Readers of my article “7 Proven Steps to Manage Your Cash with Ease” asked for more details.
In case you missed that article, or need a reminder, here are the steps.
1. Do Your Bookkeeping for Cash Management
2. Find Cash in Your Business
3. Make Quick Fixes
4. Work on the Big Cash Management Ideas
5. Forecast Your Quickly and Easily Cash
6. Manage Your Cash
7. See Your Results on a Dashboard
This article is an overview on how do set up your bookkeeping for cash management success.
Instead of a checklist or a “how to” article, I will tell you how a client (Rebecca) and I cleaned up the her company books. The company is “The Spa,” a high-end day spa.
(The method is from a real client, but the name and type of company are different to maintain anonymity.)
The End in Mind
Rebecca was stuck at about $3 million in sales. Her biggest concern was running out of cash, even with a big credit line and healthy profits. 2-3 times a month she was almost out of money. She was losing sleep and her health was starting to deteriorate.
We talked about all of this being very doable, if:
Chart of Accounts - The Foundation for Good Reports
Rebecca had a challenge that I had never seen before.
Her accountant sent her monthly financial reports with a cover letter:
“The financial statements are prepared in accordance with the tax basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United State of America.”
I quickly realized the chart of accounts was created to make it easy for the accountant to file taxes. It was not set up for Rebecca to run her company.
A good chart of accounts:
We updated her chart of accounts by making a list of accounts and the product classes.
Accounts to know where the money comes from and where it goes.
Classes, or categories, of products and services that she sells.
It took about two hours to make the changes in QuickBooks.
Accurate P&L and a Clean Balance Sheet
After restructuring the chart of accounts, it was time to clean up the bookkeeping.
I use the basis of the cleanup the Profit & Loss (P&L) and Balance Sheet reports. I do this because I always find big, obvious mistakes, as well as hidden mistakes.
I explained to Rebecca these two reports are important to get right:
Rebecca reacted with shock and disbelief that we’d need to find mistakes and correct them. She asked me,
“How will we find the mistakes?”
I told her that the answer is simple: Patterns.
We would look for patterns over time, and while we were doing that, we would also look for any interruptions in the pattern.
We started with Profit and Loss (P&L.) We looked at:
We did the same with the Balance Sheet. It gave Rebecca an idea of how key important categories changed over time. She was particularly interested in:
Looking for Mistakes
I showed Rebecca two “pattern interruptions” that seemed out of place:
Rebecca knew the business so well that she could look at the numbers and say, “This just doesn’t look right, David.”
Every time something didn’t look right, we would dig a little deeper.
Digging and Digging and Digging
QuickBooks lets you click on a high-level number and then shows you the transactions that add up to that number.
Sometimes there was nothing wrong, it was a change in the business.
We also found a lot of mistakes:
There were other mistakes, but those were the big ones.
We fixed most of the mistakes we found. There were entries that Rebecca just could not identify.
We looked for more questionable patterns after the changes were made and made a few more fixes.
We went through the Balance Sheet and used the same process of looking for changes to patterns. This was faster, but some of the changes a had a bigger impact on the business.
Lessons for Rebecca
After our bookkeeping changes Rebecca felt uplifted and more secure in understanding her business and what it takes to have good financial reports. Here is what she learned:
“David, this takes way too much time to do regularly.”
Rebecca told there was no way she could do this every month, let alone every week.
I smiled sympathetically and told her, “I absolutely agree. This took way too much time to do this every month. Let me ask you a question: When is the last time you did a review like this?”
Me: “And how long have you been in business?”
Rebecca: “Seven years.” (A look of understanding came over her face). “Do you mean that I had seven years of problems we dealt with today and that if I would do this regularly it wouldn’t take so much time?”
Me: “Yes, Rebecca! You learn quickly.”
Rebecca:” What do you recommend?”
Me: “You should do a weekly review. You can do it with your bookkeeper. You will see and correct the mistakes, so there will be fewer each week. I’ll be with you the first time and it won’t take as much time. Each review will be faster. My clients take about 30 minutes per month to review the books with their bookkeeper, finance manager, controller, or CFO.
Do a weekly review every week for a month, and then do a review every two weeks for another month. If you are not finding too many errors, try a once monthly schedule. If you start seeing a lot of mistakes, go back to every two weeks until the number of mistakes goes back down.”
Rebecca: “So once we stop finding a lot of mistakes, can I just forget about my reports and finances until it’s time to review them again?”
Rhythm of Your Business
Instead of immediately answering, I asked Rebecca more about her report review process.
She told me that the bookkeeping was always too far behind to look at reports regularly.
We came up with the following list of reports she wanted to review:
Rebecca realized that her daily and weekly reviews would keep a pulse on the financial heartbeat of the company. It would help her find bookkeeping errors and fixed immediately. This meant the monthly review would be less painful.
I explained that my clients take an hour per month to do a formal financial review. About 10-15 minutes looking at patterns and finding mistakes. The rest of the time is spent:
“Hard, but worth it.”
Rebecca was feeling weight come off her shoulders and she knew she would sleep better that night. She was finally going to understand the financial health of The Spa.
Rebecca acknowledged that all the hard work was worth it. She would come in tomorrow looking forward to the daily results.
Your Unique Business
Almost every company that is in financial trouble is missing accurate and up-to-date bookkeeping. The same is true for companies that are profitable but cannot grow their business or never seem to have enough cash.
You probably have unanswered questions about implementing bookkeeping changes that will help your unique business. Your current employees, accountant, bookkeeper, or financial advisor may be able to move you forward.
If you do not feel like they can help, reach out to successful business owners in your area and ask for referrals to find someone who can do this type of work. If you want, contact me and I may be able to help or refer you to someone in your area.
What are your experiences with implementing cash management systems? What additional questions or comments do you have? Your questions or comments may prompt me to write a new article you can use to improve your business.
David Safeer helps businesses implement cash management systems that create business breakthroughs. He founded The Cash Management Project in November 2018, to help businesses manage and optimize their cash resources. David writes, teaches, and works with diverse companies around the world.
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