Small Business Key to Sustainability: the Accounting Issue

When you buy from a small business, your money doesn’t go to some big shot executive’s pocket; rather, it allows a little girl an opportunity to take ballet lessons, or a little boy to practice soccer.  Small business is what seems to drive the American economy.

According to the Small Business Administration, small businesses represent 99.7% of all employer firms, and generate over 60% of new jobs and almost 50% of total payroll. That’s a huge number considering that it sometimes seems the larger firms have tens of thousands of employees around the country.  Well, small businesses run this country so attention must be paid to what makes a small business successful.

Small Business Owners Struggle with the Math

Small business accounting entails a lot of mathematical knowledge and skills. One mistake can lead to a huge business disaster. So, it’s crucial for startup business owners to have basic knowledge on small business accounting. 

It’s a good thing that small business accounting services are also available, helping business owners in preparing Business Activity Statements (BAS). Small business accounting services also help monitor business finances regularly and provide expert accounting and financial advice.

Now that you have an idea how small business accounting services can help you, let me share with you my professional accounting experience. 

I started out as a bookkeeper back in 2005. I’ve worked with small businesses and start-ups throughout my career, and what I’ve found is that:

1. Many owners struggle with the financial aspect of running a business, and as a result
2. Many small businesses run into cash management problems at one point or another.

I often hear from business owners that “Math is not my strong suit,” or “I trust my bookkeeper and/or CPA to deal with the financial side of the business.”  This is where small businesses often run into trouble.

Knowing the accounting basics and applying them to one’s own business is THE key to success.

Check out the most important basic accounting concepts that business owners need to know:

Accruals

Accrual basis accounting is one of the main accounting methods small businesses can use to have a better understanding of their financial status than cash basis accounting. It involves matching expenses and income to the time they were incurred to identify expenses and financial business trends better than cash basis accounting for business management purposes.

Materiality

Small businesses must record all financial transactions that can materially affect the business, giving a comprehensive financial look. Materiality involves using helpful tools, such as business accounting software to accurately record all small transactions.

Consistency

The consistency accounting concept involves choosing an accounting method that a small business should follow for all financial records. This will help mainly in comparative analyses as the method stays the same. 

Dreamer vs. Planner

Every business owner can be either a “dreamer” or a “planner.” Dreamers are your visionaries, i.e. managers who see the big picture & make 5 and 10-year plans for a business. Planners are those who know the mechanics of running a good business.

From my experience, a business owner is typically either a dreamer or a planner, and in rare circumstances, he/she is a bit of both, with a slight skew in either direction. I believe that in order to be successful, a small business owner must be both. If he/she is a dreamer (which is often the case) learning to be a planner is an absolute must.

The next step would be getting the right team in place which is what we will discuss next. If a business owner is a planner, learning to see the “big picture” and looking at his/her business and it’s positioning from 20 thousand feet is attainable and highly recommended. Make sure to engage and utilize the right technology & pursue operational efficiencies even if you’re well-funded.

Have The Right Team in Place

Having the right team in place is key. In fact, Brian Cohen, chairman of the New York Angels, in his book What Every Angel Investor Wants You to Know, talks about the fact that a group of angel investors would much rather invest in a so-so idea with a top-notch team then into a brilliant idea with a so-so team.

What does that tell you? It tells me that success depends on a great team more than on a great idea. In my experience, getting the right team in place does not have to cost you an arm and a leg. In fact, you can save money in the beginning by simply getting the right people in place.

I’ve seen many instances of business owners distancing themselves from the financial aspect completely, and ending up with an employee who is stealing or draining the business’ cash to the point of no return.

First, chose the right accountant.  Nowadays Certified Public Accountants try to be more than once-a-year-advisors, which is a great trend. The problem is, however, not many of them succeed, again, from my experience. What I’ve seen is that accountants are involved in the very beginning of a business’ life, and, since many of us take on more than we can handle in an attempt to “make” more money, we often “drop the ball” at one point or another.

On top of that, our hourly fees are usually so high that having a CPA involved on a regular basis in the beginning can be cost prohibitive. Another scenario is getting someone inexperienced or someone who is purely finance-oriented (there is a whole other article to be written on that). So, how do you, as a business owner, deal with all of this? How are you supposed to know?

Expensive Doesn’t Always Mean Good

Let me say that expensive doesn’t always mean good when it comes finding the right accountant & bookkeeper. Ditto for cheap and bad… Furthermore, as technology becomes a more and more important part of our personal and professional lives, watch out for accountants who refuse to be on board with technology.

