Chapter 3: Bookkeeping and Accounting

Your bookkeeping and accounting activities organize and record the flow of money through your business. While there's no need for you to become an accountant, you do need a basic understanding of this process in order to get the most out of your business. There is just no getting around it. For this reason, we'll begin our discussion with an overview of the principles of accounting.

The flow of money through your business must be recorded and monitored. Too often, a business owner will run his business with little more than a bank statement as his guide, but that's like coaching a hockey team by only studying the final scores after each game. It's important, but it's limiting. You need to know who scored, when they scored, and how. You need to know the individual strengths and weaknesses of each player, and you need to know how the players interact with each other on the ice. Just as the final score can't give you nearly enough information to improve the hockey team, your bank statement can't give you nearly enough information to improve your company. Good Bookkeeping and Accounting Systems provide you the details.

Your Bookkeeping and Accounting Systems record, analyze, and interpret the flow of money through your business. Without them, you're managing your finances by guesswork. They might be educated guesses, but keep in mind that your ability to make good decisions is directly impacted by the quality and accuracy of the information you base those guesses on. If your information is imperfect, your guesses, no matter how clever, will be less than optimal.

If your Financial Control Systems are solid, then every time a financial transaction occurs in your business, your Bookkeeping and Accounting Systems should spring into action to record, summarize and analyze it. The output from these systems is, or should be, useful information, but it's a chain of events that is only as strong as its weakest link. Mistakes result in faulty reports, that lead to faulty analysis, and ultimately to faulty decision-making. For this reason, it's imperative you're certain about the integrity of all your financial systems. The long-term success of your business depends on it.

An organized Accounting System will tell you exactly where your money comes from and exactly where it goes. It can even help you predict the future by revealing trends and patterns in your finances. For example, you might notice that material costs have been slowly rising. Knowing this, you might avoid a potential cash-flow problem by finding a cheaper source of materials, by renegotiating with your supplier for a volume discount, or by raising your prices before it becomes a serious problem.

IFRS — There are many different ways to document finances. If everyone did it differently, however, those outside of a business might not understand its financial statements. This would make hiring a financial expert, calculating taxes, or applying for a loan extremely complicated. As a consequence, most businesses including all public corporations keep their books using a standard format referred to as IFRS or International Financial Reporting Standards. IFRS lays out the conventions and rules accountants follow when recording transactions and preparing financial statements. Within these basic guidelines, however, there is still adequate room to customize your accounting system.