Good books and records allow you to get an unemotional view of the business, to ensure that it’s meeting your expectations as a business owner. Often, business owners will be SO busy with the day-to-day that they’ll judge the business performance and health on their gut instinct, and whether there is money in the bank account. Depending on how big of a company you have, you may or may not even be paying the bills. Imagine having a tool in your toolbox that would help you confirm or challenge your gut instincts and also help you make more informed decisions. Based on the numbers, it would allow you to understand the business and its health better.
The numbers below are exaggerated to make a point, but the same goes for a business generating $10,000 of sales every month. Think about this.
You’re selling $1,000,000 of product every month; you’re on pace to be at $12 million for the year. You’re so busy selling and doing your own marketing that you didn’t realize that the cost of the battery you’re having installed in your product has increased in price over the last 12 months and is now double what it was when you first launched. The increased price brings your cost of goods sold to $800,000 per month, and with $150,000 of monthly overhead expenses, you went from making $250,000 per month to making $50,000. That’s a pretty raw deal, but guess what? You know that’s a bad deal because you can see it in front of you.
If you’re bringing in $1,000,000 in sales per month without books and records, you’ll feel like you made a lot of money because, on average, you’re getting a deposit of $33,333 per day. You wouldn’t be able to look at historical financials from 12 months ago and determine that your costs have increased by such a large number that it’s truly affecting your profits and cash flow. You wouldn’t know that you either should have found a different battery supplier months and months ago or you should have increased the cost of your product to account for the increased costs.
Think of your financials as your scorecard for the business. They tell a story about the past and the present and allow you to better plan for the future. Keeping good books and records is the only way to ensure that your financials are accurate.
And inevitably, when it comes time to prepare your taxes, you’re going to want to have accurate and complete books and financials to help your tax preparer maximize your deductions while ensuring that you pay the least amount of tax that you rightfully owe the government. I promise you that if you’re giving your tax preparer a Profit and Loss written down on a piece of printer paper, you’re paying too much in taxes because you’re definitely missing deductions. Plus, should the IRS ever send you a letter to do a desk audit, it’s going to be really embarrassing when they ask you for your books and records of the business, and you have to give them your sheet of printer paper.
Whether you take charge and do the books yourself, or bring in a bookkeeper (always the preferable choice) to help you keep the books and records in order, make sure that you’re reviewing the books at least quarterly, if not monthly. Make sure that you understand what the books are telling you and use those review periods to set goals, make changes and become a better business owner.
On the other side of this pandemic, there are so many opportunities for business owners looking to acquire a business or merge with another company. That’s when the ability to read and interpret financials can tell you a lot about the history of the business. How much debt does the company have? What do they keep in the bank account to pay bill? Or do they distribute all of the money to themselves? It will show the business’s financial picture, and it will also show you the TYPE of business owners running the business. The books and records and the tax return filed are huge pieces of the puzzle to focus on when considering the purchase or acquisition of a business. Familiarize yourself with your books and records so that you know how to read them in the future.
If you liked this blog and are interested in topics like this for small business owners. Check out The Business Starter Kit or Command Your Business. We break down accounting and tax-related topics in plain English for you. Check out our courses on our website, https://engagecpas.com/courses.