Why bookkeeping should be a priority for small businesses

• Are we making money?
• What's our monthly burn??
• How many people should we hire??
• What can we afford??
• Can we order pizza for lunch?

Every day, finance teams in scaling companies grapple with a series of complex questions and discussions. Finding answers to these questions isn't always straightforward, except perhaps for the last one, where the answer should invariably be "yes."

In the early stages of their journey, companies and founders typically have a firm grasp of their financial position. This could be because they're intimately involved in all aspects of the business or meticulously monitor their bank accounts. However, as a company expands, responsibilities and roles are delegated to other team members, making it increasingly challenging. Sometimes, the financial and accounting aspects of the business take a backseat due to other pressing priorities. In other cases, business owners may shy away from these responsibilities simply because they don't consider themselves "numbers people."

That's perfectly all right, but it underscores the importance of having robust financial processes in place. Such processes ensure that everyone within the organization has access to crucial financial and non-financial metrics whenever they are needed.

As a provider of virtual accounting and bookkeeping services, I frequently encounter these situations and challenges when onboarding new clients. Occasionally, we're fortunate to collaborate with a client who has a well-organized financial system from the outset, and it's a virtual high-five moment for our team. However, in many instances, we find ourselves sifting through extensive historical data, catching up on overdue tasks, and rectifying discrepancies.

Once we've established a solid foundation and tidied up the financial records, we can embark on the actual work.

Bookkeeping basics

The bedrock of robust financial processes begins with effective bookkeeping. (It's worth noting that not all bookkeeping is identical; there are distinctions between cash-basis and accrual-basis accounting, but I can delve into that another time.) As your company expands, the intricacies of your bookkeeping inevitably grow, and that's precisely when it becomes crucial to enlist the expertise of an experienced professional. In my experience, I've taken over the accounting books of numerous companies, and I've encountered bookkeepers spanning the entire spectrum of capabilities. Some have demonstrated outstanding recordkeeping skills and precise coding, while others have left us astounded by the state of disarray in their records.

This is not a matter to be taken lightly.

What is bookkeeping?

Before delving into the intricacies of bookkeeping, it's essential to grasp the concept of the chart of accounts. This chart serves as a comprehensive directory encompassing every expense, revenue, asset, liability, and equity account where individual financial transactions can be categorized. Essentially, it acts as the roadmap for all your financial accounts. While the specifics of a company's chart of accounts may vary, the crucial point is that it serves as the repository for recording all financial transactions.

In essence, bookkeeping involves the meticulous categorization of every financial transaction appearing on a company's bank and credit card statements into this chart of accounts.

I maintain continuous oversight of our clients' chart of accounts and engage in regular discussions with them. Why the frequent conversations? Well, it's not uncommon for new accounts to be added as companies expand and encounter different types of financial transactions. Conversely, some accounts may become obsolete and are removed.

The objective is to keep the chart of accounts current and streamlined. There's typically no need for multiple accounts dedicated to office supplies, for instance. While the allure of new supplies is understandable, consolidating them into a single account suffices.

Over time, as individual transactions are recorded within their respective accounts, I compile the totals for each account on a monthly, quarterly, or yearly basis. These summarized accounts, constituting a financial statement, offer a clear snapshot of a company's financial performance. Allow me to provide an example.

How bookkeeping helps provide real-time financials

With the advent of cloud accounting software, user-friendly payment gateways, and various automation tools, I have the capability to streamline many bookkeeping tasks, resulting in quicker turnaround times, enhanced efficiency, and immediate financial insights.

My focus revolves around harnessing automation. Here are a few instances:

I can establish "rules" within my accounting system for recurring transactions. This means that when I import or download bank or credit card transactions, they can automatically be categorized into specific accounts. This not only saves considerable time but also minimizes manual data entry.

I can integrate an expense-tracking app with my accounting system. Whenever I come across an expense, whether it's a physical receipt or one in my inbox, the expense app can digitize it and seamlessly update my accounting system. This effortlessly creates a record of the expense.

Additionally, I can utilize a tool like Happay/Zapier to connect my accounting and bookkeeping software with any other apps I use to manage my business.

This level of automation significantly enhances accuracy while eliminating repetitive tasks. With precise financial statements readily accessible, I, as a business manager, have the capability to make decisions based on up-to-the-minute data rather than relying on historical information. The ability to access key metrics on the fly and make informed decisions is nothing short of magical.

Furthermore, if I aim to establish relationships with external stakeholders such as investors, shareholders, or banks, presenting accurate financial reports becomes imperative. Whether it's for securing an investment, obtaining a loan, or pursuing an acquisition, I need to convey my company's financial operations through comprehensive financial statements. Having them readily available when needed is far more advantageous than scrambling to compile them at the last minute.

Clear Key Performance Indicators (KPIs) and other advantages of instantaneous financial insights

Your business probably has specific Key Performance Indicators (KPIs), which are crucial and unique metrics used to gauge company performance. Examples of these metrics include:

1. Revenue growth

2. Monthly sales bookings

3. Net Promoter Score (NPS)

4. Lifetime value of a customer

5. Customer acquisition cost

Often, KPI tracking falls by the wayside simply because companies lack the infrastructure to gather and provide meaningful data.

As you might have guessed, real-time financial information comes to the rescue.

By personally keeping tabs on your company's real-time financial data, you can establish a system for tracking KPIs and comparing them to previous months and quarters as an integral part of your financial monitoring process. With a finger on the pulse of your financial data, you gain insights into various metrics, enabling you to manipulate different financial aspects within your company and assess their impact.

I recently had an engagement with a company that was in the midst of an acquisition process. The acquiring party was highly impressed with their well-organized financial information and their comprehensive grasp of their own business during the due diligence phase. They were able to highlight how their KPIs had changed as the business evolved and even forecasted certain metrics. In no small part due to this, the acquiring company felt confident and swiftly sealed the deal. On the flip side, I've witnessed the opposite scenario, and it's unfortunate how easily it can be prevented.

Real-time financials are an evolution

"Start with the fundamentals, and build from there."

This is the guidance I typically offer to businesses that may not have their financial affairs in order. It's understandable to feel overwhelmed when thinking about catching up on months or even years of bookkeeping, not to mention establishing processes to maintain financial order moving forward.

To ease the transition, seek assistance in getting organized and establishing a regular monthly routine for keeping your financial records up-to-date. Once this foundation is in place, delve into the monthly financial figures to gain a deeper insight into your business's financial health. As you do so, you'll naturally identify specific Key Performance Indicators (KPIs) that should be monitored to gauge your progress toward achieving your goals.

This valuable information can then be used to develop budgets and forecasts, critical data that every growing company requires as it strives to make its mark in the business world.