Most business owners prefer to focus on building and selling their product or service rather than being bothered with the many mundane details that go along with running a business. I’ve written before about how nothing else matters until a business has a product or service to sell and customers to sell it to. However, many of these mundane details can hinder or even kill a business if not tended to.
Business books (accounting records) are often an afterthought, but having clean books is one of those important details.
I started writing a post about how to keep clean books, but I realized that you won’t care how to keep clean books until you understand why it’s worth your precious attention.
I’ll save the how for next week. For now, I’ll try to convince you of why you should make clean books a priority.
First, what does it mean to have clean books?
Clean can mean different things to different businesses, but in general clean means having accurate, up-to-date, and understandable financial information. You should be able to rely on the financial information in your books to make decisions.
To get specific, for many businesses clean means having accounts receivable (money owed to you) and accounts payable (money you owe) records always up to date. Otherwise, you hurt your cash flow by being slow to invoice customers and follow up on late payments. You hurt vendor relationships by being late on bills.
Clean also means having an accurate income statement and balance sheet soon after the end of each month. Having accurate financial statements usually means bank accounts are reconciled, revenue and expenses are matched in the correct period, inventory is accurate, and depending on the nature of the business, other accounts are up to date.
Now, why should you make clean books a priority?
1. To help you make the best decisions possible
You are never going to have enough information to make a decision. But you can at least make sure you have all the information possible. The primary reason to have clean books is to give yourself as much accurate information as possible for decision making.
Do you have enough cash to invest in that new piece of equipment? How will you know unless you have a current picture of cash in the bank, money owed to you (receivables), and money you owe (payables)? An accurate income statement showing a history of healthy profit can give you confidence that cash will keep coming in.
Often business owners make decisions based on cash in the bank, but cash by itself is not a good indicator of business health.
A high bank balance might give you a false sense of security if you don’t realize that your overdue payables are more than cash available. This problem is common for businesses, such as retail stores, that collect money up front from customers but pay their suppliers on terms.
A low cash balance might keep you up at night, but accurate receivables might show that you would have plenty of cash if could collect overdue balances from customers. A simple collections effort might solve your cash problems.
Clean books will show you really how well your business is doing regardless of cash levels.
2. To help you avoid tax nightmares
You may think it will never happen to you, but government agencies and insurance companies do perform audits. Income tax, sales tax, payroll tax, worker’s compensation and liability insurance, are examples of potential audits.
Many businesses have gone down, bringing the personal lives of the owners with them, for failure to accurately report and pay taxes.
Even if you have nothing to hide, messy books will make audits time-consuming and expensive. Clean books make audits quick and simple.
It’s better to preempt these problems by investing in clean books up front.
3. Books are expensive to clean up, and you will have to clean them up
You will eventually need to clean up your books. It may be forced a government agency. It may be driven by your own desire for better information. It may be required by capital sources, such as banks or investors.
Like many other messes in life, messy books are much less expensive to avoid than to clean up.
Cleaning up books takes a different, and more expensive, skill set than maintaining books.
For a small up-front investment, an experienced accountant can help you set up accounting systems that low-cost bookkeepers or clerks can maintain. Periodic informal reviews by this accountant, such as quarterly or annually, can ensure those systems are operating properly.
In contrast, an experienced accountant will have to do most of the work to clean up your books. The clean-up can’t be done using simple systems that low-cost staff can perform.
I’ll write more in my next post about how to set up systems and people for keeping your books clean.
Keeping clean books is not the most exciting part of running a business (unless your business is an accounting firm). However, clean books will help the more exciting aspects of your business run more smoothly. Clean books can also help you avoid distracting audits and clean-up projects in the future.
Question: Why do you think it’s important to keep your books clean?