If you’ve always wondered why bookkeeping never seems logical, or wasted hours looking for old receipts because your accountant said you’re going to owe a penalty … you’re not alone.
“Don’t let accountants run your business!” My dear dad gave me that advice when I started my own company. This was especially meaningful because not only was he a CPA; he also built a career in financial management in the Fortune 500. He told me many stories about how decisions based solely from an accounting perspective would have been terrible for the business. And the reason is simple. Accounting is a compliance process, not a management process.
The financial accounting methods common across all businesses are based on a series of esoteric rules used to record an entity’s assets and income for the purpose of calculating taxes. In fact, the core theory was developed by a Venetian monk more than 520 years ago. Seriously! His name was Luca Pacioli, and he invented the double entry bookkeeping system built into every accounting software app used today.
Space flight, heart transplants … Starbucks! All invented in the last sixty years. How crazy is it that no one’s come up with a better way to record cashflow in over half a millennium?
The ancient practice of accountancy is the reason business owners endure tedious conversations with their tax preparer about how that equipment purchased last June was improperly recorded. And to emphasize my dad’s point, it’s why accountants shouldn’t be involved in important business decisions.
Most accountants are diligent, well-intentioned professionals who know the proper way to depreciate that piece of equipment. But their wizard-like knowledge can’t predict if the investment is going to grow your business. The only thing your financial statement tells you is how much money you have available – right now. It’s an historic record, not a forecasting tool. Real-world decisions like changing the product mix, pursuing a new market, or increasing advertising can’t be made by analyzing the P&L.
How, then, can you follow my dad’s good advice to keep accounting from getting in the way of running your business? It involves changing one back-office practice and a simple mental trick.
First, start using a professional bookkeeping service. This automatically eliminates the complexity of managing the accounting function internally by delegating it to people who know the secret methods of the Ancient Order of Bookkeepers. Not only will this keep the noise level of these activities down to a minimum so you can focus on what’s important; it provides instant internal controls that lower the risk of theft and fraud.
If you think turning over your bookkeeping to an outsourced firm gives up too much control, keep in mind that accuracy and timeliness are the only requirements of accounting. There’s nothing to control except picking the right vendor. (Shameless plug here: I own one of those).
The mental trick is when you look at your financial reports, only see the numbers that reflect growth & profitability. Learn to ignore the account names and line items listed for tax purposes and home in on the few key numbers that matter most: top line revenue, COGS, total overhead, and net profit. To track the metrics that are critical for managing the business, it’s better to use your own reports outside of the general ledger.
Every owner I know is in business for a reason – and it’s not to make journal entries or read the latest tax regulations. So, before any accountant in your family takes offense at my reference to “normal people” in the title, remind them that their chosen profession is secure for at least another 500 years.