I had a really interesting conversation with one of my advisors from the Goldman Sachs 10,000 Small Businesses Program yesterday. He was astounded by how many small businesses don't understand their bookkeeping and dismayed by those who see no value in it.
We commiserated over the many successful small businesses who don't have an adequate bookkeeping system in place to understand their current situation. They don't even know the status of their accounts receivable (AR), accounts payable (AP), or cash flow.
My advisor was especially concerned about the many businesses who didn't have a basic understanding of cash flow. He said he has seen numerous businesses fail because they didn't have a system in place that showed them when they were running out of cash.
I resonated with this conversation immediately because I have a masterful system to manage cash flow using QuickBooks. The real problem is that most small businesses don't have a good bookkeeping system in place. This may be for a number of different reasons.
You Are Out Of Your Element
Let's face it... not everyone understands accounting. Of those who do understand it, most don't enjoy it. Good business owners understand the importance of accounting, but they also know that it is not worth their time to handle the bookkeeping themselves.
The majority of business owners are intimidated by their bookkeeping, so they neglect it. Others think that bookkeeping is easy, so they attempt it themselves or have a friend or relative help out. Either way, both types of owners usually end up creating a huge mess that contains inaccurate financial information. All of this leads to a bookkeeping system that doesn't report on basic numbers like AR, AP, or cash flow. This leaves the owner running the business blind.
You Are Freaked Out About Your Entrepreneurial Leap
When people leave their secure full-time job and start a business, they are usually quite excited. They are ecstatic that they finally made the leap and have their own business. Finally, they are following their passion and couldn't be happier.
Then reality sets in and they have what I refer to as the "Oh sh*t!" moment. They realize that it is up to them to bring in sales, make payroll, and take care of not only themselves and their family, but also all of their employees. So they freak out and they sell.
All You Want To Do Focus On Sales
Before I get into this section, I want to state that I feel sales are very important. Sales are the lifeblood of the business and can be the determining factor between succeeding and failing.
Inexperienced business owners get in trouble when they focus too much on sales and don't take the time to properly track and analyze their sales numbers. The fear factor that I mentioned above causes them to sell to everyone, and they often close the wrong types of deals.
If you had focused on measuring your sales, you would know who your ideal customers were and which customers you shouldn't even engage. This would help you sell better and become more profitable.
By focusing on sales too much, and not on measuring sales, people get into cash flow problems and eventually run themselves out of business before they even have time to react.
You Haven't Felt The Pain
When I ask prospects what they are currently using for their bookkeeping software, I often hear, "I track everything in Excel." I know immediately that I am dealing with a person who has not felt the pain of running a business without a proper bookkeeping system in place.
If you bring an angel investor or a bank into your business and show them an Excel-based bookkeeping system, you will not be getting any money. If you bring your CPA an Excel-based bookkeeping system, you will either get a huge bill or be told to go get a bookkeeper.
Then there are the business owners who have no bookkeeping system in place. When they try to raise money, get a bank loan, or file their taxes and they fail because they don't have a bookkeeping system, then they feel pain. After they feel the pain, they understand the importance of bookkeeping but still don't know how to get it done.
Finding Value In Your Bookkeeping
Bookkeeping is so much more than just a means to filing your taxes or getting a loan. Your bookkeeping is a growth tool that can take your business to a new level. But how can bookkeeping help your business grow?
If your bookkeeping were so accurate that you had an update on AR, AP, Inventory, and actual cash flow every single day you operated, would that be valuable?
If—instead of looking at last month's P&L 15 days after the month closes—you had a P&L every day you operated, would that be valuable?
If you were able to look into the financial future of your business with extreme accuracy and spot potential opportunities or problems, would that be useful?
If you answered yes to the above questions, but your current bookkeeping system does not provide you with that information, it's time to make a change.
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