First Step – Accurate Financial Accounting
Pete Sabella – Too many startup companies begin their business and then immediately fail to maintain accurate accounting records. Many start out using QuickBooks or Peachtree accounting software, doing it themselves without adequate training or experience. At some point someone asks for a financial statement, typically a banker, and they go through the process of printing one from the software and it doesn’t make sense to them or to anyone else for that matter. Many times due to the lapse of time from the beginning of the business until the discovery they have a large volume of incorrect data. It is the old adage of “garbage in, garbage out”.
Most entrepreneurs’ initial thoughts on the need for the software are for financial accounting records producing reports. Many times these are required by external parties. Your banker, shareholders, taxing authorities, etc. typically require reports on your financial results. Guidance on the form and content of these reports is generally accepted accounting principles. The four basic financial statements are the balance sheet, income statement, cash flow statement, and changes in equity statement. Management also should be studying these reports. These are reports that summarize past financial activity.
This same database of transaction activity that produces your financial reports is also the database for producing reports for the managers within your organization. These are the reports that help management/you make decisions. Report can be generated on whatever financial data management wants analyzed for example: sales by customer, inventory turnover, profit margin by items sold etc. They assist the owner/manager in running the business in a profitable manner. The reports management develops to review financial activities are critical to the decision making process.
Part of your business plan should include how you are going to manage your accounting system. It can be costly to run your business for a period of time and not accurately be receiving appropriate management reports which helps analyze how your business is doing. Don’t wait for the banker to ask for your financial statements before determining if your record keeping system is inadequate.
Pete Sabella is Business Advisor for the Southwest Indiana Small Business Development Center, an organization with the mission of having a positive and measurable impact on the formation, growth, and sustainability of small businesses in Indiana, and to develop a strong entrepreneurial community. Pete can be reached at email@example.com.