Part II: Setting up Books and Records (Accounting) and Getting Started

Accounting tends to be something that many business owners shy away from.  But it really is THAT important.   As I’ve mentioned in previous posts, there are no magic solutions to problems in business, no crystal ball you can gaze into to get divine inspiration.   What you can do, though, is create systems for capturing information that will show you trends, will show relate “cause and effect” to you, will parse out the information in such a way as to help you make good decisions about future outcomes.

Your accounting system should grow as your business grows.  Don’t try to set up a complicated system of accounts or adopt a template made for the “average” business rather than your own.  Set up accounts that meaningfully track your operations.  At first, a general “Revenue” line is great.  The expenses are the ones where you’ll have many more details.  Even for the expenses, you may originally group all your telephone, electric, water for the business under “Utilities.”  That’s ok to start.   Eventually, again, as your business grows, you’ll start to notice that a single category may be capturing a larger and larger volume or amount (ex. electric vs. telephone), at which point you separate them out into single categories and track them as against your activities and see why one is growing at a different rate than the others and what you can do to control or mitigate those costs. On the revenue side, it’s the same exact logic–if you’re selling more than one item or service, eventually you may want to separate them out so you can see which one has the biggest result from your efforts (and also, which one eventually gives you the highest profit margin).  That doesn’t necessarily mean which one is the highest amount (in dollars) since something that earns you $1,000,000 is pretty useless to you overall if the cost to produce the good or service is $999,900.  You’re doing much better with a product or service that produces $10,000 in revenue and a profit of $5,000 than the previous scenario.

The key thing is to track things as much as possible.  Not to endorse any one product over another, but choose software that allows you to use your smartphone to scan items that it automatically will synch with the overall accounting software to save you time (the most important resource).   Quickbooks has those capabilities as do others.  Again no endorsement.   You also want to make sure you choose an application that is compatible with others, especially spreadsheet software.  Having an application where you can download the information seamlessly into a spreadsheet program (like Microsoft Excel or Google Sheets, etc.) and you can manipulate the information to “war game” different scenarios is how you come up with information to help you make good decisions about the future (instead of that crystal ball).

The last thing to make sure of is the program provides you with the reports you want to track on a regular basis:  your Profit and Loss, your Balance Sheet, your Cash Flow Statement, but also (If you’re in the industry of producing goods), your inventory turnover, and if you extend credit to customers (i.e. you provide the services and they can pay later), your Accounts Receivable turnover rates.

Key accounting ratios like those just mentioned will give you invaluable insight into whether you’re being effective in your operations or whether there are hidden problems that need to be fixed promptly.  Focus on what is relevant to your business.  If you don’t extend credit (are paid in advance or are paid in cash on delivery of the services), don’t worry about an Accounts Receivable account (you don’t need it) or an A/R turnover ratio (it’s not relevant).  Again, later on down the road if you do decide to start extending credit (if it makes sense in your business model at the time), THEN you start tracking that info (add that account, look at the ratios, etc.)

Getting smart about your business is something only you can do though. People can give you guidance, and offer you resources to help, but no one will ever know or understand your business to the extent you will.  That’s mainly because you are the one making the decisions that drive it.  Your decisions are specific to your situation (your personal trade-offs, your family demands, your time).  No business looks exactly like another, even if they are both in the same industry, because of those idiosyncrasies just mentioned.

There’s alot more to understanding accounting ratios and other information (to be discussed in a later section) but in the meantime, follow the guidance described above and you won’t go wrong.

As always, please provide comments on what you find helpful or what you would like to hear more about.