We recently sat down with a client and covered off on some nagging questions that they didn’t have answers to:
- Are we making money?
- Should we make that new hire?
- What can we afford?
- Can we grab lunch after this?
These are some of the questions and discussions happening in business owners and founders’ heads every day. And they’re not always easy questions to answer – except for maybe the last one (the answer to that one is always yes).
Early on in their business journey, founders might have a good handle on their financial position – either because they’re involved in all aspects of the business or by falling into the fallacy of checking their bank accounts once a day and having a “rough idea” of a buffer in their minds. But as a business starts to grow, and tasks and roles are bestowed on other team members, it gets tougher. Sometimes the finance and accounting components of the business get deprioritized. Other times, business owners neglect them because they may just not be a numbers person.
That’s ok. But it means you need sound financial processes and a team behind you to execute on this, so that everyone has those important financial and non-financial metrics at their fingertips.
At creditte, we run into these situations and challenges with many new clients we bring on board in both our accounting and bookkeeping divisions. Once in a while, we’ll work with a new client that has their stuff together (and our team does a virtual high-five) but in many cases, there’s a lot of historical data to pore over, catch up on, and clean up.
Once the foundation is set, the process hums along in the background and then the real work can begin!
Bookkeeping basics
The foundation of sound financial processes starts with bookkeeping. The more your business grows, the more complex your bookkeeping will become and that’s when it’s time to get someone with some experience on board. We’ve taken over the accounting books from many businesses, and their bookkeeping has been all over the spectrum: some amazing bookkeeping, all the way to “I can’t believe they left you with the books in this shape.”
It’s not something to take lightly as that bookkeeping and management accounting function is key to building a better business.
What is bookkeeping?
Before we jump into the details of bookkeeping, it’s important to understand the chart of accounts. The chart of accounts is the list of every expense, revenue, asset, liability, and equity account where individual transactions can be classified to. It’s essentially the index for all your accounts. Every business’ chart of accounts will look a little different, but the important thing is that all financial transactions are recorded.
And that’s bookkeeping.
When someone is bookkeeping, they’re categorizing every single financial transaction that shows up on the business bank and credit card statements to a chart of accounts.
We tend to work with our clients in developing a meaningful chart of accounts and the creditte team have even developed a standard “creditte-fied” chart of accounts for varying industries we specialise in.
You want to keep your chart of accounts as relevant and streamlined as possible. Nobody needs to have four different accounts for different subscriptions or office stationery. We get it, everyone loves/needs varying subscriptions these days, but recording it all in one expense line is just fine (it’s the tracking categories that matter but more on that later!).
After a period of time, as individual transactions are being recorded into their individual accounts, we sum up the accounts for the month/quarter/year and report the totals. Reporting on the sum of these accounts (i.e. just the total of each account) is a financial statement: it should provide a clear picture of financial performance for a business. Here’s an example.
How bookkeeping helps provide real-time financials
With the introduction of cloud accounting software, user-friendly payment gateways, and other automation tools, businesses have the ability to automate tonnes of bookkeeping tasks, leading to faster turnaround times, increased efficiency, and real-time financial visibility.
We live and breathe automation. The old adage of working smarter not harder rings truer than ever when it comes to bookkeeping. Here are a few examples:
- You can create “rules” in your accounting system for recurring transactions. When bank or credit card transactions are imported or downloaded, they can be auto-categorized to specific accounts, saving loads of time on the bookkeeping and data entry front.
- You can integrate an expense capturing app with your accounting system. When you come across an expense, whether a physical receipt or one in your inbox, you can have the expense app digitize it and publish it to your accounting system, creating a record of that expense with minimal effort.
- You can also use a tool like Zapier or Tray to integrate your accounting and bookkeeping software with any of the other apps you use to run your business.
This kind of automation increases accuracy (in addition to eliminating repetitive tasks). And with accurate financial statements at your fingertips, business management has the ability to make decisions based on real-time data, rather than on historical information. The ability to pull up metrics on a whim and make a decision? Magical.
Plus, if a business is looking to build relationships with external stakeholders such as investors, shareholders, or banks, accurate reporting is a necessity. Whether it’s an investment, loan, or acquisition, you’ll need to portray your operations from a financial point of view through financial statements. You want those ready when you need them, not scrambling to get them together.
Transparent KPIs and other benefits of real-time financials
Your business likely has key performance indicators (KPIs), important and unique metrics that can be tracked and measured to determine business performance. For example:
- Revenue growth
- Monthly sales bookings
- Net promoter score (NPS)
- Lifetime value of a customer
- Customer acquisition cost
Measuring KPIs often falls by the wayside simply because businesses don’t have the foundation to track the data in order to provide meaningful information.
You guessed it: real-time financial information to the rescue!
By keeping up with the real-time financial information of your business, you can create a process by which you’re measuring KPIs and comparing to previous months and quarters, all as part of the financial tracking process. By keeping track of financial data, you’re keyed into a wide variety of metrics, allowing you to pull different financial levers within the business and determine their impact.
We were recently working with a business that was in the process of being acquired. The acquirer was impressed with their organised financial information and thorough understanding of their own business during the due diligence stage. They were able to highlight the change in their KPIs as the business evolved and were also able to forecast certain metrics. In part because of this, the acquirer felt confident and closed the deal quickly. We’ve seen the opposite happen, too, and it’s unfortunate because of how easily it can be prevented. A business with processes and procedures will lead to profit which will lead to value.
Real-time financials are an evolution
“Start with the basics and our processes will evolve from there.”
Is the advice we typically provide businesses that aren’t organized from a financial perspective. Yes, you can be easily overwhelmed by thinking about all the months or years of bookkeeping that’s required to get caught up, let alone setting up processes to ensure things are running smoothly on a go-forward basis but that’s what we’re here for.
Get help to get organised and into a monthly cadence of up-to-date books. Once that’s set up, dig into the monthly numbers and try to obtain a better understanding of your business financials. Through this, you’ll naturally come up with specific KPIs that should be measured to understand whether you’re achieving objectives.
This information can then drive budgets and forecasts. Data that every business owner needs as it makes its mark on the world and builds a better business.
Want to get the foundations of bookkeeping right? Need a hand tracking the right KPIs? Contact us today to find out how the creditte team can help you build a better business.
