Traditional Bookkeeping Doesn’t Work

When asked, almost any successful business owner would agree that bookkeeping is a vital part of keeping their business running. As a small business owner yourself, you probably value keeping a detailed and accurate account of your business’ financial data, and you may even dabble in bookkeeping yourself if the need arises. Nearly half of small business owners, though, said that bookkeeping was the task they loathed most in running their business. Worse, nearly all business owners that do their own bookkeeping approach the task in a traditional way, keeping a ledger of past transactions and generating reports about what has already happened with their business’ financials.

This kind of approach — a “traditional bookkeeping” approach — doesn’t work today. In this article, we will briefly define what we mean by “traditional bookkeeping”. Then we will go into more detail about the problems that a traditional bookkeeping approach can cause for today’s entrepreneurs.

This is the first of 4 articles we are going to publish with real talk about why traditional bookkeeping is failing business owners. We will talk about what the solutions are and the benefits to each of those solutions.

What do we mean by “traditional bookkeeping”?

As a small to medium-sized business owner, you may be familiar with the basics of bookkeeping. A bookkeeper documents the day-to-day financial transactions of a business, and is essentially responsible for tracking all of a business’ assets, expenditures, revenue and liabilities, among other things. Put simply, a traditional bookkeeper is a recorder of data: He or she provides the business owner with a snapshot in the form of a financial report or statement of how a business has been performing. That’s it…no analysis, no strategy, no planning. You know, all of the things businesses need to grow.

Today’s business owners need more out of their accounting functions than traditional bookkeeping offers, though, if they want to grow. Below are 4 problems that a reliance on traditional bookkeeping can cause for small business owners.

Put simply, a traditional bookkeeper is a recorder of data: He or she provides the business owner with a snapshot in the form of a financial report or statement of how a business has been performing. That’s it…no analysis, no strategy, no planning. You know, all of the things businesses need to grow.

Misunderstood financial statements

Most business owners aren’t financial professionals, and the financial statements that traditional bookkeeper’s provide can be difficult to understand. Many small business owners, in fact, don’t review the financial statements that their bookkeeper provides at all. If a traditional bookkeeper is simply providing reports and leaving the business owner to interpret and make use of them, that business probably isn’t making good use of valuable financial data. Financial reports are a crucial ingredient in creating a plan for a businesses’ future growth. A skilled accounting professional will absolutely make use of them when doing so.

Consider, for instance, planning to hit a specific profit goal in a given year. Most business owners — and especially those who rely on traditional bookkeeping — would be able to envision a reasonable goal. But probably wouldn’t have the bookkeeping functions at their disposal to create a realistic plan to reach that goal. Without understanding financial statements and making use of the data they provide, planning like this is difficult or impossible.

Inefficient reporting

Traditional bookkeeping methods certainly don’t help owner’s to understand reports. Financial reports can be dense and rich in detail. Often will only provide actionable information after careful study — and the vast majority of business owners don’t have the time or accounting know-how to dedicate to that study.

Modern tools like KPIs and KPI dashboards are one solution to this problem. They boil down complicated financial data into an easily digestible, easy to interpret form. These tools aren’t part of a traditional bookkeeping function. Owners who rely on traditional bookkeeping can be rightfully overwhelmed by the financial reports presented to them as a result. A skilled accounting professional, like a virtual CFO, would no doubt make use of KPIs and other tools to make the most of a business’ financial reports.

Backward looking focus

Traditional bookkeeping has an almost purely backward looking focus: When you think of the role of a bookkeeper, you probably imagine someone who gathers and reports data about what has happened in a business, or who makes sure that a business’ books are closed. In today’s small and medium-sized business environment, this kind of accounting function isn’t enough to succeed and grow. Accounting departments or outsourced accounting services need to not only report on what has happened with a business’ financials but create a sound plan for future financial success.

Virtual CFOs or controllers, for instance, will make use of a business’ financial reports to create a long-term, broad financial strategy for that business. Owners who are concerned that traditional bookkeeping isn’t meeting their needs, or who aren’t confident in their financial planning skills, should consider outsourcing the services of an accounting professional to develop a forward looking financial focus.

Poor cash management

You’ve probably heard some form of the adage “cash is king,” and this is especially true when it comes to small business operations. In fact, over ⅓ of small businesses fail because they run out of cash, and most small business owners aren’t experts in interpreting cash flow statements.

Traditional bookkeeping isn’t the same as cash management, and the kinds of reports that traditional bookkeepers create shouldn’t be confused with cash flow statements. Effective cash management is, like the other accounting functions we have discussed, forward looking: Cash flow statements are a kind of detailed, short-term forecast of exactly where cash is going, and they give business owners the data they need to create a plan for growth. Traditional bookkeeping functions, in contrast, are backward looking, and concerned with what has already happened with a business’ cash.

Articles in This Series

We’ve put together a whole series of articles like this. Are you interested in learning more about why traditional bookkeeping doesn’t work? Are you ready to join the hundreds of thousands of other owners that are getting more out of their accounting services? Keep reading. Here are links to our other articles.

· Traditional Bookkeeping Doesn’t Work Today

· Why Bookkeeping Fails: Your Current Reporting Can Be Better

· Why Bookkeeping Fails: Forecasting – The Future Is More Important Than the Past

· Why Bookkeeping Fails: Enhanced Bookkeeping is the Future

How Krieger Analytics can help

At Krieger Analytics, we believe in “enhanced bookkeeping”. You can learn more about this by reading the next few articles. But here are the basics – your bookkeeping can be smarter and help you make crucial decisions for your business.

When most business owners hear this their first reaction is “sure, but at what cost?”. There are two ways to respond to these questions. First, the cost isn’t much more significant. Its not about doing your bookkeeping differently — it is about adding an element that your bookkeeping has been missing. Its about adding the “brains” to your bookkeeping — forecasting, strategy, and analysis. Most business owners would be surprised that this can be accomplished for just a few thousand more each year.

Here is the second way to answer the questions – it’s at the cost of your business. Your competitors are doing this (at least the ones who are growing). The “big boys” who seem to have endless budgets are doing this. How can you afford not to? How can you afford not to have strategic goals and financial insight into your business?

Krieger Analytics specializes in outsourcing accounting services for small businesses, from bookkeeping to virtual CFO and controller consultations, and our background in entrepreneurship and finance means we know what running a business entails. Our goal is to meet your small business accounting needs without burdening you with the costs of a full-time accounting staff. And, we understand your position as a small business owner, because we have experience running businesses ourselves.
Have questions about anything discussed in this article, or interested in what valuable insights a CFO and former franchisor has for your business? Conversations are free, so don’t hesitate to reach out at [email protected], and let us explain how our services could be the right fit for you.