Many small business owners list bookkeeping and taxes as their least favorite business activities. For some, this dislike is born out of confusion and frustration. For others, it is simply a matter of having to take time away from their business for an activity that they find boring and relatively unimportant. Whatever the reason, this distaste typically results in the business owner finding ways to spend as little time as possible in the books, or possibly even avoid them altogether. Unfortunately, that also means that they are missing out on opportunities to actually get meaningful information on their business performance. To help bridge that gap, here are a few tips that we like to recommend to businesses to help them produce more accurate and useful financial statements, without having to spend all of their time working on the books.
Determine what information could help you make more informed decisions for your business.
Business owners are constantly having to make decisions for their business that can have significant impact on the future. Those can include decisions on hiring, staffing levels, compensation structure, investment in equipment, products and services to offer, marketing and advertising opportunities, and dividends and reinvestment. As with any decision, making the right choice depends largely on having the right information. Despite knowing that, many business owners usually end up basing their decisions largely on hunches and guesses. Part of the reason for that is that they are unable or unwilling to turn to the resource that should the most reliable source of information on their business performance: their financial statements. Unfortunately, most small business owners say that they can’t rely on their financials. Sometimes this is because their financials are inaccurate, but usually it is simply because they aren’t structured to provide relevant information. The good news is that this doesn’t have to be the case. Accounting software today is flexible enough to allow even the smallest business to be able to design reports and procedures that will provide specific feedback, but most business owners fail to take advantage of that resource. If you aren’t comfortable taking that step on your own, talk to your accountant or bookkeeper and see what they can do to help.
Keep all of your accounts reconciled regularly
The most common financial statement used is the income statement. Business owners want to know how much money they are making and they expect the income statement to tell them that. Unfortunately, many of those income statements are lying because the books haven’t been reconciled. Every accounting transaction has two sides. If revenue goes up, then a bank account usually goes up as well. If expenses go up, then a bank account may go down or a credit card balance may go up. That means that if the bank or credit card balance is wrong, then the income statement likely is as well. Almost all accounting software programs today make reconciliation easy. At a minimum, each business should reconcile all bank and credit card accounts monthly, and also keep a close eye on inventory, loan balances, and equity accounts.
Run your income statement on both cash and accrual basis
Most accounting software will default to running income statements on accrual basis. That means that if you have invoiced a customer, then it will show up as income. Unfortunately, many businesses struggle with collections, and many others generate invoices before the income is really earned. That results in businesses often showing high income levels, but struggling to pay the bills because they have little cash in the bank. Running income statements on cash basis as well can help correct this, and it will only take a moment in most accounting systems.
Regularly run a Statement of Cash Flows
The most common question that we get from businesses is some version of: “Why does my income statement show that we are profitable if we don’t have any money in the bank?” If the two steps above don’t provide the answer, we usually recommend running a Statement of Cash Flows next. When a business invests in new assets, pays down loans, or distributes profits to owners, those activities will not show up on the income statement, even though money is being paid out of the business. The Statement of Cash Flows will start with the profit for the period, and then demonstrate step-by-step where money is flowing in or out of the business without affecting profit, ending with the change in cash and bank balances for the period. This statement has the added advantage of helping business owners detect other errors in their books. If transactions are being miscoded or Costs of Goods Sold is not being accurately tracked, it will usually show up here.
These are just a few small tips, but we have found taking the time to follow each of them can pay significant dividends to almost any business owner. It may not make accounting fun, but at least it can help reduce some of the confusion and help businesses reap the rewards of the time that they have invested in keeping their books up to date.