Why Financial Timing Changes Everything for Growing Businesses
Most business owners don't even think about bookkeeping until there is a problem with the numbers. They are surprised when a payment to a vendor bounces, that there is not enough money to pay employees, or that there is a large unexpected tax bill. By then, the situation has long since passed, and any decision that could have prevented the problem has long since been made and is now out of reach.
Timing is everything when it comes to your business. Your financial statements arrive three or four weeks after the numbers have been closed for the prior month. By the time these financial statements arrive, the decisions have already been made.
Therefore, many growing businesses make sure they have a system in place to track and determine their financial situation on a daily basis. The numbers are always up-to-date, so the owner can make the best possible financial decisions on a timely basis.
The Real Cost of Waiting on Your Numbers
Most bookkeeping is done on a batch cycle. That is to say that a whole bunch of transactions are added to the books at one time. Then, sometimes at the end of the month, all of those transactions are reconciled in order to make a set of reports. For many small businesses, this is how bookkeeping is done.
When you finally receive your financial numbers (i.e. your P&L statements), it is usually too late. For example, a restaurant owner may not even realize that his food costs are increasing until he receives his monthly P&L statement and sees that his profit margins are decreasing. By that time, 3 to 4 weeks of poor profit will have already occurred.
A contractor may bid a job based on last quarter's numbers. By the time he finds out that his material costs have increased, it may be too late to change the bid. In both of these cases, nothing wrong was done; the owner was just making the best decisions he could with the information that he had. The problem was that the information was stale.
U.S. Small Business Administration statistics have shown that cash flow problems are a major cause of failure for small businesses, largely because their owners have been misled by a delayed view of their cash position. When data lags, so too does the response to problems that have already been affecting a company for weeks.
What Changes When Your Books Are Always Current
With real-time bookkeeping, transactions are categorized and reconciled on the same day they are processed as part of normal business bookkeeping. This means that, as opposed to having to wait until the end of the month for your financial reports, you will have access to up-to-the-minute information on your business's current financial situation.
This information is made available to you through the use of platforms, such as QuickBooks Online and Xero, that utilize bank and credit card feeds to automatically pull in all of the transactions associated with a business. Invoices and their corresponding payments can also be synced in real-time using tools, like Bill.com.
Current books give you current information, and with current information, you can make the right decisions. Most decisions, though, are made based on numbers that are already out of date. Maybe they're from last month. Maybe they're from last quarter. Either way, they don't reflect where the business actually stands today. The books haven't been closed yet. Those transactions haven't made it into a report. And that report hasn't landed in your inbox.
Continual accounting also proves value in terms of being ready to provide up-to-date financial statements (i.e., a current Balance Sheet) to lenders and/or investors. In such situations, having current books and being able to generate current financial statements in real time will make for a more favorable impression than if a business had to wait for two weeks to 'catch up' on the books.
As reported in The Journal of Accountancy, practices relating to continual accounting are rapidly being transformed, and such practices are now increasingly being applied by large public companies. However, as these same reporting practices are increasingly being applied by the accounting services of growing small businesses that deal with lenders and/or outside investors, it is clear that such practices are rapidly becoming applicable to smaller businesses as well.
Making the Switch
Moving from batch bookkeeping to real-time bookkeeping is not a single decision but rather a series of smaller decisions.
- Choose the right software. QuickBooks Online and Xero are two examples of accounting software for small businesses that support real-time bookkeeping. These programs are able to automatically import the transactions of your bank accounts and credit card companies, to name a few, into your accounting software. In addition, they support automatic receipt capture as well as payroll processing. Thus, there is very little manual data entry required to keep your books up to date.
- Automate your financial inputs. Enable the bank feed functionality for your financial accounts to automatically transfer data into your financial software; use apps that automatically capture receipts for purchases to automatically capture data for those purchases in your financial software; and use payroll integrations (such as with accounting software integrated with Gusto for employee benefits) to automatically capture and process financial information for employees and their benefits in your financial software.
- Set up a review schedule. Make sure someone is reviewing the real-time financial data on a regular basis. This could be as simple as reviewing cash position and receivables on a weekly basis for 15 minutes.
- Categorize correctly, from the beginning. Even with automated financial inputs, someone has to verify that all financial transactions have been correctly entered into the proper financial account. For job costing, or for businesses with multiple financial entities, this is especially crucial. This is not a problem that automation alone can solve; it requires a person. An outsourced accounting team is able to help its clients get their bookkeeping (and the categorizing of their financial inputs) correct and in place.
Automation handles the inputs (e.g., bank and credit card transactions) into the system for bookkeeping. However, there are two additional things needed. First, someone needs to review and verify all the categorizations of transactions to the correct accounts for financial reporting and decision-making.
Many businesses hit a wall here as categorizing transactions between, for example, cost of goods sold and operating expense is complex and must be performed by someone with considerable knowledge of financial reporting for the specific business.
Second, the books of a business for financial reporting purposes must be set up correctly to generate reports on the correct numbers that reflect the business and the ownership's questions and needs.
This is typically the kind of gap an outsourced accounting team is set up to close, handling both the categorization and the underlying structure of the books so the numbers stay ready for whatever decision comes next; firms like https://atlasfirms.com/ offer this kind of ongoing support. The value isn't just in getting the categorization right, it's in having someone who understands the business well enough to know what the numbers should be showing in the first place. For a growing business, that combination is usually what turns real-time bookkeeping from a nice-to-have into something that actually changes how decisions get made.
The Bottom Line
Speed is not the goal here. The goal is to make the best decisions possible with the most up-to-date information regarding the current financial situation of your growing business. A monthly close will always provide information regarding what has already occurred.
The current books of your business provide information about what is happening now, and there is still time to act on that information.
In the end, moving to real-time bookkeeping will be worth it for most growing businesses, because of the number of good decisions that it will make possible.
