©2009    Dan D. Terzian, CPA

 

We opened a retail candy store in 1995. The accounting system consisted of a calculator, an obsolete 386 PC, DOS 5.0 and a bootleg copy of Lotus 123, v. 3.1. However remedial that may seem, it was overkill! Moreover, it would still be overkill for me today.

You’ve said it before but this time you mean it: you’re fed up. For whatever reason, the pain level has reached the breaking point, that is, the point where you’re willing to spend the money to fix the nightmare.  But what’s next?  Who to talk to?  What to look for?  What’s the cost? And can anyone really help? At one point in time or another, these questions will come up.  The cure will look bleak.

Somewhere between out of balance checkbooks and fully integrated financial systems lies the ideal accounting system; it’s different for every business. Many people stress over their books and records; much of it is unnecessary.  I lean toward the other end of the spectrum and refuse to do anything I view as unnecessary.  Admittedly, I have lost some battles, but overall I think I’m way ahead because of it.  I do have a bit of an advantage-I’m a CPA and I worked in corporate finance¹;  that instilled in me the unwavering knowledge that (1) everything is negotiable and, (2) no matter what happens, no matter how crappy the books & records, the audit is always settled.  My priority is to take care of the customer and run the business;  the administrative stuff waits for my spare time.  But, everyone needs to develop their own comfort level and with that in mind, here is what has worked for me.

First some philosophy.  Accounting serves two purposes: one is critical; the other is what you make of it.  First, on the critical side, accounting enables you to comply with those laws that you choose to follow.  You can negotiate and use finesse to the fullest extent of your comfort level, but in some manner or fashion, you should view your accounting system as insurance and use it to your advantage.²   For things that are important to you, ultimately, this can be time and money well spent, it can save you if you do it right; it will hang you if you don’t.

Now for the gray area.  Accounting is frequently a key player in many things businesses do to make informed business decisions.  This can be the black hole where money goes to die. When someone decides that certain things are important, accountants devise ways to measure them and publish rules about right and wrong.   It’s a fine theory but it only works if people measure the right things, know what they are looking for and recognize them when they appear.  More often than not, money and effort are wasted.  So, whether your books are the shambles, you’re installing a new system or you just feel a need to go a different direction, here are my thoughts:

•  Monitor and measure only critical items.  There may be gray areas, but normally there are only a few really critical items; find out all you need to know about those.  For example, in a restaurant, payroll and food cost and their relationship to sales are critical.    It is not sufficient to know your sales by week; you should be thinking sales by hour, per day, every day.  However, if you are selling capital equipment, sales by customer is critical; sales by day, let alone hour, would be absurd.   Do not gather “everything that you can ” when it comes to data; gather only what you need for your own comfort level.  Often times, this can be reduced to just a few spreadsheets. It’s your business; you need to make informed decisions; nothing else matters.    Here are some clues that apply to most situations:

•  If it  involves revenue, cash, receiveables, DSO, etc.,  it’s probably critical.

•  The same is true for inventory and cost of sales.

•  If you can’t change or affect it in a significant way, it may not be critical.³

•  If it can be stolen or wasted, its critical.

•  If it is not material (that is, in the accounting sense, it is not a big number), it is not critical.

•  Is it a legal obligation?  This is tricky.  Income and other tax requirements are documented and are relatively straight forward; requirements by industry vary.  Going back to the restaurant, accounting for tips is unique and critical.  If you have a sales force, accounting for entertainment and employee business expenses is critical; same for a large base of employer owned vehicles or aircraft.  But payroll deserves special mention.   Make sure your employees and vendors are covered.  Without them, you’re toast.  Your payables and payroll, including retirement and benefit plans, need to be current and accurate.  If you can’t pay your employees right, you can’t do anything right.  And you need protect yourself as well.  Your accounting records for payroll need to be squeaky clean from time card through pay stub.  (All your non accounting related payroll requirements also should be there; but, that is a whole different kettle of fish).  It will only take one trip to a Labor Board hearing for you to know why.  Some $20 mistakes could end up costing you thousands. Forewarned is forearmed.

•  Do what you need to do to make sure that the minimum requirements are met for all other less critical information, and then move them to the bottom of the list.  If you find yourself tempted to look at these items, don’t.  It is true that you will occasionally make a mistake with respect to some of these items; but, the effect will be greatly outweighed by other gains. 

