In a recent blog post we discussed 5 keys to forecasting. The first of these keys, and in our opinion maybe the most important, was to base your forecast on your current reality.
Wait a minute.. "base your forecast on your current reality"? What else would someone base a forecast on?!
The Reality of (most entrepreneurs') Reality
Appreciate firstly that the definition of reality in this context is fluid. When we speak of "current reality", we are speaking of one where a healthy financial system exists. Everything is in order: receipts and expenses are submitted on time, invoicing is as current as it can be, and bank information is tied to this documentation in quick order. Here, the finances of the company can be determined in a real time basis. It is a state of small business accounting bliss. There is no guess work, only facts.
Now, let's look at an entrepreneur's version of reality. Despite what over-glorified tech successes like Facebook and Google might have you think, the vast majority of small business owners are stretched and stressed. Hence the advent of the term "unicorn". Statistically, success is RARELY quick and easy. For most entrepreneurs, this then means operational issues come first, and financial issues come second... or third... or fourth... or... you get it.
Within this "real reality", there is no thought put into accounting systems or processes. Doing anything is a chore:
- Receipts are often disregarded, getting left on a car seat or dashboard... in an envelope in a drawer... in the a pockets of your favorite jeans (that just got washed).
- Invoicing is a grind, regularly behind and "people" are thrown at the issue to solve it.
- Bank information is correlated to the current account balance, seen only when people log into their online account to see if they can pay a bill.
A lot of people are probably nodding (perhaps secretly in their head), that the above examples sound oddly familiar. In "real reality", most small businesses' financial systems are in shambles. They are not current or accurate enough to use properly for good and timely decision making. So how do entrepreneurs and small business owners move from here to a reality where accounting systems can be used effectively?
5 Steps to an Awesome Accounting Platform
Here is a rough guide to achieve a state of small business accounting bliss:
- First and foremost, most small businesses thrive on credit card purchases, so get a handle on receipts:
- While usually the smallest dollar amounts, receipts add up and are hard to collect and enter into accounting systems due to their volume. To get around the volume, make a habit of dealing with receipts on a consistent and timely basis (regardless of how you deal with them).
- Related to the above, don't let receipts pile up. Simple psychology can quickly take hold, making the thought of tackling your receipt shoebox seem like a huge ordeal. It also will likely end up costing you more money, providing a pile of unorganized receipts to your bookkeeper or accountant.
- No, you can't ignore receipts... bank and credit card statements only validate that payments were made. To claim deductions the CRA has specific requirements around what constitutes evidence of a purchase.
- With receipts handled, move on and take a high level look at your overall accounting processes (or lack thereof). Establishing and revising processes can have a profound effect on the efficiency with which data can be collected. And the easier it is to do something, the more likely it is to get done. Think about:
- What methods are easiest to collect the information? (digitally or manually?)
- If you have a third party handling your accounting and bookkeeping, what is the easiest way to get it to them? (email, scan, shared cloud storage, snail mail... horse and buggy?)
- Instead of throwing people at problem areas, is there a better way to do things? (could a change in payment methods as an example, streamline your sales invoice process without affecting sales?)
- With processes in mind, take a good, hard look at the accounting software behind them. As the centerpiece of your financial systems, your accounting software needs to fit well with your habits and operations. And remember, what works well for one small business, might work terribly for another. Consider:
- All of the costs. Most small business accounting software is competitive in price these days. Some desktop versions might appear cheaper, but have hidden costs that make them comparable to cloud versions. Similarly, ERP systems might be more expensive than first thought once all functionality is considered.
- Be prepared to pay. A number of entrepreneurs worry about the smallest costs... and they should... just not for what is likely the second most key system in their business (behind operational systems). Cheaping out on integral systems will likely sacrifice your long term ability to scale and grow.
- Functionality. Some platforms position themselves as full bodied accounting software when they are not. They miss key functionality in expenses and reporting. Some platforms also play nicer with other software than others. This can save you time and money as you grow.
- After establishing a solid foundation of a great system with a framework of processes feeding into it, start stepping out of the box. There is a host of software available today that can make your life infinitely easier (going back to earlier points, just make sure you use them!). Great examples:
- AP automation - remember those pesky receipts? A number of apps can help you collect them, and even enter them for you into your accounting system. Check out: Hubdoc, Expensify and Receipt Bank.
- Payment automation - not only can you automate away some data entry, you can also lose your cheques. Take a look at: Plooto and Bill.com.
- Bad debt collection - yes you can now have a "bot" chase people that haven't paid you: Debtor Daddy, Chaser and Invoice Sherpa.
- After following the rough guide to this point, you might still be feeling some pain points. Now would be the time to look at getting some specialized human talent (in house employees, outside bookkeeper, contract accountant, etc.) behind your amazing systems. The main point being, that systems and processes can have a significant effect on efficiency prior to this.
Getting financial systems to a state of harmony will take some time and thought. Once done however, the disdain that most small businesses see within their accounting will disappear. If fact, with consistent, quality data, companies will:
- Be more nimble and scalable as a whole.
- Realize better decision making from the use of better data (remember, it's a key first step in budgeting and forecasting!).
- Have lower costs in the long run (i.e. better decisions, but also less interest and penalties, late filing fees, risk of audit, etc.).
- Have higher sales prices upon the sale of the business (i.e. high quality data and processes can often improve sales multiples when businesses sell as it reduces perceived risks in the buyer's eyes).
Sounds like that accounting system should get fixed sooner rather than later!
At Twenty Eighty we love to help. As part time CFOs, part time controllers and small business accountants, it's our M.O. to analyze, assess, educate, and bring our clients from a point of "you don't know what you don't know" to a place of harmony within their small business (financial, accounting and otherwise). We believe that business planning and strategy execution is key.