Most business owners understand that they have to have an accurate set of books, primarily involving the main two financial statements, a Balance Sheet and a Profit & Loss/Income Statement. At the most basic level, this is a prerequisite to filing your tax return. Some business owners stop here; they just want to do the bare minimum to be compliant and only look at their revenues, expenses, and net income every once in a while. These folks mainly operate their business on a day-to-day “bank balance” philosophy. They presume that if their cash balance increases, they must be profitable and potentially even become more profitable over time, and the opposite is if their balance is declining.
To be candid, there is an infinite supply of bookkeepers who can help you achieve the above “strategy” for pennies on the dollar.
Why This Doesn’t Work
If you wanted to win any championship in any sport, you would never have an inflexible strategy of just keeping your head down, running through the motions only to look back a couple of weeks later to see if you won any of your games. Instead, you would keep track of the score throughout the game and adjust your strategy when it’s not working, take bigger risks when they’re needed to get back in the game, and play more conservatively if you needed to protect a large lead.
It pains me to write that because it should go without saying. Yet, if you’re only looking at the cash in your bank account and trying to extrapolate that into your team’s (or, in this case, business’) performance, it would be the equivalent of monitoring your team’s shooting percentage in a basketball game and falsely assuming that your shooting percentage is directly correlated to the score of the game. Sure, it could be. If the team is shooting 90% from the field, I’d be willing to take that bet. But if your team is shooting 35% but getting a lot of rebounds, creating second-chance opportunities, and the other team is shooting worse and not getting as many rebounds, you could still have a sizeable lead in the game.
The point in all of this is that if you want your business to grow and win market share (what most entrepreneurs want), you’ve got to have a scoreboard to measure performance against. This scoreboard must display the correct metrics, be consistently up-to-date, and drive strategic decisions to improve performance.
What Does Work
First thing’s first. You’ve got to select the right accounting software for your business. It needs to be robust in features and should be cloud-based. If this software is on your company’s local computers, you’re going to be creating a nightmare for your bookkeeper that will drastically impact the cost and quality of the financial statements produced. We recommend QuickBooks Online, Xero, or Net Suite for most small businesses.
After you have selected your accounting software and created your company file within it, you’ve got to start with the right chart of accounts. The chart of accounts contains all of the asset, liability, equity, revenue and expense accounts your business will use to track performance. When it comes to your P&L, you’ve got to have a chart that allows you to see meaningful metrics. For example, an accurate gross margin (revenues minus the direct cost of the products and/or services), net income as a percentage of revenue, profitability by location, fixed overhead costs as a percentage of revenue… the list goes on forever. If your chart of accounts is too generic, you’ll never get accurate and meaningful insights into your business; you will only know your total revenue, expenses, and net income for a given period of time. It’s just not enough to actually make strategic decisions.
After you have the right chart of accounts, you need to make sure that your bookkeeper has access to (and is utilizing) receipts, statements, and invoices so that they can properly categorize transactions. If they’re just guessing… guess what? They’re going to guess wrong a lot, and your financials aren’t going to tell an accurate story. There are various tools to simplify and streamline this process, like Expensify and HubDoc, that can give your bookkeeper the right information when they need it. It will also help you substantiate expenses in an audit as these records can be attached to the transactions themselves within your accounting software.
Last, you need to make sure you have the right cadence to deliver your financial statements. Most companies do this monthly. Whatever your cadence is, you’ve got to make sure that you’re receiving these financials shortly after the end of the reporting period. If you’re getting your monthly Balance Sheet and P&L weeks (or months) after the end of the month, then by the time you get them, the numbers will be stale, and you’ll have lost valuable time to implement insights gained from them. Also, you’ll likely be waiting a while to see if your pivots/tweaks are working out the way you hope.
Accounting Goes Beyond Bookkeeping
What I've outlined above meets many startups' and small businesses needs. For others, there’s a host of other accounting-centric services they need for operational support (bill pay, accounts receivable support, etc.) as well as gaining deeper insights in real-time (dynamic KPI dashboards, proforma forecasting, etc.). Additionally, entrepreneurs often need assistance in identifying the key metrics and results that deserve more attention than others. In my next article, I will expound upon this realm of the Fractional CFO, Fractional Controller, and outsourced accounting department.
About Dark Horse CPAs
Dark Horse CPAs provides integrated tax, accounting, and CFO services to small businesses and individuals across the U.S. The firm was founded to save small businesses (and their owners) from subpar accounting and tax services and subpar client experiences. These small businesses are Dark Horses among their larger and more well-known competition. Being a Dark Horse CPA means advocating for small businesses by bringing them the tax strategies and accounting insights previously reserved for big business. Get a quote today.