Wednesday, May 26, 2010

Why It's Important to Understand and Have a Good Bookkeeping System

A few days ago I told you why you hate the numbers. Was I right? Thought so...

Today I'm sharing why it's important to understand what your numbers will help you with in running your business. Then I share a three step exercise at the end to help you get your arms around your numbers so it's not so overwhelming.

Why its important:

To avoid unnecessary fees - This is a problem because it adds unnecessary expense. Being late on a payment or overdrawing your bank account, is like burning money! Banks charge hefty fees for overdrawn accounts, and this is just money wasted. If you aren't managing your money on a weekly or monthly basis, these fees can add up. (I HIGHLY recommend overdraft protection because occassionally there will be an oversight. But even so, why give the bank ANY of your money?)

So you won't be disorganized at tax time - You'll waste a lot of time and possible sleep trying to gather everything together at tax time in order to do your taxes. If you have your taxes prepared by a professional, then you risk adding additional fees for the time it takes your accountant to make sense of it all before they can even begin to prepare your taxes.

To be able to make informed management decisions; long term and short term - If you don't know your numbers and you don't know what's in your numbers, you can't make solid business decisions. If you don't know how much money you have in your bank account, you can't decide whether or not you can spend money on an opportunity that happens to come up during the day or during the month. Having a solid grasp of where your numbers are and where they are going will help you to make better management decisions. For the short-term, that may mean purchasing a piece of equipment that happens to be on sale this week. For the long-term, you may see a conference coming up in three to six months that you would love to go to but because you don't know what money may be coming in and what expenses are going out the door, you won't be able to plan for that big expense in the long-term.

Knowing the ROI on a particular outlay of cash - The benefit you get from the money you put into your business has to be measured in some way so that you can make adjustments accordingly. You need to know whats working and what isn' your advertising and marketing that you can change them for better results.If it's bringing money in the door, then you most certainly want to continue doing it. If it's leaking money, then you want to get rid of it. You won't know that unless you understand and have a solid book-keeping system.

Saves you time - Time is a very, very precious commodity when you own your own business, especially entrepreneurs and small business owners. Your time is money, so it is more important for you to spend time doing the things you love; those glamorous things; the creative things; the things that led you to start your business in the first place, instead of sitting behind a computer, at a desk, crunching numbers.

Here are some steps, just three simple steps to getting started on understanding the finances of your business:

  1. Make a list of all the different ways that money comes in and out of your business; cash, checks, Paypal, debit cards, and credit cards. Under each type of tender, name and describe some of the situations/transactions where you use those vehicles of payment. A new client sale, supplies purchases, lunch or coffee date with the client or vendor, marketing and advertising payments, one time payment and recurring payments, professional fee payments, membership fees, club fees, rent, utilities.
  2. Next to each transaction type, write down whether it is a revenue transaction (service or product sale), or an expense. There are several types of expenses but I won't bore you with trying to determine that right now. Leave that for your accountant or bookkeeper to figure out.
  3. Develop a process or system that you are comfortable with, to record the transaction (spreadsheet or Quickbooks). Make it simple so you'll be more successful at keeping up with it. Also, designate a place to store the receipt/invoice/documentation for each of the types of transactions listed above. Like a folder or envelope labeled with the contents and what month it's for.

Now...go and create some time and space in your schedule to do your bookkeeping once per week or at a minimum, once per month. If you can't find the time in your schedule to do it, then hire someone to do it for either create an easy, step by step system for your unique operating style or to actually do the bookkeeping for you each month.

Create the peace of mind you need to be a successful business owner as it relates to the creative side AND the financial side.

Tomorrow's post shows you what a simple, easy Cash Flow Statement looks like`and how it can help you.  Don't miss it!

Until next time...

Aspire to Plan!


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