Your Business Checkbook Doesn’t Tell You Everything

It can be a real challenge for a new entrepreneur who doesn’t regularly balance his or her personal checkbook to adjust to the demands of business accounting.  Business accounting is a critical discipline that the business owner either must learn and adopt – or must outsource to someone else.  No matter how small your business is, you simply can’t run your business as if it were your home.  There are many solid reasons for this.

One reason is that in business it is far more likely that more people are going to have claims on your money.  Lendors, vendors, employees, and Uncle Sam all need to get paid.  These obligations create liabilities that your checkbook doesn’t show.  How much should be set aside to pay the bills?  How much do you need to reserve for tax payments?  What about those business loans?  It is simply too hard to track in your head.

And, to make things even more confusing, the reality of most businesses is that there is a time difference between when you close the deal (the SALE), and when you actually get paid (the SETTLEMENT).  Sometimes those two parts of the transaction happen at the same time – but frequently they occur minutes, hours, days, weeks, or months apart.

This is particularly true when your business sells good or services on terms.  Many small businesses operate in a world where they need to be able to keep track of deposits – which are upfront payments for services not yet provided, and are haven’t yet been “earned” – and work that has been done for a customer for which the business has not been paid.  It isn’t unusual for many small businesses – particularly contractors and service providers – to regularly operate out-of-pocket.  They provide the work up front, and bill for services later.

Keeping track of all these moving financial components can be a challenge.  And “checkbook accounting” simply isn’t up to it.  That’s why the finances of a small business need to provide for detailed tracking and recording of of these pieces.

But perhaps the most important reason these things need to be tracked is that the goal of the entrepreneur is to build the value of the business.  The goal is to build a healthy business that is worth something.  Whether your plan is to build and operate your business over the long-term, build your business to sell to a willing buyer at a healthy profit, or build the business to pass on to your family, it is critical to have a complete picture of how the business is doing.  You want to have some idea about the current value of the business you are building. The checkbook simply doesn’t tell you those things.

All of these reasons highlight the need for regular reports that give the small business owner a snapshot of these important pieces of financial information.  These reports are called financial statements, and they are among the least understood tools for many entrepreneurs.  If you are not seeing regular financial statements for your business – or if you don’t really understand the financial statements that you are seeing – you have just identified an important place to start in your business education.

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