ask an expert about :: why good bookkeeping is so important

May 1, 2012 / by calvin wilder / Make A Comment / Filed under msv, ZENCubate

Q. until my taxes were finished this spring, i had no idea whether my business was making any money or not. my accountant is really pushing me to hire a regular bookkeeper. he says i’ll be able to better manage my business, but i’m not sure the business can afford to take on this extra expense. is a bookkeeper really necessary to running my business?

A. you’re not alone in failing to recognize the value of good bookkeeping practices. if being able to better manage your business doesn’t excite you, how about being better able to control the lifestyle you lead?

good bookkeeping practices lead to good information. good information leads to better business decisions. better business decisions leads to a larger and more stable income! what business owner doesn’t want that?

here are 8 key financial measurements that good require good bookkeeping. with this information in hand, business owners can gain deep financial insight on their operations. so if you’re not receiving or using this information, you’re depriving yourself of the opportunity to better control and improve your personal lifestyle.

1. total revenues :: which products and services are generating your most revenues. are current levels changed from last year? last month? last quarter? look for trends and relationships — did sales increase in conjunction with specific marketing efforts? did your number of customer transactions increase, decrease or remain the same after you modified your pricing?
2. gross profit :: this is the number left over when you subtract the direct costs of products / services sold from your gross sales (so before subtracting other operating expenses like rent, insurance, etc.) measure this both in terms of dollars as well as a percentage of total revenues. again, it’s all about recognizing trends and relationships. it’s good to know whether you’re becoming more profitable or less profitable, but it’s better to put yourself in a position to figure out why.
3. ratio of sales & marketing spending to total sales :: you should measure sales & marketing costs as a percentage of revenue. what’s potentially more useful, though, is measuring the cost of each new customer acquired (those total sales & marketing costs divided by the number of new customers). knowing how much it currently costs to acquire a customer lets you hone in on which of the ways you acquire customers is ultimately most profitable.
4. general & administrative costs as a percentage of revenue :: this is basically a measure of your overhead, and can by cyclical with growing companies. if your operations are fairly constant, monitoring this number can provide early warning signals for poor expense management or the need to change the pricing of your own products / services.
5. operating profit margin :: quickbooks calculates this based upon your “net ordinary income.” consider maintaining a monthly graph of revenue and operating profit going back 24-36 months so you can easily see your top line and bottom line numbers with margin percentage calculated. this can vary significantly from month to month, so a longer term perspective is important.
6. days sales outstanding (“dso”) :: this is a measure of how fast you’re collecting your accounts receivables from customers (it literally calculates how many days’ worth of sales you’re waiting before you’re paid by customers. you calculate this number by dividing your month-end accounts receivable balance by the total amount of revenue invoiced during the month and then multiplying the result by 30.). benchmarks vary by industry, but lower is better. generally speaking, for companies extending 30 day terms to their clients, a dso in the 30-40 day range is reasonable for many industries.
    
   that said, no matter where your dso lies most businesses can usually improve their number. identify trends by comparing your dso to last year as well as to the last couple of months. and remember that dso only measures the efficiency of your collections — not their effectiveness or your overall profitability and cash flow positions.
7. the year-to-date cash flow statement :: this report translates your reported profit or loss against changes in actual cash. unfortunately, many business owners learn the hard way that cash flow can be very different than reported profits, and the cash flow statement shows why. because cash flow may vary significantly from month to month, a longer term perspective is better for tracking actual results and trends.
8. return on equity (roe) :: this measurement is especially important for capital-intensive businesses with a lot of property, equipment or other investments. to compute the annualized percentage of your roe, divide the value of shareholder’s equity on your balance sheet by your quarterly profit and multiply the result by four. if debt is a major part of your capital structure, ask your accountant to substitute return on invested capital measurement instead of return on equity.

understanding which financial statements are important for your business, how to make sure you are getting them (and in a timely fashion), and helping you use this knowledge for corporate health and profitability is one of the things we do best. so if you’re unclear on how to take advantage of this information, leave a comment or join the main street ventures small business community (membership is free) and take advantage of the “ask-an-expert” feature to get your answer.

calvin wilder is the president & ceo of SmartBooks, offering financial services solutions that helps small businesses across the nation transform their bookkeeping from a liability into an asset. join our on-line community and bring his expertise to bear on improving your own company’s finances & operations.