In Part 1 of our September series, we walked through some simple ways to set up and use your Chart of Accounts. Why focus on such a mundane aspect of your business? Because, like anything else, if you don’t understand it, you won’t give it proper attention. Your financial statements are only useful to you if you can read them, and if your accounts are disorganized, you won’t want to read them. Your accountant will be (and should be) embarrassed. Your banker will make that face at you (you know that banker-face).
Remember, your financial statements are not just numbers. When interpreted and understood properly, numbers take the form of language. Your financial statements tell a story. When your statements are not well-organized, the story they tell is: “I have no clear idea of what’s going on in my business; I’m just working really hard and hoping for the best.” (Insert Unhappy Banker-Face here).
When those statements are well-organized, you can run accurate comparative analyses, and you can do it quickly: How are we doing versus last month? Versus the same month last year? Versus the same quarter last year? Have any unexpected patterns started to occur?
- Did my profit drop because of less sales, or because of a bunch of “less-profitable” sales? When or why did that start happening?
- Is that new line of business we started up last year really working? Let’s look at it in isolation.
- I’m suddenly sitting on a bunch of cash. That’s good, right? But wait…let’s see if that’s just because we’re slow now, and not billing out much new work – which could mean trouble ahead.
Now you’re starting to tell the story. That story may be good or bad, but at least you know what it is, and you can set out to fix what’s wrong (as opposed to just “fixing something” that isn’t even the problem).
Let me turn your attention to another highly useful tool: In QuickBooks (about 95% of our clients run QuickBooks), be sure to set up Classes and Items for maximum effectiveness. Classes, generally, should be the key segments of your business (divisions and product lines are typical examples, but in a Professional Services business, your Classes might be individual employees / contractors that you use). Items should usually include “things that you do” or “things that you sell.” For instance, “Office Visit” might be one Item for a medical practice. Learn how to use Classes and Items in the way that best fits your business, and a wealth of informative reports will be open to you, for better decision-making.
Learning how to use your accounting software effectively is a “must-do” for every business owner. Talk to your trusted advisor about how to improve in this area, and start taking control of your business story.