Organization Assessment

Despite the importance of bookkeeping, small businesses often neglect it because of the time and effort it takes to set up and tend to a bookkeeping system. But bookkeeping is an essential part of every business regardless of size and one thing you can't afford to ignore.

Bookkeepers are responsible for organizing and tracking receipts, cancelled checks and other records generated by financial accounting transactions. Bookkeepers chronologically record all transactions — cash disbursements, cash receipts, sales and purchases, and others — in a journal and post the journal entries to a general ledger of accounts, which accountants use to prepare monthly financial statements.

There are several good reasons to have a bookkeeper maintain balanced books:

1. Helps you assess whether or not gross profits and expenses are in line with your budget and projected net profits.
2. Helps you anticipate and avoid cash-flow problems.
3. Lenders and investors want to see accurate and complete books for a business before granting loans or investing capital.
4. Up-to-date accounting records help you keep track of customer balances and monitor potential collection problems.
5. Keeping good books along with receipts and cancelled checks will back up whatever deductions and tax credits your company takes.
6. Without good bookkeeping, you leave yourself exposed to fines and penalties if you get audited.
    

You can learn the basics by taking a bookkeeping class at a community college or small business center in your area, but most businesses hire a full or part-time bookkeeper to maintain their books.

Budgeting Fixed Costs

Fixed costs are simply those costs that do not typically fluctuate with sales volume or revenue. Examples of fixed costs often include management compensation, rent, professional fees, marketing, and insurance. Also, while some costs may be variable for certain companies (e.g., utilities for a heavy manufacturer), they may be fixed for others (e.g., utilities for a service organization).

Fixed costs are typically budgeted with reference to prior spending levels, adjusted for anticipated changes in the current period. For example, you may need to budget an increase in insurance expense due to a recently received rate increase notification. Or you may budget lower legal fees because this year’s legal expense included costs associated with settlement of an unusual matter which is not expected to recur. Management compensation is usually analyzed for each existing or new employee, while other expenses may be linked to specific planned activities – e.g., special travel, anticipated product promotions, significant consulting projects, etc. Items such as depreciation and amortization can usually be estimated from schedules prepared by your accounting firm.

Budgeting Cash Flows and Interest

Once you’ve budgeted your revenues and expenses, it’s usually a good idea to translate budgeted net income into budgeted net cash flow, especially if the company has debt, anticipates significant growth or is planning to make capital purchases. Net income adjustments required to calculate cash flows typically include non-cash expenses (e.g., depreciation), anticipated changes in receivables and payables, planned capital expenditures and anticipated borrowings and repayments on debt. From this information, you can also budget interest expense on planned outstanding borrowings.

Putting It All Together

Once you’ve established the "top-down" revenue and variable cost budgets and the "bottom-up" fixed cost budget, you need to put the two pieces together. Is the net result acceptable? If not, it’s time to revise the financial plan. Budgeting is ultimately an iterative and interactive process involving many individual pieces that must be assembled in a logical, coordinated fashion. Often, it’s the process of creating the plan, rather than the plan itself, that provides the most benefit. Notwithstanding the benefits of the process, using the plan to measure and assess the company’s ongoing performance can be a highly effective tool for managing the company’s operations and, ultimately, guiding the company toward achievement of its vision.

Where to Go for Help

So now that you’ve decided to ask for help, where do you turn? Fortunately, you have numerous options. The path you choose will depend on your particular situation: stage of your company in its development, strength and diversity of your management team, available time and money. So where do you start?

First, try to perform an honest assessment of your business strategy and financial plan. What kinds of issues/problems are you facing? What are the obvious symptoms and what might be some of the root causes? Don’t be afraid to involve your management team or other employees – they may have observations and suggestions you haven’t thought of and will appreciate the opportunity to become involved. You might also consider doing some outside research on your particular problem, since it’s likely others have faced the same challenges. Fortunately, there are a variety of articles, books and other sources available on various subjects related to business and the issues business owners face.

The next step might be to seek input from your peers or other business professionals in your community. Others who are not as close to the problem as you are can often provide useful, objective insight into your underlying issues, as well as possible solutions. People to contact might include your banker, an accounting firm, financial planner, consultant or attorney, all of whom have probably worked with other companies with similar issues. You might also want to join a local business group such as the chamber of commerce, a trade organization or a CEO "round table". These groups often provide an excellent opportunity to meet and develop relationships with individuals like you who have experience in running and growing a business.

Finally, if you haven’t already, you should consider developing your own board of advisors. While your board might not be as formal (or as lucrative for its members) as your Wall Street counterparts, it can be just as beneficial to the company. Your board might consist of lenders, attorneys or accountants, as well as other business partners such as vendors, customers, and community/business leaders. A great choice might be an individual in your community who has successfully grown his/her business in another industry and could provide you insights from their experiences. You could also target an individual with certain functional experience that is relevant to your situation. These are both examples of individuals that you could meet thru networking.

Regardless of which course of action you take, the key is to access this information by asking for help. As the CEO of your company, it is imperative that you don’t isolate yourself with nowhere to turn. Instead, seek assistance from others and surround yourself with resources that can help you lead your company to the next level.