Good Accounting is so Important

~Elvis Presley

Great accounting is so important for each and every business, but too many are lacking in this area. Most use standard income statements and balance sheets, but there is so much more information business owners need that is not available in these basic financial statements.

For example, one business I am working with offers seven different products. Their only concern had been whether the firm was making money, so they were using only monthly income statements and balance sheets in their accounting. This told them how the firm was performing overall, but not how the individual products were doing.

When we did a rough profitability analysis of their products, we quickly found that one line was losing almost $100,000 a year, a deficit that was being made up by the others. They had no idea they were dragging this dead weight because the firm’s overall profits looked great.

In the case of this firm, they were profitable, but their total-firm accounting system was not showing them that their profits could be even higher if they optimized their product offerings. Once the owners saw this, they were willing to invest time and money in adopting more thorough accounting practices.

With another firm I am assisting, management was running the company based on how much they had in the bank because they had no faith at all in the accuracy of their financials. They just did not trust that expenses were recorded in the right categories and were not comfortable relying on these statements to make business decisions. This approach was keeping them from making optimal decisions.

To address this firm’s issue, we hired a CPA to come in, get the accounts set up in QuickBooks and ensure expenses were recorded correctly. The firm spent about $4,000 for this and hired a new bookkeeper—money well spent because they now have financials they can rely on.

For a final example, a firm with several smaller divisions was taking a total-firm approach to their accounting when they should have been using profit-center accounting to keep tabs on each division’s performance. Accounting by profit centers simply means you are measuring the income from a division or a small part of the business. Doing so is important because you need to be able to hold staff accountable and measure how effectively they are managing the resources they are given. This rests on having adequate accounting in place.

Now go out and make sure you have adequate and accurate accounting practices in place to help you measure your organization’s overall performance as well as the various parts of it.

You can do this!