I don’t have a percentage for you, but a huge number of my clients only do their books in order to have some Peace of mind that their assets are accounted for and for taxes. Rarely, small business owners take any time or effort to learn how to read a financial statement or understand how it can help their business.
I was so concerned about this problem that I teamed up with Shaila Chamberlain, CPA, CMA, MBA, and we wrote an easy-to-understand book on the subject. The book is written in a way that even the math-challenged should be helped.
The book is called Making Money Out of Thin Air. You can get it on Amazon as a paperback, Kindle, or Audiobook. The book goes into depth on this subject, so we won’t do a 200-page or even 10-page version here. What we will do is provide you a list of the cash-in-your-pocket benefits of spending 10, 20, or so hours to become a pro in this area of your business.
ACCURATELY TRACKING SALES
Does this seem only too obvious? Hopefully, you’ve never failed to invoice someone or invoiced them incorrectly, but my guess is that this has happened. Good order entry, invoicing, POS systems, and analysis of the reports generated from these systems can spot those kinds of mistakes and also shrinkage due to employee theft.
DETERMINING COST OF SALES
This is a big one and often makes the cost of bookkeeping into a profit center all by itself. Do you know your cost of sales? Do you know it only as an average or do you know it by product, department, service type, overhead application, and also net of returns, commissions, deals, etc? I (Randy) have saved clients huge amounts of money just by adjusting margins, commissions, and discounts.
DETERMINING FIXED OVERHEAD
You can have great sales and great margins but lose it all due to fixed overhead that has gotten out of control. I have personal experience with this factor.
FINDING THE BREAK-EVEN POINT
It is very helpful for every company to know its break-even point. When sales are off (due to recession, seasonality, loss of lines, loss of major clients) this metric helps you make quick decisions on lowering costs.
PLANNING OF ALL KINDS
Creating great books is step one to good planning. Once you’ve got some historical numbers, you can now begin to play with the impact of future changes in sales, margins, overhead, markets, products, services, or other strategies.
REVIEWING ACTUAL RESULTS AGAINST BUDGET
As noted in number number 7, good books and fast reporting will allow you to check your progress against all aspects of the budget, then adjust.
DETERMINING KEY PERFORMANCE INDICATORS (KPI)
You should be able to determine a handful of specific metrics that you want to see daily, weekly, or monthly. Those metrics will be early warning systems and/or reasons for jubilation.
Most businesses would consider this to be number number 1. They want their books to be a tool for tax avoidance. However, the truth is this: if you make $60,000 a year and avoid paying taxes on $20,000 of that, your savings will be minimal. If, on the other hand, a great understanding of your books allows you to make $120,000 a year and pay all taxes due, you’ll be so much better off.
This could be number 1, of course. But if you mind the first ten, this one is much more likely to be where you want it to be. And if it isn’t, you should be able to figure out how to increase sales and/or margins, and decrease costs, overhead, etc., in order to get a great take-home amount.
CASH FLOW ANALYSIS
A great cash flow analysis is a huge help in avoiding sleepless nights. An accurate cash flow analysis needs to have great books, really great books. Even then, it is a complicated formula to create and customize to your business. A good CPA should be able to help you with this. Wouldn’t you love being able to project when you will have cash shortfalls, so that you can find solutions well in advance?
PROVING YOUR WORTH TO A BANK OR INVESTOR
If you decide that you need to borrow money from a bank or other financial institution, your books will be instrumental in determining: how much you can borrow; the interest rate you’ll pay; the type of collateral, both business and personal, you’ll need to provide; and the type of reporting you’ll be asked to submit on a regular basis. The better the books, the better the loan provisions for you.
WHEN YOU WANT TO SELL ALL OR PART OF YOUR BUSINESS
Investors or buyers of your business will also pay more for a company where the assets, liabilities, and income stream are clear and concisely presented.
GRANTS FOR NON-PROFITS
If you are a non-profit or charitable organization hoping to get grants, and/or required by regulations to provide financials, the better they look, the more likely you are to achieve your goals.
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