This article was written by Renee Butler – Consulting Manager, Littlefield, Siminski & Co., From her blog, Reprinted by Permission
Your books are only as good as their execution. Otherwise, even the most perfect business model does no more good than the latest diet book growing dusty on your bookshelf.
The fact of the matter is that your books ARE your business. At the end of the day, your company IS how much it makes. You take in your sales but you have to deduct the cost of goods sold as well as all your administrative expenses. In addition to the regular costs like rent and payroll, you have the one offs – like the impromptu holiday party you threw to thank your workers for pulling off a tight deadline or the machine that broke down right as you were in the middle of a huge order.
All in all, if you aren’t keeping accurate books, you could find yourself in a tough spot.
Many business owners are so focused on their trade that they neglect their books, or at least don’t give them appropriate attention – but sloppy bookkeeping can cost you a ton of money. It can make you flip from playing offense to playing defense. Think of it like a soccer game. One minute, your team has the ball and you are taking it all the way to the net. Then, something happens – a foul or an interception. Before you know it, the other team is halfway down the field and you are running as fast as you can trying to get back in the game. It happens just like that, when you least expect it and in the blink of an eye. You went from offense to defense.
In the case of running a business, this can mean that because of sloppy bookkeeping you are stuck with a 27-percent cash advance loan instead of being able to access a 6-percent bank loan or open a credit card with a 0% APR. Not only are you paying a small fortune in interest but you also miss out on favorable repayment terms. You may only have six month to repay the cash advance whereas you could have been able to spread the repayment of a bank loan over 5 years or more.
Sloppy bookkeeping can take many forms. Maybe you don’t bother to balance your ledger until your quarterly taxes are due or maybe you tuck some personal expenses in with company ones. Whatever the case, even if you were cranking out profits like you had your own money tree, if your books are not kept up to date and accurate, you can expect extra costs No lender in the world is going to loan money to a company that hasn’t balanced its books in months. Further, even if you are keeping your books up to date, if they are packed full of so many personal expenses that your cost of goods sold is inflated to the point you are barely showing a profit, your lender may assume that making a payment on a new debt could be difficult and deny your application on that basis.
You Might Be Surprised
Moreover, there are greater costs to worry about that just lending. If you are keeping sloppy books, you may not realize how much you are actually spending or how much your jobs are actually costing you. Many businesses, especially early on, end up finding out that at least one venture is costing more than it is making. By keeping accurate books, you can track your actual costs (read: “not the figures you wrote on the back of a napkin”) and get a much better picture of where your company’s operations stand.
In turn, this can help you make more informed decisions about the direction of your company and develop a strategy that plays into your company’s inherent efficiencies.
Maintaining accurate books will save you in the long run. Whether it means better access to financing or improved cost accounting, your business will run better with better bookkeeping.