This is a stream of consciousness concerning the value of accounting for small businesses. I’m not an accountant, I’m a business guy trying to understand how to put a value on what I should spend for accounting. I am concerned with the adage that a man who represents himself in court has a fool for a client. Should I do my own accounting?
Aside from the obvious need to file taxes, it is stated that accounting provides four essential services to a small business. First, it records revenue obtained through the sale of products and services. Second, it provides an accurate record of the expenses associated with the sale of those products and services. Third, it keeps a record of monies owed in relationship to those expenses and finally it is a record of what the company owns.
This is very succinct. So what? Running a company is about cash. Knowing your profitability is important in the long term. However, staying in business in the short term is about cash management. Cash based accounting helps the owner understand their cash position more clearly in the short term, but makes it difficult to determine if the company will be profitable in the long term. There are four types of taxpayers that cannot use cash based accounting; Corporations over $5M, C Corp Partnerships, tax shelters and taxpayers with revenues over $1M requiring inventory. (You might want to talk with your tax preparer about reporting inventory if you are using cash based accounting). Accrual accounting is great for accessing the financial health of an organization over time, but tells you almost nothing about your cash position on a real time basis. Mid-size to large organization use accrual accounting with cash projection reporting. That is they run a separate set of books that keeps track of cash sources and cash uses.
Therefore, it would seem the best approach would appear to be accrual based accounting with a cash projection worksheet. Sounds like double work. I don’t have the time to do this myself. The way I save time is using summary data as opposed to detailed data. The problem with summary data is that it tells me almost nothing about how to run my business better. If I hire someone to do this thing for me, how does the effort pay for itself? I’m a guy that believes you don’t invest in a business expense that won’t pay itself back with profit. So how much net profit will I generate by having a bookkeeper or accountant? That’s a tough one….
Well for one thing, I know inventory consumes cash. Increasing the velocity of my inventory (that is the inventory turnover rate) will help me hold on to my cash longer. In my business, it won’t earn me much interest, but it may help avoid a late penalty on a payment due. Having a detailed analysis of how much I buy verses how much I sell, by item, will help me conserve cash. It might also help me identify waste, spillage or theft.
Knowing the profit margin on each product I sell could help me set pricing better. The market is going to drive many of my prices, so I might end up discontinuing products I can’t make money on. This could help me pay for help.
If my accounting could tell me how much profit-per-employee I make it might help me manage my labor cost more closely. I might also be able to assess how much I really spend on marketing if I can include all the ancillary expenses like meals and give-a-ways. Knowing how much I spend will help me understand its value better. All I really have to do is find a one per cent reduction in expenses or a two percent increase in revenues. With the right help it might be there…. There might even be more…. However, I’m going to have to find someone who understands both my business and how I manage my business… they need to understand both accrual based accounting and cash projections to really be useful..... what I don’t need is another employee to manage….