Accounting – Your Company’s Life Line
Most small businesses don’t have a full-time accountant, more than likely, they have part time bookkeeper who comes in a few times a week to enter a key journal entries. Because entrepreneurs are so focused on revenue, accounting is one of the most overlooked departments in small business, both brick and mortar and ecommerce.
We’ll start here because at the end of this discussion is how we measure the profitability of our business.
Your accounting system needs to be set up properly and maintained in an orderly, systematic process.
If you’re a new to starting a business, then you have a blank slate to get it right from the start. Be sure to talk to an accountant to help you set up your accounting books. Pay the couple hours to have a professional accountant set this up for you. He or she should ask what type of business entity you have and set up your accounts accordingly. Most likely, it will be cash or accrual accounting. Once your business reaches a certain dollar amount you will have to go with accrual accounting method.
If you’re already in business, it is important to review the current state of your books.
Are you up to date on your bank reconciliation, credit card reconciliation, payroll updates and the like? Next, do you have budget set up for each of your accounts? Make sure to include your revenue forecast and expense projections.
Now the key is to go back and enter the actual revenue and expenses to see how close you are to the budgeted (projected) numbers and make sure that you’re on track. Compare your numbers. This exercise greatly impacts your cash flow. If you’re profitable, great! It helps you see areas in which you can continue to invest in, to add to your bottom line. If you’re not profitable, it opens your eyes to the areas bleeding money and that need fixing.
A few years ago, a fellow ecommerce entrepreneur was selling like gangbusters online. She was so focused on growing her business and had a friend helping out with the bookkeeping. She called me out of the blue one day to ask if inventory was an expense and why couldn’t she write it off (since it’s bought and paid for). Now, you maybe shaking your head but this is a legitimate question. Unfortunately generally accepted accounting principals (GAAP) won’t let you write off your entire inventory but something as simple as this can be missed and mistakes can happen. When she finally got around to hiring an accountant who re-did her books, she discovered that she had been making money and owed taxes for which she didn’t set aside money.
In my own experience, our accounting department was like a redheaded step-child. We were always behind in updating our records because we were so focused on revenue. When our business stabilized, I made it a priority to get caught up financially. We hired a full time accountant to get our records current and to ensure that all our reconciliations were up-to-date and that we were making decisions based on at timely data.
Now, make sure you’re reviewing your updated financial statements every month. The 3 most important: 1) balance sheet 2) profit and loss (P&L) and 3) cash flow. With your balance sheet, I would focus in particular on where your money is being held, cash in the bank, inventory and equipment (assets).
With you P&L, pay attention to your sales revenue and your cost of goods sold (COGS). Review margins (every week) to identify anomalies, then review your expenses monthly, compare it to the same period last year to ensure that nothing unexplainable is going on. Watch your expenses closely. Know where your cash is going.
Speaking of cash, a cash flow statement helps you determine if you have enough cash to sustain your operations through slower or busy months and help you determine what revenue stream your cash is coming from. Your monthly cash outlay and monthly cash income is allocated here in details that is not listed on the P&L.
When your company consistently has more cash in the bank than you are reporting on your P&L, this is a good sign that you’re making a good return on your net income. In order words, you’re making money with your money. Or if you have less cash but showing profits in your P&L, you might have purchased equipment, so your cash flow statement tells you where you are spending your cash on hand.
Next, ensure a step-by-step business process for every task done in this department by every person, however mundane the task may seem, write it down and create an operations manual for each job, for each task. Post it on the wall near the desk of the person working on the task, their daily, weekly, monthly, bi-annual and annual task/responsibility. When a person is absent, on vacation, or sick, you will easily know what tasks this role is responsible for and there won’t be any reason or excuse not to keep your accounting records current and up to date.
In summary, your accounting department is your financial life-blood. It must always be current and updated. Without good financial data, you cannot make sound business decisions. In fact, you will make bad decisions if you don’t have the full picture of your business’s fiscal health. For entrepreneurs, a good accounting system is the closest thing to having a crystal ball.
Paula Haggerty says:
UGH!!!! I know you are right but there are so many other parts of the business that are fun! This is something I have to spend more time on and you have provided a great reminder. I see my weekend more clearly now.....UHG!!!
When I was doing research for my book titled "Your Bookkeeping Stinks - Why It's Killing Your Business", I discovered interested research from the SBA.
They indicated that poor bookkeeping practices were one of the main reasons for failure in over 25% of those businesses that filed for bankruptcy.
I've always maintained that "bad books = bad business" and your article drives that point home quite nicely.
Every business should have an accurate profit and loss report within 10 days of month end - every month.
Many bookkeeping courses spit out quickbook savvy data entry clerks who don't have a clue about what actually goes on behind the scenes when doing stuff like amortizing an up front investment that is not really an expense.
On another note I have been looking to purchase ecommerce businesses and have been through sites like bizbuysell and there are really a dearth of ecommerce businesses available for purchase. Flippa is not really the place for finding quality ecommerce sites.
Do you have any ideas as to where to look. I really want to buy a small to medium sized e commerce business and am willing to spend upwards of 100k. I figure you might have a clue since you've sold your business. Thanks