I’ve tried using my accounting system to track my business, but I find the numbers don’t make sense. Then I don’t trust what’s there, and feel like, What’s the point?? Any suggestions you can make would be appreciated.”
There are a couple things to remember about reporting on the numbers of the business. First, garbage in, garbage out. Second, be sure the report you’re looking at is the right one for the information you want, Here are some suggestions to help you understand what’s going on.
Set up a routine to proof that is on short cycles, preferably weekly. Code reports that you use frequently to memorized reports. Always check what the report is based on – cash or accrual. Know the difference between the P&L, Balance Sheet and how to bridge the gaps between the two.
When entering checks, withdrawals, deposits and credit card charges and payments, someone can proof the accuracy of the numbers each month through bank reconciliations. Do a bank rec each month for every bank account and credit card statement. This will help to insure that you’re not forgetting charges and deposits.
Have someone review the general ledger report weekly or monthly. Print out the report, it’s not that many pages if you do it weekly. Scan the report to see that all items are properly coded into the correct accounts. Make notes on the report regarding any changes that need to be make. File the report in a binder, so you can check back if there are questions later on. If you do this regularly, it’s a short amount of time to review and make corrections.
Establish a set of reports to review the company’s status. P&L, Balance Sheet, , Accounts Payable and Accounts Receivable are typical. Monitor specific vendor or client accounts, due to lateness of payment or size of outstanding amount, through memorized reports.
One thing that can change the numbers dramatically is switching between accrual and cash reporting. The Profit & Loss Statement, in particular, may change a lot. Accrual reporting is based on Accounts Receivable and Accounts Payable – or bills and invoices that have been entered. Cash reporting is based on what’s gone into and out of the checkbook.
Why do you have 2 types of reporting? Accrual, assuming you enter bills and invoices as they occur, often gives you a better picture of how the business is flowing along on an operating basis. Cash reporting gives you a partial picture of what’s happening to cash. For example, If you run reports only on a cash basis, you might get a bill for the materials 2-4 weeks out, pay for labor this week, and get paid by the client whenever – nothing in relation to each other. If you enter client invoices and bills for material and labor as you incur them, you’ll better see the relationship between the income and expenses of the work you’re doing.
Paying for things on credit cards, bank loans and lines of credit adds a layer of complexity. Those obligations sit on the balance sheet. You could pay for things on the credit card, and see your cash on hand go up because you haven’t paid off the credit card bill.
When you charge something to the credit card, you won’t see anything in the check register, but you should see expenses incurred on the P&L, even though you haven’t written a check to pay for them. When you pay for a credit card bill you’ll see the check to the credit card company in the check register, but the payment will flow out of the balance sheet. Remember to check both balance sheet and P&L to see where you are!
Keep in mind that if you have multiple bank accounts, moving money from one bank account to another will show up in the check register, but won’t show on the P&L. You will see the change in your bank balances on the Balance Sheet.
You can use a budget to help you plan out the gap between the P&L and Balance Sheet. Plan out income, expenses, additions to, and pay off of debt obligations. Plan out income, either as you expect it to come in, or as you expect to invoice customers, depending on whether you plan to report on a cash or accrual basis. Or, you can develop a budget for each scenario if you think you’re likely to see big gaps.
Sound confusing. It can be. Different reports do different things. Get someone to work with you until you understand what’s going on. After all, the truth is in the numbers, and you want to know what’s going on in your business. You want to know how to win the game of making money!
Looking for a good book? Try Small Business Accounting by Daniel Sitarz.