Is your book keeping system doing the best job it can for you? Do you have the right accounting system for your business?
Back in 1991, Lisa Kleinholz wrote an article for Home Office Computing on evaluating small business bookkeeping systems entitled, "Keeping the books: how 5 businesses do it". (She's a successful mystery novelist now.)
The systems evaluation yardstick she used, and how to proceed with the evaluation was simple (which I always like) and is still valid today for small businesses ... so here it is in much less elegant prose.
In Lisa's words, the success or failure of a business often comes down to two things:
Whether you are just starting out or have been in business awhile, how do you know if your accounting system (the method you use to track your business finances … from each receipt to your tax preparation) is the right one for your business?
It’s best to keep it as simple as possible for your size and needs of your business. But there are just so many choices.
So before you can evaluate your accounting system, you need to stop right now and do a bit of information gathering.
Sip some tea while you actually take the time to answer the questions about your book keeping system before you move on. I really do mean take the time to answer the questions. Brian Tracy, a best selling author and coach, always says, "Think on paper, think on paper, think on paper."
... Use the picture from a gorgeous summer day at the lake to relax and focus.
This was my view from my kitchen window for sixteen years. I have now downsized and moved from northern British Columbia to the Columbia Valley in southeastern British Columbia. My view is now of the Rocky Mountains to the east and the Purcell Mountains to the west. Lake Windermere is a twenty minute drive.
In this picture, if you look closely, you can see the devastation the pine beetle has caused to our area around 2004. See all the dead trees? Thousands of trees had to be taken down because they became a major fire hazard. Once the barrier from the trees were gone, the wind storms picked up for about five years until the wind break could reestablish itself.
... But I digress so back to our topic - book keeping system criteria and evaluation.
By the end of this chat, I hope you will have a solution (or at least some ideas) that meets your needs and solves the problems you are experiencing with your current accounting system. Okay ...
... Are you stuck? How about these possibilities:
What is your business?
What are your business needs?
What are your problems?
To determine if you have a good book keeping system that meets the needs of your business, Lisa suggested your system should answer these five questions:
(1) Are you charging enough?
Practically any organized system will let you see if your revenue coming in covers your business expenses (including your draw) with some extra room left for a profit. Even simple systems will let know what your profit margin is.
(2) Are you spending too much?
Your system should let you break down your expenses by type so you can see where your largest outlays are. You need this important information if you are going to control your costs. Cutting costs may make sense in the short run but take the time to think about how will it affect your long range plans for your business?
(3) Are you monitoring your cash flow?
Projecting your cash flow three to six months into the future will give you a heads up if a cash squeeze is coming. It gives you time to be proactive; perhaps plan a sale to bring in business during the slow period.
(4) Are you focusing your energy prudently?
If your accounting system is doing it’s job, you should be able to see where your highest profits are so you can direct your time and money there instead of on the less profitable parts of your business. Or maybe you can brainstorm to see if there is a way to increase your profits in these areas.
(5) Are there red flags warning of problems ahead?
Your book keeping system should produce comparative reports so that you can use your history to run your business more effectively now and make strategic decisions for the future. :O)