When clients ask me to demystify the concept of bookkeeping, I typically explain that it’s just a standardized way to keep financial records for your business. Without going into detail regarding the intricacies of each accounting methodology, the main point is that bookkeeping at its core is a way to collect, report and maintain your businesses’ financial information in a standardized, repeatable way. It’s no different than how you might track the scoring stats of your favourite hockey team.
That was then
For the astute business owners out there, you probably have a relatively accurate idea of whether you’re making money or not generally, even if you don’t have a high level of precision on that insight. Where bookkeeping has often created the most value is in external reporting situations, such as preparing financial statements for an investor or creditor, or as the starting point for preparing a corporate tax return. While bookkeeping is a necessary business function, it has often been viewed as a mere compliance exercise that has to be done in order for the business owner to focus on what they actually got into business to do. But this is neither weakness nor failure. I mean, who starts their own business simply because they love record-keeping and administration (other than accountants, of course . . .)?
Once upon a time, high quality bookkeeping could certainly make year-end accounting work more streamlined, but there was ultimately a limit on how much benefit could be created. Year-end assurance engagements could be done more quickly, with less headaches for owners. Issues with tax reporting could also be minimized to a certain degree. But, at the end of the day, good bookkeeping was mostly about reducing administrative burdens on business owners.
This is now
In the past, bookkeeping was done on paper or on desktop software where the data remained locked and difficult to access and analyze, limiting its usefulness. Today, with cloud-based bookkeeping software, a business owner’s financial reporting function can now truly become part of a larger business operating system. While this new class of software allows for greater automation, it also unlocks a treasure trove of data that business owners and their advisors can use to make better decisions going forward. Instead of being exclusively about telling external users what happened in a business’s past, good bookkeeping can be used to support decisions around a business’s future. This is the difference between awarding the Maurice Richard Trophy to the NHL’s top scorer and deciding whom to put on the ice when you’re down in the third period of game seven.
By using software that can help to analyze this data and combining it with a CPA that has experience in business data analysis, businesses can now employ the data generated by their bookkeeping function to help them decide on how to allocate the resources of their business. This is, fundamentally, the main job of any business owner. Do you need to hire more staff? Do you need to automate? Do you need to purchase more assets? Will you need a loan in the next few months? What will happen if you lose your best client? What will happen if you lose your worst? These are all questions that good bookkeeping can enable business owners and their advisors to begin to answer together.
The two-line pass
I had a friend who worked for a small business in Toronto that provided various construction services to a range of clients. One of those clients, responsible for a plurality of their revenue, was constantly demanding revisions and updates to their blueprints. On a purely revenue basis, it made sense to cater to this client’s every whim. Who wants to wake up one day and find 20 per cent of their revenue gone? My friend, though, ever the data geek, decided to see how much this client was actually contributing to their gross margin—a very different question from asking how much they contributed to their revenue.
After calculating the return on his time for this client, what he found was that the attitude of “this is our biggest client so we need to everything we can for them” had caused them to spend so much extra time on them that it was eating away at their margins. Despite being one of their largest clients by revenue, they were actually one of the smallest contributors to the bottom line. My friend and his boss were now left with a choice: they could keep things the same or they could increase this client’s fees to bring them in line with the rest. They decided on the fee increase, which the client rejected and went elsewhere. But my friend, suddenly finding himself with a lot more time than he had before, was able to go out and find new clients. Their company has since replaced that lost revenue (and then some) and now has a larger bottom line than they did before. Had my friend never endeavored to put the data he had to good use, he never would have been able to convince his boss to make that decision and he’d still be running around trying to please what he thought was a good client, at the expense of the clients that were actually helping him realize his vision.
Toward the Hall of Fame
Maybe one day you’ll find that who you thought was your best client (or employee, or networking contact) is actually your worst, or maybe vice-versa. Ultimately, you should be looking at bookkeeping as a value-added component in a larger system that can be leveraged to make better decisions so that whenever you shoot, you score.
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