You’ve probably heard the expression, “Garbage In, Garbage Out.” This phrase, originally applied to computer hardware and software, also works for the financial side of your business. If you want to succeed, you’ll need to create a financial system that clears out the garbage and that gives you accurate and useful information to see how you are doing and so you know when to act on this information. Here are five easy steps in creating a simple financial record keeping system: Capture, Check, Record, Review, Act.
First, CAPTURE the information. If it isn’t there, it doesn’t exist. As you start your business, get in the habit of capturing everything, so it becomes automatic. “Capture” is the most difficult, and the most important part of the process; it’s a matter of forming the habit of collecting information. Keep track of every amount you spend for your business and every amount you take in as sales. Don’t worry at this point about doing anything with the information. Just be sure everything you capture includes (a) a description of the item, (b) the amount, and (c) the date.
Second, CHECK. Every two weeks, spend an hour going through everything and checking it. Check to see that all the information you have is ready for recording. Be sure you have included the date and amount, and enough detail on what the expense was for that you can record it accurately. For example, a note for “paper, $3.55, 7/12” may not be enough information. What was the paper for? Was this a newspaper you bought for the office? Or did you buy a ream of paper for the computer?
Set up a specific time for an appointment with yourself at the end of alternate weeks (every other Friday, for example) to check everything. Don’t wait too long; the longer you wait to do this, the more difficult it will be to remember and collect information.
Third, RECORD. Recording means putting your financial information into useable form. After everything is checked, turn it over to your bookkeeper to record, or record it yourself. Do this monthly. Input the information into a spreadsheet or accounting software. You might also find that online software works for you, so you and your bookkeeper can both see the information and discuss it. Just be sure you get everything recorded each month, so you can review it.
Fourth, REVIEW. After your financial information has been recorded each month, print out four reports:
Finally, ACT. In most cases, “ACT” can mean doing nothing, if everything looks all right. In other cases, it might mean making a change. Create “trigger points” where the information compels you to act. Here are some suggested trigger points:
- Balance Sheet. If you see liabilities are increasing each month for three months (which probably means assets and/or expenses are also increasing), cut back spending.
- Income Statement. If you see that a particular expense is increasing as a percentage of sales, ask yourself why it’s increasing. If the increase is necessary, you might want to cut spending on other expenses, to maintain your profit level.
- Accounts Receivable Aging. Be assertive in going after slow payers. The longer you let the debt go unpaid, the less likely it is that you will receive the money. Set up a collections system, as I discussed above, to make sure you’re paid promptly and that slow payers are not left to assume you don’t want your money.
- Accounts Payable. Pay what you can as quickly as possible. Try to pay early to get discounts. If you can’t pay all your bills, pay those which will cause you to incur penalties, or which will affect your credit rating. Even if someone else is responsible for paying bills, you are the person who is ultimately responsible for making sure your business debts are paid.
Even if you’re not familiar with financial systems, you should be able to set this one in motion and keep it running. Tthe most difficult part is collecting the information. Once you have formed the “collection habit,” you’ll find the rest will come along with it.
Remember, CCRRA- Capture financial information for your business, Check it every other week, Record and Review the information monthly, then Act as necessary to keep your financial situation moving smoothly. If you follow this simple five-step system, you’ll minimize the “garbage” and the problems that come with it and you will maximize your financial situation.
A well-organized financial system will keep your business financially viable for many years to come.