Accounting Essentials: You Can’t Fix What You Don’t Know
Proper accounting procedures provide vast insight into your company’s Key Performance Indicators, and its financial condition at any given time.
Do you know your numbers? So many home service business owners don’t, and it can put them at a disadvantage when driving profit and growth. Without access to a basic understanding of information about their business, they have no roadmap for success.
Without the right financial information to guide them, business owners can end up feeling frustrated their business isn’t growing as they think it should. They might even be struggling to make ends meet each month.
If this sounds like you, it’s time to get acquainted with the numbers you should use to steer your business. The No. 1 way to see a clear path to profitability and growth is to have a solid understanding of accounting, financials and key performance indicators (KPIs) and review that information regularly.
These figures can be intimidating for many business owners, but, bluntly, you can’t fix what you don’t know. Without access to these financial and operational facts on a daily, weekly, and monthly basis, you’re operating blind. At best, you’re making educated guesses. Having these facts in hand empowers you to take control of your business and get on the right track to maximizing profits.
Inning by Inning
It can help to think of yourself, the business owner, as the coach of a baseball team. You have a season of 12 games to play, one for each month of the year. Financial reporting serves as your scorecard.
To win games, you need the information to make decisions from moment to moment. You can’t wait two or three weeks, or even months, after each game to find out whether you won or not. You need to know what’s going on during each game so you can make changes to win.
Many home service business owners make the mistake of not looking at financials at all, or they’re held hostage by bookkeepers who don’t produce timely and accurate reports. Implement processes and work with your team to get the reports in your hands, so you’ll be empowered to change the game in real-time.
Understand the Numbers
It’s vital the business owner, not just the accountant, understand the scorecard that sound accounting, financials, and reporting represent. To ensure timely reporting, the business owner must take the initiative and put processes in place to support it.
Some best practices for getting and understanding your reports include:
• Identify and overcome common accounting bottlenecks that result in tardy reports.
• Bill daily
• Collect daily
• Know when revenue is earned
• Understand the difference between cost of goods sold (direct costs) and overhead.
Once you have the difference between cost of goods sold and overhead correct, you can find your breakeven revenue figure. This will let you know day to day how you’re doing in the month’s ballgame. But be careful. Make sure you recognize revenue correctly and timely, as it is the top misreported item. Revenue is earned and must be weighed against costs.
The business owner should be monitoring specific reports on a regular basis. A good schedule includes:
• Daily — monitor revenue earned against breakeven figure using a daily billing report.
• Weekly — review accounts receivable and collections, plus overall cash flow.
• Monthly — look at the profit and loss statement and your balance sheet.
With these indicators at hand, you will know your status at all times, giving you the ability to make informed decisions that will drive profitability and growth.
Don’t Ignore the Numbers
Unfortunately, many home service business owners don’t feel comfortable with accounting and financials. This lack of understanding can lead them to outsource or even ignoring their financials, which is never good.
Ideally, the bookkeeping and accounting processes are maintained by company employees. Hire a qualified bookkeeper and provide proper training and the tools for the job. This includes industry-specific accounting training on best practices as well as key performance indicators. Ensure they have a work area that has minimal opportunities interruptions, thereby reducing posting errors and creating an environment that is conducive to timely and accurate reporting. Especially noteworthy is the accuracy of documentation submitted to the accounting team. Incomplete communication on incoming documents to accounting will result in a callback, thereby delaying the production of the scorecard.
If you need to outsource bookkeeping and accounting, you may find it challenging to get reporting in the timeframe you need. Nevertheless, if you choose to go the outsourcing route, make sure the vendor understands your needs and reporting expectations. And agree to how you will submit documentation to ensure that they receive information in a timely manner.
Also, don’t confuse a tax service with accounting. The CPA or tax preparation service has a different job from an internal accountant. A CPA is tax-focused. They play a once-per-year ballgame focused on minimizing tax liability instead of maximizing profitability. Their goals, while beneficial from a tax standpoint, may be at odds with your management reporting needs.
Training to Win
If you want to take control of your home service business’s ballgame, you don’t have to figure it out by yourself. Many owners seek out business coaching to give them the answers they need for a winning season. An investment in business coaching and training can help you understand your numbers and empower you to excel.
Make sure training covers specific coursework to give you a complete understanding of the topic. This includes how-tos of accounting, office management, and detailed QuickBooks training that shows how to produce an accurate and timely financial statement.
Also, make sure your coach or training series is specific to your industry. While some accounting and reporting fundamentals are universal, each industry has unique issues. Make sure you’re not missing the best KPIs and find training focused on your line of work.
With the right tools and training, you’ll have the ability to make positive changes in your business, to plan ahead, and position yourself for the winning season you and your team have worked so hard to achieve.
About Kim Archer
Kim Archer is the Vice President of Dealer Coaching for Business Development Resources (BDR), the premier business training and coaching provider to the home service industry. She is the lead trainer for BDR’s financial courses, Accounting & Office Management, and QuickBooks for the HVAC Contractor. The architect of BDR’s Profit Launch business planning workshops, she created the templates used to produce hundreds of monthly financial statements, with combined client revenues of over 2.1 billion dollars annually. Learn more about BDR at www.bdrco.com.