Smart Bookkeeping and its Benefits – Dollars Making Sense

Desktop with accounting sheets, pen, pair of eye glasses and keyboard on desktop.

Whether it’s businesses big or small, most people don’t like sitting down and working the books. Hell, back in the day the good folks of Enron disliked traditional accounting so much, they created their own “black box” system that – surprise! – obscured billions in losses for the better part of a decade. Ignoring the realities of accounting will always come back to haunt a business, big or small, there’s no avoiding it.

Businesses are complex, and even ‘simple’ small businesses can present some pretty complex financial situations that the average entrepreneur isn’t ready to handle: a recent business literacy test revealed that entrepreneurs scored in the 20th percentile when it came to financial literacy. Managers of large corporations didn’t exactly set the benchmark either, clocking in around the 50th percentile.

But the beauty of bookkeeping is, once you set you and your business on the proper path, it stops being an unpleasant chore that grows more perilous as it feeds off your procrastination and starts becoming an indispensable tool that can help you get a leg up on your competitors.

So how do you avoid bookkeeping blunders and get on the path to success?

Well if you found your way here by searching phrases like ‘business bookkeeping mistakes’ all the standard reasons are going to show up in almost every article like the clickbait they are:

  • Mixing personal and professional accounts
  • Not saving your receipts
  • Not reading your financial statements
  • Not filing your taxes

And so on and so on, etc., etc.

But we’re assuming you’ve already considered these more obvious errors in accounting judgment, and focus on accounting as it pertains to your ability to assess your businesses health on a day-to-day basis, and how it can help you better forecast for the future.

Because despite its reputation as a spreadsheet to be assembled come tax time, accounting can beneficially be utilized to assess and plan growth. A deep understanding of your numbers can help you make better decisions about what the company can achieve through spending on products, ad-spend, marketing, and hiring. One of the many financial decisions business owners have to make is which accounting method they want to use: cash-basis or accrual.

Abandon Cash-Basis Accounting and Adopt Accrual-Based Accounting:

One of the cardinal sins of many online businesses is that they often adopt cash-based accounting practices, and there’s a good reason for this: it’s as simple as accounting gets. Money comes in? You book it. Money goes out? You record that as well. With this simplicity comes a pretty big downside: it can be very hard to assess the true cash-to-debt ratio of a business and to understand your financial position on anything but a macro level.

This is where accrual-based accounting presents significant advantages, particularly if your online business traffics in a high volume of individual orders or a substantial inventory of products. It seeks to look to associate every dollar that comes in with the true cost of receiving that dollar. So revenues get matched with expenses, and a more complete impact of each and every business transaction can be seen within a single reporting period. It separates the cash in your accounts from the overall financial health of the business: two very different things.

One of the ultimate benefits of more robust accrual-based bookkeeping is better forecasting. Knowing the strength and positioning of your business allows you to see farther and farther into the future: a superpower all business owners – big and small – want to have.

  1. Get Honest With Your Numbers: Entrepreneurs are optimists, through and through. But when it comes to good bookkeeping and the forecasting that comes with it, sober second thought should always rule the day. While any business wants and needs cash in their accounts, it’s important to maintain the wider perspective of those dollars in terms of profit, loss, and liabilities.
  2. Understanding Your Inventory: Robust bookkeeping built on accrual-based accounting can do wonders for helping you forecast inventory needs, inventory costs, and what products to put promotion behind and when.
  3. Don’t Fear Your Debts: Okay, technically you should always fear your debts a little bit, but what we mean is that if you keep clean books and practice smart forecasting, debts don’t have to be the bogeyman, they can actually work for you. Understanding the true financial picture of your business will allow you to better predict if your business has the capacity to take on strategic debts in order to grow the business. Debt is always a risk, but sound financial reasoning can mean that it’s smart risk.
  4. Be An SKU Sleuth: For businesses that sell multiple SKU’s, it’s important to be aware of the true cost each and every one represents to your business. Your #2 or #3 items might be a huge component of your total sales, but it can also be a huge part of your costs. Often owners become enamored with high-volume products and gloss over things like fulfillment costs, advertising costs, or return rates: instead of becoming intoxicated with the cash they see coming in. Knowing your SKU’s means knowing exactly what percent of every product represents a profit to you at the end of the day.

Good accounting is the foundation of any successful business, and through the insights, you gain from it the benefits extend just beyond the cash in the bank: better forecasting, inventory management, profit/debt ratio, and true product cost. Not only are these benefits that can generate profit and value for you and your business each and every day, but a stable foundation and the clear picture it paints of your business can also make it exponentially more valuable to prospective buyers when it comes time to exit.