Good Bookkeeping Prevents Financial Insanity

Like many middle-aged entrepreneurs, I grew up professionally in a career at a very large multi-national company. I spent more than twenty years working for United Parcel Service (UPS), in a variety of operational, sales and marketing functions. One of the things UPS is known for is efficiency in every operational and financial aspect of the company. UPS measures everything. They have a 100-year-old culture founded on routine measurements, using financial, operational and statistical numbers to guide fact-based decision-making. Part of the reason measurement is so critical to their success is because of the shear size of the organization. For instance, improving fuel economy in the package delivery fleet by an average one tenth of a mile per gallon can save the company millions of dollars in fuel expense. Their economies of scale are mind-boggling. You don’t have to be a Fortune 100 company to realize financial savings from the same attitudes and routines around attention to accurate, complete and timely measurement of your financial data.   Since leaving UPS to unleash my entrepreneurial spirit, I have held leadership roles in several small businesses. In the process of ensuring that financial decisions were based on reality, I created a handy teaching concept to help communicate how to apply a routine of financial data management.  I call it FACT-Based Financials. The four components of FACT-based financial data include Frequent, Accurate Complete and Timely. Each plays a vital role in the relevance and value of your financial data in decision-making. Let’s take a closer look at each component starting with Accurate.   A is for Accurate Are your financial statements an accurate reflection of what’s really going on in your business? For example, does your cost of goods sold (COGS) number include just the costs of what you sold or incorrectly include everything you purchased during the year? Using total purchases can distort your gross profit, so use only the total costs of what you actually sold. Sales minus COGS equals Gross Profit. Gross profit is the lifeblood of your company and it needs to be greater than the operating expenses if you want to have anything left over to take home. Does your balance sheet balance? In other words, do your total assets equal your total liabilities plus equity (net worth)? Are operating and administrative expenses getting put in the right account? Create routines of checks and balances to ensure all your data is entered correctly and entered in the correct account. Don’t just use your CPA at year-end to avoid paying taxes. He or she can be a tremendous resource to ensure that your books are accurate during the year. If your numbers aren’t right find a qualified person to do the job.   C is for Complete Are you tracking everything you should?  Is every transaction recorded in your accounting software? Make sure your accounting processes (routines) include purchase, sales, payments, receipts, payroll, tax, and banking transactions. Do you have routines and controls in place to ensure your data is complete? Routines help eliminate errors and omissions of information by reducing the number of choices you have to make in a process. Do you have a budget and is it loaded in your accounting system? Make sure your financial data is forward-looking as well as historically complete. It is hard to know if you will reach your goal if you don’t know what your goal is.   T is for Timely The total number of transactions you generate in your business coupled with your total number of employees are key drivers in defining “Timely” for your business. The larger both numbers are the longer it takes to compile your data in decision-relevant formats. The larger your business is also means you have more constituents with whom to communicate your financial position and performance. Ultimately, you should insist on a complete and accurate set of monthly financial statements by the 5th working day of the next month and no later the 10th day. Your year-end financial statements should be prepared by the end of January and no later than mid-February.  Every day that passes by beyond what you define as “Timely” makes it so you don’t have the FACT-Based information you need to take corrective action if your business gets off plan. Time can be your worst enemy when trying to make business decisions that affect your wallet. Don’t wait until it’s too late.  Fall is a great time to sit down with your accountant, staff and advisors to put together a plan to get year-end numbers for the current year completed by the above timeline.   F is for Frequent Once you have Accurate, Complete and Timely financial data you need to look at that data at Frequent and regular intervals. Create a routine to set aside time on a regular basis to review and analyze your financial numbers. I recommend the following as a starting place: <ul style="MARGIN-TOP: 0in"> <li style="MARGIN: 0in 0in 0pt; mso-list: l0 level1 lfo1; tab-stops: list .5in">Weekly to monitor cash flow, inventory, expenses, and accounts receivable (if you sell on account).</li> <li style="MARGIN: 0in 0in 0pt; mso-list: l0 level1 lfo1; tab-stops: list .5in">Monthly to review financial statements. Review the dollar amounts in the accounts and also look at them as a percentage of sales. Compare this month to last month and to the same month last year. Look for anomalies and trends that indicate corrective action is required. Don’t forget to celebrate your successes. Also compare your actual cash flow balance versus projected.</li> <li style="MARGIN: 0in 0in 0pt; mso-list: l0 level1 lfo1; tab-stops: list .5in">Quarterly to review quarterly statements (present quarter compared to the same quarter last year and to the previous quarter). Like your monthly review, look for anomalies and trends that require corrective action or celebration.</li> <li style="MARGIN: 0in 0in 0pt; mso-list: l0 level1 lfo1; tab-stops: list .5in">Annually to do a five-year review (three years is adequate to see trends) and complete tax planning with your accountant. Compare your current year-end statements compared to the prior four years, again in both dollars and percentage so you can see trends and not just fluctuations due to changes in sales volume. Get some good industry benchmarks so you can compare yourself to your peers. Benchmarking is a great way to validate if your goals are reasonable based on how financially efficient similar companies are performing.  </li> </ul> If you need help knowing what to review, see my other article titled, “How to Review Financial Statements Like A Finance Know-it-All (even if you’re a Finance Not-at-All).” You will find it posted in the Money & Financing section on Biznik.   So, you’ve set yourself up with good routines to collect, enter and review your financial data – Yea! But wait, are you missing something? FACT-Based Financials can promote an effective process IF (note the emphasis with capital letters) you have the right software in which to collect, sort, review and share your financial transactions. As the son of an engineer/inventor, I am a HUGE (more capital letters) fan of using the right tool for a job. Be sure that you are using the right software tool to manage your financial data. Professionally designed software, like QuickBooks and Mind Your Own Business, are perfect for small businesses. Accounting software has evolved to be easy to learn and it is quite affordable.  Accounting software puts incredibly powerful features like preformatted financial statements to work helping you grow your business and communicate your success.   The sole purpose of your financial statements is to be a standardized communication tool between you, your shareholders, your accountant, your lending community, and taxing agencies. It is imperative that the data in your accounting system used to create these statements accurately and completely represent the financial position and performance of your business. You and your business advisors need to have confidence in your numbers so you can make decisions based on FACTs and not conjecture. The financial health and sustainability of your company depends upon it. The best way to achieve this is to apply routines in data collection and data entry, to ensure you can review your numbers with Frequent and regular intervals, and that you have transaction data that is Accurate, Complete and Timely.   Get the FACTs. Get growing!     2008-10-09T03:28:31Z

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good-bookkeeping-prevents-financial-insanity

2008-10-11T21:14:13Z

Do you have what it takes to make smart financial business decisions? It doesn’t take an MBA, luck, intuition or a gaggle of experienced advisors. It just takes an interest in the success of your business and attention to detail.

Good Bookkeeping Prevents Financial Insanity

2009-02-24T09:46:27Z