You’ve probably heard the expression, “Garbage in, garbage out.” It originally applied to computer hardware and software, but it also works for the financial side of your business. You have to create a financial system that clears out the garbage if you want to succeed.
Your system should give you accurate and useful information so you can see how you're doing and you know when to act. These five easy steps will help you create a simple financial record-keeping system: capture, check, record, review, and act.
Capture the Information
If it isn’t there, it doesn’t exist. Get in the habit of capturing everything as you start your business. After a while, it will become automatic.
“Capture” is the most difficult step and it's the most important part of the process. Keep track of every amount you spend on your business and every amount you take in as sales. Take care to keep personal and business expenditures separate even if you always pay your business back when you pay personal expenses out of that account.
Don’t worry at this point about doing anything with the information. Just get in the habit of gathering it. Be sure everything you capture includes a description of the item, the amount, and the date
Check to Make Sure the Information Is Complete and Correct
Spend an hour every two weeks or so going through everything you've captured and made sure that all the information is ready for recording.
Be sure you've included enough detail on what the expense was about so you can record it accurately. A note for “paper, $3.55, 7/12” might not be enough. What was the paper for? Was this a newspaper you bought for the office or did you buy a ream of paper for the computer?
Set up a specific time for a "check everything" appointment with yourself at the end of alternate weeks—for example, every other Friday. Don’t wait too long or it will become more difficult to remember information.
Record the Information to Save It
Recording means putting your financial information into a usable form. Turn everything you've checked over to your bookkeeper to record or record it yourself. Do this monthly.
Input the information into a spreadsheet or accounting software. You might find that online software works best for you—you and your bookkeeper can both see the information and discuss it. Just be sure you get everything recorded each month so you can review it.
Consolidate and Review the Information
After your financial information has been recorded each month, print out four reports: a balance sheet, an income statement (p&l), an accounts receivable aging report, and an accounts payable report.
Include a comparison with the same report information from last month with each report. Pay special attention to specific information within these reports.
The most important financial statements are your profit and loss statement and cash flow analysis.
Act Based on What You Know
"Act” might mean doing nothing if everything looks all right. But at other times, it might mean making a change.
Create trigger points where the information compels you to act. If you see liabilities increasing each month for three months on your balance sheet, this probably means assets or expenses are also increasing. Cut back on spending.
If you see that a particular expense is increasing as a percentage of sales on your income statement, ask yourself why. You might want to cut spending on other expenses to maintain your profit level if the increase is necessary.
Be assertive in going after slow payers that turn up on your accounts receivable aging report. The longer you let a debt go unpaid, the less likely it becomes that you'll ever receive the money. Set up a collections system to make sure you’re paid promptly. Don't let slow payers assume that you don’t want your money because they haven't heard from you in a while.
As for your accounts payable (your bills), pay what you can as quickly as you can. You can often get discounts by paying early. If you can’t pay all your bills, pay those that will cause you to incur penalties or that will affect your credit rating if you're not prompt.
Even if someone else is responsible for paying bills, you're ultimately responsible for making sure your business debts are paid.
Your Business Credit Rating
If you want to keep your business separate from your personal financial life, you'll need to work toward getting a business credit rating. Dun & Bradstreet (D&B), Equifax, and Experian are the primary business credit bureaus.
Keeping Records for Tax Purposes
Another important reason to keep excellent business records: tax time. Well organized records make your tax preparations easier and help prove expenses if you are audited by the IRS, your state, or other taxing authorities. The IRS has specific requirements for how long you must keep business records for tax purposes.
The Bottom Line
Even if you’re not familiar with financial systems, you should be able to set this one in motion and keep it running with minimal effort. The most difficult part is collecting the information. After you've formed the “collection habit,” you’ll find the rest will come along.
Remember CCRRA: Capture financial information for your business, check it every other week, record and review the information monthly, then act as necessary to keep your financial situation moving along smoothly.
You’ll minimize the “garbage” and the problems that come with it and you'll maximize your financial situation if you follow this simple five-step system. A well-organized financial system should keep your business viable for many years to come.