Here is a real hint.  If you consider yourself a good “manager” (even if you don’t) take some of these bottom of the list items and give them to a talented employee to keep track of.  Its unlikely that they will screw it up; its more likely that you will be pleasantly surprised.  And you’ll have a happy employee. 

•  Don’t waste money for accounting services that you don’t need.  If all you do is file the financial statements, why pay for them?  Don’t waste your money on statements or reports unless you really use them.  If you reconcile your bank accounts and track critical items you’ll be ahead of many folks.

One last thought in this regard:  just because a CPA gives you a balance sheet and income statement doesn’t mean that it is any more accurate, let alone more useful,  than what you could print yourself; make sure you are getting what you think you’re paying for, that is, if you really want it.  If you have an accountant who  has given you an “engagement letter”, by all means, read and understand it.

•  If you don’t understand the software,  it may be more than you need.  For example:  QuickBooks is a great program. If you don’t know double entry accounting, however, QuickBooks can surprise you, leave you lost or lead you astray.   But it can save a lot of time if you develop the skill to use the features you need.  For those who don’t aspire to use a program like QuickBooks, spreadsheet programs can’t be beat.

•  Don’t be shy about questioning “requirements”.  Always try to finesse onerous tax reporting requirements.  The stakes are too high for you not to try.  The exception:  don’t dodge them if they work in your favor.

•  Leverage technology.  My old IBM 386 was better than manual work or a poorly thought out program running on a better machine.  Take the time to think it out well up front and it will pay dividends down the road.  Focus only on the big picture.  Don’t succumb to the technology trap.  In fairness to the newer machines, the 386 couldn’t run QuickBooks.

•  Don’t be shy about asking “why” whenever you are presented with a request for more data.  This applies no matter who asks for it; don’t go down without a fight.

•  Above all else, continue to run the business and take care of your customers.

Now, if you took the time to do all of the above, who is going to run the business?  Unless you are an accountant and you are in the accounting business and it’s the slow season then your time is better spent elsewhere, like sales, marketing, manufacturing or customer service.

You need competent help.  Be prepared to allow time to find the right person to help. Like other professions, accounting is specialized.  Some CPAs specialize in taxes, others do audits, some serve only large clients and others do governmental accounts.  Don’t be surprised if some firms just give you a referral, that is, if you get to speak with someone who can help.

This is where we toot our own horn.  For a whole host of reasons, we relish helping clients with a mess, and  the bigger the mess, the better.  To us, it’s exciting; and, we think it’s genuinely appreciated.  To get this job done right, the first time, you need someone with,

• business experience,
• ability to get down and dirty with the nuts & bolts,
• ability to work well with people in a tough environment
• the tenacity of a bulldog,
• ability to make decisions,
• ability to resolve problems,
• crystal clear knowledge of the difference between right and wrong, and
• working knowledge of computers, taxes, labor, accounting, negotiations, and general business matters.

And, to top it all off, they need to work independently without much input from you, or you might as well do the project yourself.

We can do that. We’ve done it for others.  We can do it for you.

The next order of business is deciding how to keep it straight.  If you think you can go it alone, go for it.  But if you’ve really had it, there are various levels of service we offer that would ease your workload.  These range from simple chores such as taking care of receipts and payments, to complete payroll, bookkeeping and accounting services; it strictly depends on your personal preferences and needs.  Remember the only things that you should pay for are those you are required to furnish to others and those that you use on a regular basis; anything else is a waste.  And, remember, as far as “requirements” are concerned, everything is negotiable.

Of course, if you don’t yet have a mess but are interested in preventing one, we’d still be happy to accommodate you.  If you’ve read this far, you must be interested.  Give us a call; we always have time for a consult.  We may even buy lunch.

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Berkshire Hathaway is a huge and immensely successful company.  At my last reading there were only 17 people, including Mr. Buffett, who worked at the corporate headquarters.  That is focused management.

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¹Some might assert these to be disadvantages.

²If you’re going to document things, be sure to do the best jobs on those things that are favorable for you.

³In my hypothetical restaurant, the food costs run $5,000 a week and the lease costs are $10,000 a month; how much quality time should you spend on each?  If you find yourself debating the issues, contact us; we’d be happy talk with you about our spin on it.

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