Why Is Your Business Doing Accounting?
Every business keeps a set of books. Is this a worthwhile activity? The answer comes down to Why. I recently read Start with Why by Simon Sinek. Without giving away the book, Sinek challenges business leaders to remember (and live the values that) lead to the start of the business. And he demonstrates many examples of businesses who do this successfully, can and will achieve success in their ongoing business. This has me thinking about the power of WHY.
I started my career in larger corporations. I would support other colleagues to translate their financial reports and compare that to their business intentions. It was more than just balancing banks and filing tax returns. It was being able to evaluate performance, predict outcomes and track progress. Now that I am on my own, I am working with several entrepreneurs. Each with their own story about how they started their entrepreneurial journey.
Some of my clients call me before they even opened their business. Some call when they think that they are in trouble-- either they don't know what they are doing or they just no longer have time to do it. But here is my question:
Why is your business doing any bookkeeping/ accounting work?
If your answer is around taxes and being "good with the feds" this is what we call compliance. You do this work because you feel you have to. And you are not wrong, there is a valid compliance requirement for all businesses. But, if this is your answer, then your objective is to find an inexpensive way to pull this off. And, the truth is, everyone has this as part of their reason. Well. Criminals don't ever worry about compliance. But everyone else does.
There are so many more reasons out there. Reasons that allow you to achieve compliance and excel your business towards success. What if your reason was "to see if I achieved my goals"? And while not all of your business goals can be measured with the accounting system, a lot can. Sales growth. Cost minimization. Tax minimization. These types of goals are performance measurement. And what I suggest to you is that a strong management accounting system can help with this in your business. It is not just asking of what did happen, but also starting to assess what should happen. Creating these by measurable standards helps you, the business owner, assess what went well and what did not go well.
Every business needs a way to measure performance, and a management accounting system can facilitate that goal. I encourage you to think of management accounting in a similar way as compliance --- you have to have this.
If we look at compliance and performance measurement as a must have then finding a balance to create a system that simultaneously achieves both goals is a challenge. Is this a challenge that you are willing to undertake? I suggest to you that you need to undertake this for the health of your business. But, I also suggest that this is (with some limited exceptions) that this is an area where you should get support.
So many entrepreneurs start their journey with a focus on compliance. The softwares do make it easy to start with a do-it-yourself bookkeeping model. This will allow you to file your taxes. And, in its most simple format, this will allow you to decide if you performed well, if, profit is your measure. This quickly becomes a frustrating task. Why?
If you had a desire to do bookkeeping, that would have been the business you started. There are a significant number of demands on a new business. Being able to determine if a receipt should go to cost of sales or overhead expenses is not one that should be left to you.
You are building a brand, attracting clients, developing marketing strategies and a whole host of other tasks that are not your specialization. But this is inconsistent with the initial comments from Sinek, which is that you need to focus on why you are in business. The task of bookkeeping, for those who do not have a passion for numbers, is boring and tedious.
There are rules that the softwares do not teach. Meal and entertainment are only 50% deductible. Assets with a useful life of > 1 year needs to be capitalized and amortize over the life of the asset. Where the purchase of an item covers a period of time outside of the fiscal period, it is prepaid and should be amortized over the life of the expenditure. And if you read that and said HUH, you probably need help.
The softwares that make it so easy to do-it-yourself is a good building block for a management accounting system. This part is not so easy to do-it-yourself. And the integration of a compliance system and a performance measurement system is not for a do-it-yourself model. This is true even though the entrepreneur provides the most important information for the entire system. The WHY.
I challenge you to figure out your why. Why do you have an accounting system? And if you are doing it for compliance then do you have the expertise to do this well? I suggest to you that you need a bookkeeper who does have that expertise. If you are looking for more performance measurements then you need to ask yourself what the right expertise you need to do this well. Getting help does not sacrifice control. It does not mean that you will not know what is going on in your business. It means that you will lead the business and use the data from these systems to make your business better.
The common mistake is made is that we all took math in school. It is easier to know that legal, web design, marketing etc... Do not make this mistake. Use the math you learned in school to understand the data. Use the math you learned to find that measure that proves to you that you are working towards your WHY.