The Problem with Bare Minimum Bookkeeping
Every business has to do bookkeeping. It’s one of those “comes with the territory of having a business” things. Sure, you have to do your books for taxes every year, but have you considered the other benefits of keeping good books? Have you thought about how valuable your bookkeeping can be for building a healthy, growing business?
I know bookkeeping isn’t very glamorous and to most small business owners, it feels like a pain. But I’d like to propose a new way of thinking about and approaching your books and managerial accounting. To do so, I’ve got a helpful analogy for you.
The Problem: Bookkeeping + Building a House
Let’s say you want to build a house.
You know building a house can be expensive, so you decide to find ways you can get some “cost-savings.” You also know there are regulations when building a house. It must be built to code. The various building codes help make sure the home adheres to health and safety requirements.
So you find a contractor and tell them you want to build a house. You tell them your main priority is to stay in your budget. Your contractor says, “Great! Tell me more. What kind of home do you want to build? What type of floorplan, style, and design are you envisioning? How do you plan on using the home?” Your reply surprises the contractor, “To keep costs down, just build it to code with the smallest size house the zoning requirements will allow me to put on the lot.”
The contractor has no instruction about what you want the house to look like, what the floorplan will be, how many rooms it will have, the style of the exterior or interior design…nothing. You reiterate, “Just build it to code. Keep the cost down. It’s my shelter, nothing more.”
Can you imagine?! Of course not! This would be complete insanity.
Okay, so where am I going with this…?
Well, believe it or not, this is the same thing business owners do every day when they build and design their financial home – ie: set up the financial side of their business.
They find a bookkeeper or accountant and basically just say, “Make sure you catch everything so that my taxes are done right.” They might as well have said, “Just build it to code. Keep costs down. Nothing else matters.”
The problem is that meeting the minimum requirements – whether it be to get your taxes done or to build a home – won’t get you the desirable outcomes for a healthy business or a functional, enjoyable home. Everything that’s amazing about the house you build comes after you hit the minimum code requirements. In the same way, you should labor over your home design, you ought to do the same for the financial design of your business. Design matters. There are not many things in life worth doing the bare minimum on, and your business finances definitely are not one of those things.
If you are only doing your bookkeeping to allow you to pay your taxes correctly, then you are missing it. Yes, taxes are an obligation. You want them to be done right. But having records to pay your taxes does not mean you have the financial information that allows you to make wise decisions for your business.
So, what does this mean?
Understanding Financial + Managerial Accounting
The finance side of your business should be doing two main things:
(1) Creating accurate financial reports and recordkeeping that allow you to pay taxes correctly, and…
(2) Making it quicker and easier to make financial decisions based on your reality.
In the accounting world, this is the difference between financial accounting and managerial accounting.
Financial Accounting
Financial accounting is about accurate recordkeeping that is summarized in reports that adhere to GAAP (Generally Accepted Accounting Principles). This is the “build it to code” side of things. It’s mandatory and gives external parties (government, lenders, investors) key information about your business.
Managerial Accounting
Managerial accounting is an additional layer. It focuses on helping managers of the business make decisions. If your books aren’t helping you manage, forecast and make informed decisions, then you are only getting 50% of what you need out of them. You are only “up to code”, nothing more.
At Hoffbeck + Co, we believe that both financial accounting and managerial accounting are important. All of our bookkeeping packages include both aspects. We get your books done right so that your CPA can take them and file accurate taxes. We also create books that give you detailed information where you want and need it, so your books actually talk to you – like the gauges on the dashboard of your car – allowing you to really see what’s going on.
We know some bookkeepers and CPAs do monthly bookkeeping for a couple hundred bucks a month just to make sure you are “up to code” and can pay your taxes correctly. We are not the same. It’s a bit of an apples-and-oranges comparison when you compare to our standard bookkeeping packages with a typical bookkeeper because we do so much more. We won’t be the cheapest you find, but what we do will set you up to make knowledgeable management decisions.
So what does this look like firsthand?
An Example of Implementing Managerial Accounting: Separate Your Revenue Accounts
*This is just the tip of the iceberg for the many ways you can implement effective managerial accounting.
Lots of small businesses bucket all of the money they make into just one revenue account. By not breaking it out into separate revenue streams, they’re missing out on helpful insights that lead to good financial decision-making. What you measure, you can improve. What you focus on, you create more of.
What if instead of having just one revenue account, you had multiple sub-accounts setup that were meaningful and gave you a lens into your revenue composition? You might say you could find that out, if you really wanted to, by pulling a report from some platform (which you probably could do), but do you do it on the regular? How long would it take you to tabulate the information you were looking for? What if you could design a bookkeeping flow that was efficient about getting your revenue stream number(s) in front of you? What if those numbers stared you down every time you looked at your income statement? It might instigate some new ideas or shift the direction of key business decisions.
Specific Examples for Various Industries
For Hoffbeck+Co:
Our main revenue streams are Marketing, Finance, and Strategy Sessions.
So as an example for a starting point, we carve out these three main revenue streams in our chart of accounts in Quickbooks.
If I was a realtor, I might want to categorize my revenue accounts like this:
Commissions Revenue
• Direct Clients
• Clients Referred by Directory Profile
Referral Revenue
Coaching and Consulting Revenue
House Staging Revenue
Books and Course Revenue
If I was an event venue, I might want to categorize my revenue accounts like this:
Wedding Revenue
• Wedding Rental
• Wedding A La Carte Services
Event Revenue
• Event Rental
• Event A La Carte Services
How can you implement something like this to get started?
Step 1:
Decide how you want to categorize your revenue streams with helpful buckets.
Look at what categories make the most sense and give you the most compelling information without it buying overly invasive to find the info.
Start there!
Step 2:
Find the balance between too much detail and too little.
A “General Revenue” account is an example of being too little detail, and…
Too much detail might look like a clothing store creating an account in the Quickbooks chart of accounts for “Small T-Shirts.”
Remember, if you set up your other systems well (whether that is Shopify, Square, Squarespace, or any other tool), then that can help make your information findable.
What we are going for here is an easy, jump-off-the-page, quick gauge as to how your company is doing in core areas.
Step 3:
Add these accounts to your Quickbooks chart of accounts and start tracking them
Managerial accounting can take many forms in your books beyond just categorizing revenue streams. From expense categories, to tracking project profitability, to products and services, the opportunities are extensive.
The key is to believe your books are meant to be more than just used to pay your taxes. If you still believe that, then just pick the cheapest house you can find that is “up to code” and go live there. No takers? I didn’t think so. 🙂
P.S. TLDR: Your books can do a lot more than just help you pay your taxes. Your books should help you make financial decisions with ease. They should help you monitor the health of your business and see quickly what is working and what isn’t. Where the opportunities lie, and where pivots need to be made. Get after it. Start tracking it. The minimum is just that, the minimum. Do more. Your business deserves it.
More soon,
Lane
CONSULTANT + PARTNER
P.P.S.
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