is reflected in a financial event in one form or another. Collecting and recording all of these events is the job of your bookkeeper—the better the collection effort, the better the quality of your financial reports.
The difference in quality becomes apparent when attempting to review and analyze the performance of the company. The cost compound when your CPA misses tax deductions or fails to quality your company for a tax credit because the supporting details are not available or apparent. The outcome of bad bookkeeping becomes the basis of bad decisions made from poor financial reporting.
On the surface, bad bookkeeping is simply flat out wrong. This does happen but not that often. Usually, even the worst bookkeeper will make the checking account total match the total in the ledger. The separator of quality is in the details.
Occasionally, the ugly form of bookkeeping does appear and is often caught by the accountant preparing the business’s tax returns. In these instances, the accountant is forced to redo the business books, which incurs an incredible expense. These cases are apparent because the ‘story’ told by the financial statements is so far off from the reality that the errors become apparent.
Bad bookkeeping often happens, and business owners rely on incomplete information in attempting to run the business. It is much like getting a weather report. The bad bookkeeper will tell you the temperature. The superfine bookkeeper will tell you the same temperature along with the wind speed, barometric pressure, cloud cover, humidity, and other critical details. The details are what differentiate a bad bookkeeper from the superfine bookkeeper. Without the entire picture, you could run the company for a year with unreliable information. Only when you meet with your CPA at tax time, you discover it is 84 degrees, and you are in the middle of a hurricane when you thought it was 84 degrees and you were on a sunny beach. The financial details complete the picture you need to run your business and build growth.
Tax penalties and other punitive fees. When business is getting assessed with nuance fees and penalties from your bank, tax authorities, key vendors, and other financial partners, the details are likely not being checked.
Old or unusual items on common reports. These are more technical errors that occur when a bookkeeper records a transaction to a sub-ledger and then does not correctly close out the transaction resulting in numbers that should have removed from reports remaining forever. This makes the reports less reliable for business decisions.
Inability to answer questions about their work. The bookkeeper cannot answer questions about their bookkeeping, or the answers are inconsistent with the business’s operations. A business should be able to rely on their bookkeeper for financial information.
Inconsistent treatment of similar transactions & lack of understanding of trend analysis. Inconsistent treatment of similar transactions indicates a lack of understanding of basic accounting principles and makes accounting data less useful for trend analysis and monitoring mistakes. An example of this is when the bookkeeper records waste removal to a utilities account one month to repairs and maintenance the next. Utility type expenses should have twelve items expensed in a year (one per month). Trend analysis can be used to watch for errors, both in accounting or operations. A missed month could indicate a missed payment.
Superfine bookkeeping can improve your bottom line!
Superfine bookkeeping should provide information to manage your business. Strong management of accounts receivable can show your customers you are well organized. A work in progress listing can enable faster billing. An accurate accounts receivable listing will identify a need to phone customers with amounts older than thirty days. An accounts receivable listing will also pinpoint customer trends. If a certain customer normally orders $10,000 in product every week and this week they haven’t, someone can phone the customer to find out what happened.
An aged inventory listing can be used to manage stock. For example, a wine shop can track old and slower-moving inventory and put any inventory older than a year on sale, replacing it with more popular vintages. The listing can be used to monitor popular vintages, and larger orders can be placed for any new product that sells out within a week.
Strong cash flow management can cut down on borrowing costs. As an example, often, accounts receivable is a business’s largest current asset, and management of it can cut down on your business’ use of a line of credit, which charges interest. For example, if the average collection period for an invoice can be moved from 45 days to 25 days, the faster payment can be used to reduce the use of a credit line.
It is strong attention to detail that brings joy to a superfine bookkeeper and provides you with the critical details to grow your business. Superfine bookkeeping is essential to a healthy business. If you don’t have one – either get your bookkeeper some training or replace your bookkeeper.