What if I told you most of your accounting problems aren’t really accounting problems? They’re merely an indication of problems with your processes and systems.
The reality is that your bookkeeping process should be a virtual reflection of everything that’s physically happened in your company; of everything that has added value, created expense, or both.
And as a result, the numbers on your financial statements are measurements of whether or not you’re doing those things—creating value and spending money—in accordance with your plans and expectations.
Assuming you have a good bookkeeping process in place (and that’s a ground rule for this article), when you see a number that makes you cringe, you know something’s wrong. Let’s say that your profit margin is down, your payroll expense is high, or your revenue didn’t meet expectations. Each one of those signals provides insight into your actual physical business operations.
So, for example, if you’re not meeting revenue projections, you should look at the process that leads to revenue. That process starts with lead generation, sales pipeline, closing sales, booking estimates, creating work orders, signing contracts, and pricing. It goes on to include customer service, returns, discounts, and subsequent sales. All these elements are real business processes, and revenue reflects their success or failure.
If there’s a decrease in your profit margin on your financial reports, then there is a specific business activity or process that is causing it.
Perhaps your prices are too low. Maybe you’re selling too much of an unprofitable product line and need to focus on a higher margin product line. Or maybe someone forgot to buy at the right time and volume break to get a discount.
Whenever something doesn’t look right in your financial statements, you should take that number apart and look into the business processes that are causing it.
Remember: You can only fix what you measure. Your budget and forecast are your measuring stick and your actual monthly financial results are the measurement.