November 2009Being the only word in the English language I know of that sports three double letters in a row ("ookkee”) is not the only thing bookkeeping has going for it.
Boring though it may appear on the surface, it can, and often does, hold the key to business survival.
Mention bookkeeping to the man on the street and you may well receive a yawned reply. You can see him picture dusty general ledgers with rows of cryptic figures running up and down columns, meaningless to all but a few brave souls who normally add the letters "CPA” after their names.
But, believe it or not, under that dusty—and often vilified—exterior runs a streak of truth, for numbers don’t lie. While it might be true that some would rather not know where, precisely, they stand financially or cash-flow wise, the viability and well-being of a business depends on knowing, and acting on, precisely that.
As with any discipline that involves data, you can of course fool the system by lying to it—known in bookkeeping as "fudging or doctoring the accounts,” and is how the expression "it looks good on paper” got its bad name. But given that you have the discipline to enter correct and timely information, and the faith then to trust what the figures tell you, bookkeeping may well save your day.
Purpose of Bookkeeping
Generically speaking, the purpose of bookkeeping is to record, and bring to light—in the form of helpful reports—the amounts and sources of income and expenditures for any given period. Proper bookkeeping should also show the nature and value of the assets and liabilities of a business, as well as its net worth at the close of that period.
Extending this definition to include the construction industry, it would also embrace payroll, accounts payable and receivable, job costing, as well as estimates, allocation and forecasting.
Proper bookkeeping is particularly important to a small business, since it rarely can afford to waste money; and it also enables the small business owner to support expenditures made for the business in order to claim all available tax credits and deductions.
In essence, bookkeeping is a real-time scorecard for how your business is performing, and it holds the vital clues to how to improve it.
Or, as Pat Arrington of Commercial Enterprises, Inc. in New Mexico puts it, "Closing out a job is making an entry in a history book, you can see whether you made it or not. Good bookkeeping, on the other hand, gives you the ability to see how you’re doing during the project.”
In order to control any activity, you need first to take responsibility for it, and then truly to inform yourself about it. Figures may be sterile and unemotional things, but that’s precisely what you need to determine a state of affairs. The current job is running on time, or it is not; it is currently on budget, or it is not; the cost of change orders is threatening your bottom line, or it is not. The figures do not have feelings about this, they speak a plain, cold truth, and any business manager would do well to listen and act accordingly.
Bill McPherson, president of Central Ceilings, Inc. in Massachusetts, got religion a long time ago: "We closely track the cost of each job, and hold weekly job progress meetings to go over the figures and handle any problems or situations that come to light.
"Now, as an owner, I’m not a micromanager, but I certainly am a micro-observer, and it is crucial to have a good bookkeeping system in place when you grow from 10 or 15 guys to the next level, otherwise you’ll find the fish will outgrow the boat.
"Good bookkeeping keeps you aware of what’s going on. In fact, it is what makes it possible to operate.”
Steve Birkeland, owner of Artcraft Wall & Ceiling in Minnesota, agrees: "You have to know where you stand. You simply cannot run a business without it. If a job doesn’t feel right, you must be able to go to your books, whether manually or in software, and see exactly where you stand financially. You simply cannot operate a business if you don’t know the truth about the financial health of it.”
Saving the Day
In fact, boring though it may be, good bookkeeping does save many a day.
According to Arrington, "Our bookkeeping is saving our day right now. Many major banks have stopped giving or extending lines of credit to contractors, and the only way you can convince the bank that you’re capable of carrying such a line is to present them squeaky clean job costs. And that takes good bookkeeping.
"Talking to our banker the other day, he said they now dealt with many contractors who have not turned a profit for two years, who have no backlog, and who still ask for a line of credit. From his viewpoint, they don’t have the means to repay the line, and extending one to them would be doing them a disfavor, just digging the hole deeper.
"The good news for us is that the owners of our company are so meticulous in their bookkeeping that we have banks fighting for our business.”
Kim Sides of Sides Drywall, Inc. in Alabama concurs: "As a matter of fact, bookkeeping is saving the day as we speak. Were it not for our bookkeeper, we could be in bad shape right now. She has kept a very close eye on the financials over the last year, and by holding back on expenditures, we’ve been able to ride this downturn quite well.
"The key is that you have to know where you stand. Without perfect books, that’s almost impossible.”
John Drexel, division manager at Anning-Johnson Company’s Los Angeles Office, arrives at the same conclusion: "As far as tracking projects, their cost allocations and actual costs—the bookkeeping portion of that is sometimes the actual savior of the job. Especially in these times, those who monitor and manage their money wisely are faring better than those who do not. Tracking and being careful with your cash is extremely important nowadays.”
For Greg Vangellow, owner of R.W. Dake Co., Inc. in New York, and a banker turned contractor, this subject is close to his heart. "Bookkeeping saves the day, every day; especially the automation of bookkeeping,” he says. "It has often saved us in terms of recognizing when a job may be in trouble, allowing us to take corrective action and bring it in on or under budget.
"When you get caught up in the details of a project, it is easy to lose sight of the financial picture. Good books, and flexible software to convert raw data into useful information, let you look at the numbers and see what’s actually going on.
"Bookkeeping has certainly saved us in terms of tracking costs, especially of change orders that prior to our fully automated system we may have overlooked or forgotten.
"And as contracts get more complex and change orders proliferate, having a software with a purchase order system in place, allowing you to easily enter and monitor these change orders, is essential.
"A good financial system is the lifeblood of any company, and if you don’t have good financial records, you probably won’t make it. They are the tool used to communicate with banks and bonding companies; they are the language they understand.”