There is no immediate threat but chances are that soon enough their expertise will be outdated and YOUR business can suffer. I consulted a client some time ago, who told me that he’s been using QuickBooks Online (doing bookkeeping himself) for years. Then his new CPA switched him to QuickBooks Desktop (my guess is that they weren’t as comfortable with the cloud version of QuickBooks). After several months the client took it back to QBO. The fact of the matter is QuickBooks Desktop is so last Century at this point.

You can have a solid bookkeeper coupled with a pro-active CPA-advisor. There is a variety of options available:

• Full-time bookkeeper with a once-a-month or once-a-quarter CPA
• Part-time bookkeeper with a more involved CPA-advisor
• No-bookkeeper with just a CPA-advisor.

There is no right answer for every business because each of those businesses is simply different.

Some businesses have heavy transaction volume and require a full-time bookkeeper. Some owners update the books themselves and just need an experienced accountant-advisor to make sure they understand the business trends and important metrics.

An experienced accountant-advisor will actually be able to HELP you determine what would be the most efficient scenario, given your business’ intricacies and budget. Beware of the “finance-only” advisors, who lack the tax and accounting experience altogether. Advice they provide may be solid, but without tax and accounting implications it can get unrealistic and lead you to make the not-so-smart business decisions.

How to Hire The Right Bookkeeper

When the time comes to pick a CPA/Accountant-Advisor, do your homework first. Make sure you understand the basics by reading some of the sources listed in this article, then ask for recommendations AND ask questions. Consider several candidates.

Finding the right bookkeeper is a different story altogether. In my 13 years of working with small businesses, I’ve been a full-charge bookkeeper & a part-time bookkeeper myself, before becoming an Accountant and then getting my MBA. Over the years I’ve worked with numerous bookkeepers. I’ve learned to anticipate their errors, guide them and explain why some things must be done in a certain manner. Most of the time it’s a bumpy road, unfortunately. There are several reasons for that, again, from my experience.

Becoming a bookkeeper nowadays is very simple. All one needs is the ability to use QuickBooks (that is the number 1 small business software and I love it, although I am not “married to it”). QuickBooks makes it super easy to manage the books. Issues arise when opposite of “normal” balances surface and the tax accountant starts asking questions. Or worse, when you realize someone is stealing. How do you mitigate those risks? How are you, as a business owner, supposed to tell a good bookkeeper from a bad one? I’ve come up with a few indicators you can use.

• Before you hire a bookkeeper, run a background check (with their consent – it’s required) for both bankruptcies and criminal convictions. You are looking for fraud/theft and the like (or worse…). It’s the best $50-70 you’ll ever spend.
• Check to see if they have taken some accounting principles. Ask them to provide an example of a Current Asset, Long Term asset (and explain the difference), same with liabilities. Ask for an example of an Owner’s Equity account.
• Ask your candidates to write down the basic accounting equation, with expanded Equity section. Ask them to specify “normal balances” for each of the account types.
• Ask them to perform a bank reconciliation and delete a small bank/interest charge ahead of time. See if the candidate “adjusts” the difference for being small, or reconciles carefully and bring up the difference to your attention.
• Look for a personality match. Make sure the person has an attitude of an enthusiastic problem solver vs. a grumpy processor, which many of us are (unfortunately, it’s the nature of the beast and I have been guilty of that in the past).

What’s Next?

So you’ve done your homework and hired a great candidate. What’s next? Well, my advice is to keep your hand on the pulse.

Review reports (which you should be doing anyway as a frugal and savvy business owner), read Your First CFO by Pam Prior, do unexpected checks and balances, and trust your gut.

It doesn’t mean you have to be involved in the everyday minutiae, but keeping a cool head somewhere between macro and micro is crucial.  The fact of the matter is that accounting is a double entry system, so for every debit there must be a credit. Any suspicious entry will eventually make its way to either a Profit & Loss statement OR a Balance Sheet, if you know how to read those; and if you don’t – learn it now!

You can always ask your CPA to review reports for suspicious items once in a while, pay them per hour and insist upon a senior person doing that (maybe even someone with forensic training and an open mind). Try to avoid doing this in March-April and August-September, at all costs, as you will unlikely receive the person’s full attention, because most of us are probably overwhelmed with work during those times.

Conclusion

Ideally, over time you will learn how to be a savvy business manager. You don’t need an MBA for that, but you cannot afford to be lazy and/or ignorant when it comes to finances, no exceptions and no excuses.

The first principle I’ve learned in accounting is that CASH is KING, therefore, getting some basics on managing cash is critical to your business’ success. Read, read, and read. Educate yourself. Remember that revenue growth is awesome and I see many business owners assessing the health of their businesses by looking at the top line alone, which is a serious mistake (see Profit First by Mike Michalowicz).

Furthermore, business growth in general is fantastic and desirable, but it requires daily cash management & owner involvement, now more than ever before.

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