February 2005    Vol. 14, No. 2  REAP HOME PAGE  A publication of the Center for Rural Affairs    
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REAP Rural Business Roundtable

Topic:  Why to Keep Good Business Records

Why bother with records? Most people view bookkeeping as an exercise they go through for one reason only: the tax return. With this outlook, it’s no wonder that no one wants to bother until the end of the year when it’s that or go to jail.

But it’s also no wonder that businesses fail from surprises in their bank accounts – which shouldn’t have been surprises at all. Here’s the full story on why you have to keep accurate books, and you’ll notice that tax reporting is so far to the bottom that it’s really just there by default.

  • Price your product accurately.
  • Know if you’re making or losing money – in general and on specific jobs.
  • Know your cash flow – short and long term.
  • Work with bankers.
  • Let the tax agencies know how you’re doing.

Pricing your product is the first single most important thing you have to do in business. It’s a simple equation, which says that you have to charge more than it costs you, right?? So tell me, what about paying back that loan that you opened last winter when you couldn’t meet your workers compensation bill? What about the tools you put on your MasterCard for the last job? What about product liability insurance?

There’s a long list you’re likely forgetting, or if not forgetting, discounting beyond reality. Nearly anyone can figure out the direct costs of their product or service – a good set of books will tell you just what ought to go into that equation for overhead, which is the difference between making a profit or loss.

Are you making money? Well, even after you price your product, you have to know how your pricing compares with reality. If you are making some bad decisions with your pricing, and you wait until next April 14 to find out whether you’ve lost or made money, it may be too late to do anything about it.
Running a business profitably is tough. It can take a long time for some of your decisions to prove right or wrong, even with good books. Give yourself a break and at least be paying attention so you see things happening soon enough to correct them.

Cash Flow? What’s that? Laugh all you want but learn from the mistakes of one couple that didn’t know what cash flow was until it was almost too late. They had an incredible summer starting their contracting business. There was always money in the bank, thanks to customer deposits which seemingly never ended.

When fall came, however, business began to slow down and they took a look, in a sort of vague, starry-eyed way, at “the books.” They congratulated themselves on having beaten the odds of making a business very profitable in its first year.

A week later, they revised the profit estimate down to account for a loan payment they had forgotten was still due. A month later, they had to revise it down again when the quarterly payroll taxes came due that included a contribution to worker’s compensation.

Then there was the $2,500 check that had been added to the checkbook by mistake, because the wrong button on the calculator was hit. It wasn’t long before they were on their knees at the local bank, pleading for a loan to tide them over the winter, promising they could pay it back in three months.

(You should have seen the party two years later when they actually did finally pay off that first loan!) One of the most important things you will learn from keeping your books is how to understand and manage Cash Flow.

The Banker. You may not work with a banker ... yet. The couple that we just discussed didn’t, until, as you read above, they ran out of cash. They were lucky – they found a banker who would work with them and help them learn about business while they were growing their business.

As much as possible, have your numbers organized on a cash flow spreadsheet before you go to the bank. If you’re already working with a bank, impress them with good numbers. I don’t mean good in the sense of whitewashed, at all. I mean good in the sense of accurate.

With good books, you will see problems coming before they happen. Go talk with your banker about them in advance, and you’ll have a better chance of getting and keeping that person on your side.

A side note about relationships – never go in thinking that your relationship with your banker is adversarial by definition. The opposite is true – that relationship has to be one of teamwork and understanding.

To look at your banker as an adversary from whom you should hide bad information is a huge mistake. Find a banker you can talk to and work with, and keep him/her posted, good or bad. Develop those relationships, and they’ll stick by you as long as they can.

Finally, that tax return. Use books that you’ve prepared for your decision-making, and maybe the results won’t be a surprise. If your books are done and you know before the end of the year what taxes you have to pay, chances are you can save yourself money by paying ahead, or by buying tools that you know you’ll need. At any rate, your tax accountant can help you do whatever planning you need to do, but you cannot do that in the absence of good information.

Reference: SBA Online Women Business Center, www.onlinewbc.gov/docs/finance/


Roundtable Topic Questions

Review /read through the above article “WHY WE SHOULD KEEP GOOD BUSINESS RECORDS,” which begins on the other side.

  1. Go around the table and ask participants to share their record-keeping tips. What helps keep them on track in their record-keeping?
  2. What accounting programs or services are used by businesses represented in your group?
  3. Record questions and any future program ideas that relate to this topic. Do you need someone (maybe REAP staff) to help you with pricing? Does the group or any individual business need technical assistance from REAP to prepare a cash flow spreadsheet?

 

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