Accounting Versus Bookkeeping

Many of you may think that accounting and bookkeeping is the same thing.  But it is not.  Bookkeeping is merely the reporting of information; accounting is analyzing the information for making good decisions.  Hiring a bookkeeper with an accounting back ground is very important.  All of us are familiar with accounting but may not know it.

Anyone who's worked in an office at some point or another has had to go to accounting. They're the people who pay and send out the bills that keep the business running. They do a lot more than that, though. Sometimes referred to as "bean counters" they also keep their eye on profits, costs and losses.

Unless you're running your own business and acting as your own accountant, you'd have no way of knowing just how profitable - or not - your business is without some form of accounting. No matter what business you're in, even if all you do is balance a checkbook, that's still accounting. It's part of even a kid's life. Saving an allowance, spending it all at once - these are accounting principles.

What are some other businesses where accounting is critical? Well, farmers need to follow careful accounting procedures. Many of them run their farms year to year by taking loans to plant the crops. If it's a good year, a profitable one, then they can pay off their loan; if not, they might have to carry the loan over, and accrue more interest charges.

Every business and every individual needs to have some kind of accounting system in their lives. Otherwise, the finances can get away from them; they don't know what they've spent, or whether they can expect a profit or a loss from their business. Staying on top of accounting, whether it's for a multi-billion dollar business or for a personal checking account is a necessary activity on a daily basis if you're smart. Not doing so can mean anything from a bounced check or posting a loss to a company's shareholders. Both scenarios can be equally devastating.

Accounting is basically information reporting and analysis for decision making. This information is published periodically in business as a profit and loss statement, or an income statement.

How Bookkeeping Records can make or break a new business start up

Often times the difference between a professional bookkeeper and an a in house bookkeeper can make or break a business.   Typically when business owners are starting out, they try to cut corners and hire help that is very inexpensive.  This hiring strategy can turn out to costs you more in the long run.  If you are going to spending money in your business, you have to spend it on areas that can improve your bottom line.  A professional bookkeeper with an accounting back ground can help you.

Let me tell you the story of Mr. Money.  Mr. Money was a gentleman I met who was not concerned about having enough money to start his business because he sold a business and had more money than most to start his new business venture.  He knew his business very well and had a service that was well needed.  What Mr. Money did not have was two very important elements that every business needs to have  regardless of their knowledge and amount of start up capital.  Every business starting out needs a spending plan and a professional bookkeeper.  Mr. Money did not have.

Mr. Money had a friend he had known for years to do his bookkeeping and the bookkeeper had worked at the previous firm that Mr. Money  owned with a partner.  Mr. Money and the partner parted ways over the value of the business and business operations.  Because Mr. Money, had over two million dollars to start his new business he felt like he did not need a spending plan.  The business owned with 50 employees been added to payroll immediately.  There was no hiring strategy in place.  There was so much money that each employee went down to the local office supply store and ordered what they wanted for office furniture and equipment.  The bank account still had cash in it so no one bothered to check to see how the company was doing.

When I met Mr. Money, he was bragging to me about his new company and how this time it was all his and he was going to make millions and be able to sale this company for tens of millions of dollars.  I asked Mr. Money if he had a growth plan in place.  He said I know how to grow a business.   I asked Mr. Money if he had reviewed his most recent profit and loss statement and he told me he had a great bookkeeper that knew what she was doing.  She worked with him for years.
Well, ask you can see Mr. Money had all the answers and there was nothing I could do to help him.

Three months later, I received an urgent phone call from Mr. Money.  He called my office twice with in the hour and stated it was urgent for me to call him.  When I telephoned Mr. Money, he said I think I need your help.  Mr. Money was down to $390,000 in his bank account after starting with $2,000,000 three months earlier.

He had only had one sale in 90 days. He still had his 50 employees and they all had full medical and dental benefits.   When I asked to see his profit and loss statement, his bookkeeper got real defensive only later to find out it was not updated and the entries she had on there were not accounting for properly.  We later discovered the bookkeeper had no experience with a new company and setting up a chart of accounts.  She was only familiar with doing what she did at the last company.

I immediately worked with Mr. Money to get his books up to date.  It turns out he was spending $375,000 a month on overhead including employees.  He had purchased new trucks using cash and none of them were recorded on the books.  My process was simple, I needed to drop expenses quickly and get this company making money quickly.  I analyzed every single expense.  Unless, the expense was a direct contribution to the bottom line we got rid of it.  We had to off board employees fast.    In less than thirty days, I had dropped the companies costs down to $175,000 per month.  With $390,000 left I knew Mr. Money had to be at break even in 60 days.  By the 3th week, Mr. Money had generated enough in sales to cover half of his expenses.  This gave us another half of month to get it together.

As you can see having good bookkeeping records is crucial.  You can’t manage your business by the amount of money in your bank account.  You have to have good records to grow your business even when you have money in the bank.  Mr. Money’s business is profitable now and is still growing.  The difference is he now has accurate bookkeeping records.