3 parts of small business accounting
Last week we made the surprising reveal that 40% of business owners consider accounting & finance to be the worst part of owning a business…and I asked you to share why that was true for you.
Let’s recognize that accounting is big umbrella for several different activities.
The first step in accounting is bookkeeping. That is getting all of your business transactions recorded and organized in some system…old ledger books, Quickbooks, Peachtree, Dynamics SL…etc…you’ve got to get your data organized to do other stuff with it.
It’s pretty safe to assume that as a business owner you don’t want to be spending your time doing bookkeeping. It is something that absolutely needs to be done, but we can use your time more productively.
After you’ve got all of your data recorded you have to do something with it. That analysis and manipulation branches off into tax accounting and managerial accounting.
Tax accounting is just what you think it is. You probably have a CPA that takes care of generating your tax paperwork, but their piece of the puzzle dovetails somewhere back with your bookkeeping process in terms of work papers to prepare the tax documents--such as income statements, balance sheets and fixed asset lists--as well as the organization and format of your initial bookkeeping to get data out that the CPA can use.
Viewer John has no time for tax accounting. “Accounting is no fun for me if it’s just numbers stuck in a t-table” he says. “Move to managerial accounting and you have my attention.”
Stick with me John, we’ll get there. John is the kind of business leader who is going to lean heavily on his CPA for tax preparation. Our CPA’s do a great job of keeping us out of tax trouble and are very knowledgeable. However, there is still a lot of time and resources on our end that goes into prep work before our CPA’s can get involved and their time can be really costly.
Finally, there is managerial accounting, this is where John gets excited. In managerial accounting we take all of that data that bookkeeping has fed into the system and slice it and dice it to help us make the decisions that make our businesses successful. If tax accounting deal with outward facing reports and data we make for people outside our organization, managerial accounting is completely inwardly focused.
Good budgeting, forecasting, and analyzing revenue streams and expenses for opportunities are all parts of managerial accounting. Businesses need systems in place to perform, interpret and communicate these activities, and our businesses must be opened to making operational changes as a result.
Viewer Paul addresses that last part saying, “I spend one and a half days every week doing weekly forecasting, midweek updating and end of week actual. None of this changes the way I do business.”
Paul’s company has managerial accounting systems in place, but no mechanism for making changes based on those findings. His employer is wasting 30% of his time every week, until they recognize this shortcoming.
This is all so challenging because accounting is outside of most business owners’ wheelhouses. Only 40% of small business owners state that they are at least “very knowledgeable” about accounting and finance. So where is a business owner supposed to turn for help? Over the next couple of weeks I am going to release three more videos: one to address each of the areas we discussed today: bookkeeping, tax accounting and managerial accounting. We will review the options that are in place to help you get the most out of accounting in the most efficient means possible.