Turn Your Accounting System Into a Secret Weapon
Want to turn your accounting into a business power tool? Interesting in making your bookkeeping a true secret weapon for running a more profitable business? Consider these five techniques...
Trick #1: Get Granular
When it comes to small business accounting, we're all tempted to take shortcuts.
Why record sales as they occur if you can just batch up the bookkeeping until the end of the month or, gulp, quarter? Why get anal about tracking sales to individual customers if you can just use dummy "catch-all" customers? And why get nit-picky and track income by individual products or services if you can use generic product or service items?
Here's why: Granularity in your accounting provides you with useful insights into your business.
Granularity about the details and timing, for example, means you see how revenue ebbs and flows through the days of the week, the seasons, and even time of day. You easily see when and what a particular customer buys or doesn't buy. And you see what products or services are hot.
Get granular, in other words, and you receive hard actionable insights into your business--such as how to schedule staff and what products to sell.
Trick #2: Track Trends
Small business accounting systems, like QuickBooks for example, make it easy for you to compare this week's sales to sales from the same week last year or to compare your year-to-date revenue, expense or profit between years.
And this sort of bookkeeping seems boring. But here's the reality sandwich...
Spotting a trend—increasing sales or decreasing profits—as soon as it appears allows you to exploit strengths or work on threats as soon as they become visible, which is probably months before the trend is visible to competitors.
And a related point: Tracking trends of course also means you spot changes in trends early, which almost always an information windfall. A trend of growth changing to a trend of decline, for example, often signals cataclysmic trouble in an industry. And a trend of stability or decline changing to a trend of growth may portend wonderful new opportunities.
Trick #3: Categorize Customers and Clients
Your accounting system stores quite a bit of information about your customers. But considering taking your information gathering one or two steps further.
For example, I recommend you categorize where your customers come from in terms of referrals, web site visitors, direct mail, newspaper advertising, and so on. You might also be able to categorize customers by size or some other meaningful-in-your-industry factor.
If you categorize your customers, you can aggregate financial data by customer categories and gain insight.
For my accounting firm, for example, I track where clients come from. As a result, I know that a dollar spent on newspaper advertising produces about a dollar of revenue, that a dollar spent on yellow pages advertising produces about two dollars of revenue and that a dollar spent on web advertising produces about ten dollars of revenue.
Categorizing customers in this way means I'm smarter about investing in marketing and advertising.
And you can often think of other useful categorizations, too. For example, categorization lets me know which category of client produces the most bad debt. And categorization lets me know the sorts of clients for which I experience the highest rates of attrition.
Note: Your accounting system absolutely has customer information fields (customer type, salesperson, class, and so forth) that you can use for these sorts of categorizations.
Trick #4: Stick to Simple
Now a quick point: Keep your finances simple enough that your accounting team can handle the books.
Why mention this point? Because we can all make choices or play accounting tricks that seem to help cash flow or boost profits or revenue in the short run. And that's terribly appealing.
In the long run, however, complexity such as capital leases, borrowing from personal credit cards (like American Express) to pay accounts payable, barter accounts, and so on, may seriously degrade the reliability of our accounting information. And that's a sure, long-term disaster.
As soon as we lose the reliability of our accounting information, we've lost the most important navigational tool we have for mapping out a course of business success.
Trick #5: Keep It Clean
My final suggestion: Make the effort and take the time required to keep your accounting records clean and up to date.
And here's a self-test you can use to determine whether or not you keep the accounting clean: You should be able to produce a balance sheet with logical, meaningful numbers.
The cash and receivables balances should be right to the penny, for example. If you don't know how much cash you have in the bank, you're obviously in deep trouble.
What's more, you shouldn't see any goofy numbers on your balance sheet. Any goofy numbers on a balance sheet—strange loan balances, great gobs of undeposited funds, negative balances—suggest your accounting records are dirty.
About the author:
CPA Stephen L. Nelson is the author of Maximizing Employee Retention Credits.