Here’s Why Your Bookkeeping May Not be Revealing Your True Profitability

By PRETTY BOOKS ON March 11, 2021
HERE'S WHY is a collection of simple explanations for the things in your business that just don't make sense. There are a lot of moving parts in your business, and not all of them are obvious. Here's Why gets right to the point in identifying what's happening, why, and what you can do to improve your operations. Here's the deal, you need clarity in your finances to make data driven decisions for your company.

You’re hungry to understand where your business stands. You’re thinking about the word “profitability.” You print off your Profit and Loss Statement and look at the top and bottom numbers. Somehow, things are not making sense to you. You feel incomplete, and a little confused. You’re really not even sure if you’re making any money. Here’s the deal- Perfect bookkeeping is not necessarily reporting your profitability.

You aren’t in sync with your bookkeeper.

Your definition of bookkeeping and your bookkeeper’s may be different. Ultimately, bookkeeping is just recording your income and expenses—that’s it. Your data may not necessarily be calibrated to tell your financial story in a way that reflects where your business is today.

Let’s say you’re a photographer and you were hired for a photoshoot this month. In order to accept the gig, you had to hire an assistant and buy some supplies. However, your customer is not going to pay you until next month, after the photoshoot is done.

If your bookkeeping blueprint has been set up to record all income and expenses when they hit your bank, it’s likely that you’ll see a net loss this month and a huge profit next month. Your reports won’t really tell you if you made money on this shoot—you’ll have to do some mental math to try to align your income and expenses. The reports you are seeing this month probably aren’t going to answer your questions.

You need to set up your software to reflect your definition of “profit.”

Your accounting software is a tool that requires your input. Based on the instructions you program it with, your software spits out a certain output. You need to make sure your instructions and input align with the numbers you’re trying to get out of them. If not, your reports will not be accurate.

Don’t be fooled—no matter how advanced these systems are, they are just tools. A tool is only as good as its setup and the operators managing it.

You didn’t change your blueprint for bookkeeping.

Bookkeeping is all about consistency. Once a bookkeeping process is in place, it won’t change without a trigger. That trigger has to come from you.

In your business’ first year, you hired a bookkeeper who got your books in order. Now, five years later, your business and needs have changed. Things are more dynamic, and you are expected to make data-driven decisions.

If your reports aren’t easily giving you the information you need to make those decisions, you need to reassess your bookkeeping blueprint, decide on the necessary changes, and pull the trigger. Establish constant reevaluation of the work that is being done, and make it a point to update these processes and blueprints as your needs change.

How do I start?

If you want to make changes, you have to understand what’s happening with your bookkeeping now. Ask yourself these questions:

  1. Who is your audience? Is your bookkeeping for the IRS to file taxes? Investors to provide data with?
  2. What is the purpose? At the end of the day, what questions are you trying to answer? Based on these questions, you can design a bookkeeping process that gets you the results you need, so you can stop doing mental gymnastics.
  3. What are you really tracking? Do you need to know about income, cost, or overhead? How about what people owe you…and what you owe them? Assess what’s important to you and try to figure out whether you have the relevant systems in place.
  4. Are you in sync with your bookkeeper? Now, it’s time to have a serious conversation and see if you can work together to reach your end goal. Articulate your needs, bring your bookkeeper up to speed, and create a plan.

Remember, you may have the best bookkeeper, but that doesn’t mean your bookkeeping software is calibrated for your current business needs. Your business is changing; your accounting should be too.

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The information provided in this post is for general informational and educational purposes only and is not a substitute for professional advice. Consult your financial, business, or tax advisor with respect to matters referenced in this post. Pretty Books assumes no liability for actions taken in reliance upon this information.
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