I just finished checking out yet another “accounting” program that promises to do all the heavy lifting and thinking for a business owner. Those programs make me worry.
The process of setting up and maintaining your accounting is a crucial part of understanding whether your business can/might make money. It worries me when software promises to automate away the importance of upfront planning and setup.
To illustrate the importance of being involved in the processes, take a moment to brainstorm about the numbers. What will you charge for your product or service? What will it cost you to purchase, manufacture and/or provide your products and services, what are the other costs of running a business? Examples of other costs include Rent, Office Supplies, Telephone and Maintenance.
See how easy that was? Those products and costs that you just brainstormed up are the start of your accounting books. You can always add accounts later as you encounter new things but you can see in the example below how functional our initial setup is.
Subtract the cost of your product from the price you will charge your customers. That is your margin. Now, add up all the “other” costs of doing business like rent, utilities, fuel and payroll and divide them by your margin. That number is how many products you will have to sell to break even.
- Product: Shipping Container
- Direct Cost of each container = $100
- Sales Price for each Shipping Container: $200
- Margin: $100
- Other costs of business: $2,500
- Break-Even Point: $2,500/$100 = 25
If your product costs, your other costs of business and your sales prices don’t change, you will break even if you sell 25 container each month and you’ll have a profit of $100 for each container sold over 25.
The process of estimating the margin and break even point has established your budget numbers. You’ll use them to measure against your actual results. This is all crucial information and a crucial part of managing a business.
Now, you have established a plan. You can dream about selling thousands of containers each month and raking in the money. Caution! I know I told you that you would have a profit of $100 per container sold over 25 but now you have to start watching both your predicted costs and the additional costs that come with higher volumes of products sales. Some of your costs - such as payroll and storage will increase with your the number of sales.
My point here is this, don’t allow yourself to be lulled into a false sense of security by the promises of simple accounting software. It is potentially very dangerous to avoid that first step of understanding your numbers and it is just as dangerous to allow your software to just process your information without paying close attention to the details.
Seek help in setting up your accounting but be involved in the setup process. Automated setups are not all evil, they can actually give you clues about costs you might not have thought about. For heavens sake, use software to help automate the accounting and bookkeeping process but stay involved. If you pay a person or service to take care of the process for you, at least make sure you set aside time to review the results as often as possible preferably at least once a week while you’re getting established but for sure do it at least once a month.
Automation can be a beautiful thing, I am not against business owners using simplified bookkeeping programs and services with one caveat. Understand Your Numbers! Seriously, you don’t have to do the setups or bookkeeping yourself but you do need to pay attention. If you don’t want to take the time to pay close attention to your numbers should you try to run a business?
© 2008-2010 Erin Lawlor
**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.