Where’s my money going?- The importance of bookkeeping

A tale as old as time, we meet a business owner whose operations are going great. Customers and team members are happy and revenue is steadily improving. These business owners love talking about the growth and the efficiency of their business… but then we ask how much the business is clearing after expenses and the tone begins to shift. Suddenly the conversation turns defensive talking about unexpected maintenance, team growth, or generally unexpected costs. While these are legitimate challenges, we regularly see two silent profitability killers hidden in plain sight that can be improved with simple changes to your company bookkeeping: 

1. Customers are costing you more than you think

2. Incomplete picture on SG&A expenses

I know exactly how much I make from my customers! 

The reaction to “customers costing more than you think” is always passionate. Most business owners are current or past practitioners with a deep understanding of every aspect of their business. However, as the business grows and deals become more complex our teams typically see two scenarios that silently erode the profitability of your customers  

• Customer specific tools/hardware- Your team just signed a new customer with a large custom order. You purchase miscellaneous equipment to fulfill the job thinking “I’ll use this for future jobs” and put the expense into a general account. However, once the job is done, the equipment sits in your office and you haven’t used it since. While the original expense categorization was correct, when the equipment goes unused your team needs to “reclassify” the expense to the job directly so you have a clear view of the profitability of each job. Periodic reviews of general accounts to reclassify expenses are critical to understand customer profitability!  

• Customer promotional expenses- Your sales team has been courting a new customer and periodically takes them to lunch, buys gift baskets, or drops off company swag. Instead of coding this to marketing, they put the expenses under general (e.g. meals and expenses) and you quickly lose visibility into how much you’re spending on your customers. By correctly coding these expenses into specific marketing categories, you can better understand the sales and marketing costs. Even better, tie these expenses with your CRM so your team can fully understand the cost of customer acquisition!  

SG&A or Office Expense; Why do I care? 

Eyes quickly glaze over when we talk about Opex, SGA, and Office Expenses. As a quick refresher, Opex is an umbrella term, everything not directly related to delivering your product is considered “operating”. SG&A (Sales General and Administration) is a sub-category and Office Expenses are a sub-sub-category. If you’re feeling confused on how to think about these categories or want more detail, please take a look at our in depth article here.

Now, why focus on SGA and Office Expense accounts? Simply put, these accounts tend to become a catch all for your business’ miscellaneous expenses. This outcome is not entirely unexpected as a business grows. Taking a step back, consider for a moment how you would go about planning your personal finances. 

The first step most people naturally take in budgeting is to categorize expenses into large buckets like groceries, rent, utilities, and entertainment. If we consider groceries, most leave that as a broad category and few would go through the trouble of making a budget sub-category to track how much they spend on broccoli or toothpaste. 

This method works for awhile, but now assume you start purchasing food, pharmacy, electronics, or more from your local Costco, Target, or Walmart. Now when you review the “Groceries” category, you have tripled your original budget!  

We see this exact scenario with small businesses particularly in the Office Expenses category. Computer equipment, software, and even business permits get categorized as general Office Expenses! Then within a year or two, the Office Expense category is 3 or 4 times the original budget. There are two solutions (short and long) to help address this challenge

1. Short Term- Percentage thresholds and periodic categorization review. For this method, you monitor each category as a percentage of total budget. If the percentage spikes over expected, you schedule a category review. These threshold approaches are natural but regularly trigger reviews. This is due to most small businesses being on a cash basis which creates “lumpiness” in your budget categories month over month.   

2. Long Term- Moving your company to accrual accounting will naturally align the revenue generation period and the associated cost of business. By aligning revenue generation and support costs, your business can improve budget oversight and overall forecasting. Unfortunately, accrual accounting is (slightly) more complicated and requires owners to invest into accounting governance. 

Where do I go next? 

Implementing accounting processes can feel overwhelming at first but it’s vital that your team has a clear view of the cost of running your business. Laying the foundation early will also improve your budgeting and cash flow analysis allowing you to make the best decisions on how to grow your business. Additionally, if you are considering loans, external investors, or someday selling your business then you’ll need to have a solid set of financial reports for support. 

Leveraging TS Accounting Solutions, we can help you quickly explore different strategies to determine what is right for your business reporting. Take a look at our free resources or feel free to reach out today!