Running Your Own Books (Into the Ground)
The Hidden Cost of Believing Software is the Solution
Accounting software helps make our lives easier. It should aim to minimize mistakes and make us more productive. The most popular accounting software in the US is Quickbooks by Intuit. Ever since it gained popularity, Quickbooks touts its usability, because easy to understand source documents (invoices, bills, etc.) drive the underlying accounting transactions. This means that someone with little or no accounting knowledge can keep the books, since no accounting knowledge is needed to create financial statements. Breakthrough!
Software pushes specialized tasks down the ladder to generalized labor. This should make it less expensive to achieve the same result. However, for this to work, there is a major thing that must be in place. A professional of specialized skill must set up the system correctly, customized for your company’s own workflows. This step ensures minimization of mistakes in the long run. You cannot accomplish this using an off the shelf software wizard or default setup. Too many small business owners overlook this, and it ends up costing so much more money in the long run.
Here’s an example of what can happen when you overlook this first step. Business owner buys accounting software and sets up default chart of accounts (COA) using a wizard. The default COA contains some accounts that are not needed, and omits others which are. The company delegates daily operations to an office administrator, who has office organization skills, but no specialized accounting knowledge. When the admin creates source documents, sometimes the correct accounts are chosen on bills and invoices, and other times they are not. The accounts either don’t exist in the chart of accounts (bad wizard!), or the admin does not know how to properly categorize the transaction.
A year passes, and the company completes the end of year closing. The business owner sends financial statements to the company’s CPA, who can instantly tell that they are wrong at first glance. Now the CPA charges for clean-up before she can file the company taxes, likely at around $200 per hour. This can get very expensive quickly depending on how bad the books are.
Learning The Principles (The Hard Way)
In this example, no one in the company understands the underlying principles of accounting that the software is trying to implement. I see this every time I train a client who asks “what menu did you use to get to this screen?”. This question indicates focus on learning the software in a vacuum. I care less for software certifications than I do accounting knowledge. Someone with a grasp on accounting principles can learn a new software in an afternoon.
Intuit must have figured out how many of their customers were screwing up their own books because they rolled out the ProAdvisor program. This is a marketplace for premium help by “certified experts” that you can call to troubleshoot your Quickbooks woes. I would argue these certifications focus too heavily on the software and not the accounting principles. One advisor may be certified on every desktop version that came out since 2010. Who cares? He has proven that he can find the correct menu that contains your chart of accounts. Can he look at your books and instantly know what is messed up? Can he set up your chart of accounts correctly the first time? This knowledge saves you money with your CPA, and maximizes the informational value of your financial statements.
If you run daily bookkeeping operations as an office admin, you can greatly increase your value by studying the basic accounting principles that are at the heart of your company’s accounting software. Here is a great place to start that costs no money. After this, learning the software is much easier.
Trying to learn accounting software without a grasp on accounting principles is akin to trying to learn to write poetry without knowing how to write language. Before choosing a software and trying to set it up yourself, it pays dividends to consult someone who can understand your overall business’ financial workflows, and set it up correctly the first time.