Management Decision-Making: The Role of Bookkeeping in Your Business

No question. Financial accounting is an integral part of any business.  There’s a big difference, however, between the financial reports required when reporting to the government for tax purposes and when reporting to management for effective decision-making.

Both are directed toward determining profits. But tax return filing is all about what portion you will pay out to the government and management accounting is all about measuring what actually produces profit in your business.

To be meaningful for management decision-making, your accounting records should provide you with the following information:

Sales and cost of sales of each product or service you provide for your clients. Part of cost of sales is simple to calculate. You pay a certain amount to bring in a product at cost and sell it for a price that’s higher than that. Shipping costs, packaging costs, sales commissions and shelf space can all be calculated as cost of sales. Unless you have instituted a form of cost accounting, your wage costs are usually lumped together under Overhead.

Overhead expenses are those costs that are constant regardless of whether you actually sell anything on any given day or in any given hour. These include rent (or mortgage interest and property taxes), telephone, basic utilities and most of your non-sales or production staff costs.

Taxes such as taxes collected and payable, employment expenses other than wages, and income tax on profits are also required calculations to determine your net profits.

An effective cash-flow management system. For the micro-business, a spreadsheet you can manage on your own is best. For others, cash-flow statements should be kept up-to-date by your bookkeeper or accountant so that you can reference them at any time.

THREE TIPS FOR MORE EFFECTIVE MANAGEMENT REPORTS

Make sure you understand your financial reports. A good accountant will recommend how to set up your books to achieve optimum effectiveness as management decision-making tools. Your bookkeeper uses the List of Accounts recommended to assign your income and expenses. And your business coach or mentor can help you by suggesting a list of  questions to ask, to make sure you get the most usable information in your financials.

Insist on timely financial reports and review them regularly. Over time you will recognize trends in your business and develop a growing ability to “read between the lines”.

If you are tagged for a tax audit by the tax department, ask your accountant to be your contact person. Your accountant can prevent a great deal of stress for you by acting as your go-between.

Keep in mind that E-Myth guru Michael Gerber almost went bankrupt because he left the financial decisions to his partner for years, while he concentrated on recruiting and training franchisees. Don’t let that happen to you. Learn from his mistakes and the mistakes of others instead of doing everything the hard way yourself.