One of the things that small businesses – and often mid-sized ones too – don’t do well is bookkeeping, the source of all their financial reports. When money to (1) expand the sales and marketing team, or (2) add new products, or (3) pay bonuses to the owners, have to compete for dollars with an adequate accounting system and competent staffing, accounting sometimes loses out. After all, accounting doesn’t make money for the company (or so I’ve heard), and often getting it right means paying more income taxes than the owners want, which means even less money for those favored projects.
No finger pointing – this is a ‘hypothetical discussion.’ But if that should be happening in a company that you know, there may be a couple problems, such as:
- A company with multiple products or services, or both, may not know which products or services are making money (and how much) and which are losing money (and how much). Discontinuing a product could actually increase profits, if they knew that.
- There is no ability to reasonably project the future results of the business, and that means limited ability to prepare for surprises (good or bad), allocate future funds for those special projects with the advance knowledge you can fund them, or develop strategies that will reduce income taxes legally.
- Limited ability, or maybe none, to get a bank loan to take on a really exciting project, or mortgage a new building or piece of equipment – at least at reasonable interest rates. The potential for growth may never be known because the project couldn’t get off the ground.
- Even a business in financial difficulty can often qualify for funding to help them through tight times, such as SBA loans, but if the accounting reports are clearly unreliable, that possibility goes away, absent a rare government grant program, e.g. COVID related. No bank wants to gamble their money that your company might be better than it looks on paper.
- If you have an exit in mind in the next few years, the price you’ll likely get for your company will be a lot less than you hoped for, maybe even a lot less than it’s worth, because you can’t prove it.
Now some would say that they can fix the accounting if and when it becomes a problem. That’s nice, dear, but by then it’s too late to fix the problem from last year, and the year before that, and so on. Accounting is a historical record of your business, and nobody puts much trust on history rewritten in the moment. Except those folks who don’t understand how this works. The cost of good accounting is always less than the cost of bad accounting. We know, because we’ve seen the results of both.
We are your CFO for Rent.