Brendan Sheehan, CPA, with Dan J. Sheehan Company in Georgia, also believes that good bookkeeping saves the day on an ongoing basis: "We use [software that] allows us instant job-cost access. Once the estimate is loaded into our system, we can monitor progress on a daily basis, letting us know how we perform against projections and budgets, and allowing us to take action as needed to make sure the projects are brought in profitably.
"Without accurate and up-to-date bookkeeping, there is no way we could manage the business. We track percent complete of each discipline in each project against the forecast, and each day we know precisely where we stand.”
Brian Jahn of Jahn & Sons, Inc. in Wisconsin agrees: "It saves the day, every day. Tracking job costs, for example, allows us to ensure the viability of projects. Without good bookkeeping, I don’t think you’ll be around for long.”
Stephen Angell of Cape Cod Plastering, Inc. in Rhode Island thanks good bookkeeping for a smooth operation: "Bookkeeping is an absolute must. We have spent a lot of time, a lot of money and a lot of effort to make sure that things are tracked properly. Whether this has saved the day will remain to be seen, but because we do keep excellent books, everything else flows.
"Also, because we do much public work, we’re audited by all sorts of different people and thanks to our good records, these audits go very smoothly.
Richard Riley of Simpson Plastering, Inc. in Alabama says, "Bookkeeping not so much saved our day as made our day a couple of years ago when during an analysis of the books the report showed we had been using an incorrect tax classification. This saved us some $40,000.
"Truth is, I don’t know how you’d keep a business going without good bookkeeping. Before I undertake any new project, I’ll study my cash flow projections, and swear by them.”
A common denominator among the owners of contractors who do well today, and who seem to be riding out the current fiscal crisis, is that they stay on top of the financial health of their company, on a weekly, if not daily, basis.
Robert Aird of Robert A. Aird, Inc. in Maryland cuts to the quick on the issue, "Bookkeeping keeps me focused on the essentials: cash in, cash out. I have to keep on top of it.
"Also, forecasting was never a strong suit for us, but is now. Our new bookkeeper, using software, forecasted the last six months for us and predicted exactly what we needed to do in order to survive. We did just that, and we’re surviving.”
Gerald Roach, owner of Forks Lath & Plaster in North Dakota, says he checks the books at least weekly, "especially as far as job costs go, which I check against bills and retainage.
"You need a good bookkeeper, because that’s what, at the end of the day, lets you know where you are with the company. If you don’t keep on top of that, you’ll soon be on the street.”
Angell is briefed about where his company stands every day: "What money has come in, what money has gone out, where we are. I am very close to it.
"I also review all our projects on a weekly basis, projections versus actual costs. You have to keep your finger on the pulse. It’s a must today.”
Birkeland says, "I get briefed on the overall financial health of the business at least once a month, and I inspect the jobs and their allocations versus costs at least weekly to make sure we’re on track.”
Leo Sheehan, vice president of Dan J. Sheehan Company in Georgia, receives a full briefing on the state of company finances monthly as well, but he also reviews "job costing against allocation and projections on a weekly basis.”
Sides likes to be ready 24/7: "I pull up and review financial data at least two or three times a week, especially these days. In fact, all the figures are at my beck and call every single minute, every single day. I can pull it up and see where we stand on any job, any time.”
Roger Olson, president of Sig Olson & Sons Plastering, Inc. in Minnesota, is briefed on the finances at least weekly. And, he says, "I meet with the project teams to cover job costs versus projections on a daily basis. Knowing where we stand gives us the confidence to bid what we need to bid and to know what we need to know to order materials, to know that we have the money to pay for them.”
Glen Sieber of Easley & Rivers, Inc. in Pennsylvania keeps a close watch as well. "I check the books almost daily,” he says. "I look at man-hours, payroll, money in-out, job progress, job costing, and all this with an eye to forecasting what types of jobs we need to bid at this point to keep our different crews busy.”
According to Dun & Bradstreet, 33 percent of all new businesses fail within the first six months. Fifty percent fail within their first two years of operation and 75 percent fail within the first three years. And here’s the kicker: Many reports on business failure cite poor financial management as the number one reason for failure.
Sparked perhaps by a great idea, or by the vision of barrels of money "if only I worked for myself,” new business owners often, if not frequently, lack relevant business and management expertise in areas such as finance, purchasing, selling, production, and hiring and managing employees.
Unless they recognize—as with the help of good bookkeeping—that they are not doing well financially, and so either seek help or take the necessary actions, business owners may soon face disaster.
The old adage in business is that "Cash is King.” Perhaps not supreme ruler, but certainly up there, and in the early months of a new business it is very important to monitor cash flow.
The operative word here is "monitor.” You need either a good bookkeeper or excellent financial software—where you enter correct and timely data—to know, precisely, how your cash flows. Unless you know that your well is about to dry up, you cannot take preventative measures, or dig a new one.
Though some economic schools beg to differ, it really is as simple as this: If you spend more money than you bring in, you will soon be out of business. Period.
Note, however, that it is not uncommon for most businesses—according to their startup plan and projections—to have negative cash flow for the first several months of operation (for some startups, this may be for a year, or even longer).
Bookkeeping is nowhere near the top of the list of exciting things to do, nor of chivalrous undertakings. And admittedly, in the day-to-day grind of things it can be outright boring. But when measured against your need to view the true state of your business accurately—so you can manage it to success— you would be hard-pressed to find a more effective discipline.
Coeur d’Alene, Idaho–based Ulf Wolf writes for the construction industry as Words & Images.