Signs You Need A Financial Pro
In mid-January 2017, I was traveling in Europe and in Berlin, Germany. It was my first visit, yet I was only there for a few days and wanted to explore this storied city. On a horrid cold day, I went on a 6-hour walking tour. I froze my tail off and learned a lot. The city is full of history, monuments, and cool and quirky things. One such quirk was a car called a Trabant.
The Trabant is pretty ridiculous. It was popular in East Berlin behind the Berlin Wall. Trabis were cheap and did the trick in moving people from A to B. But you wouldn’t drive one now. Today they are collector’s items with a cult following, like a classic car.
The exterior was a fabric-resin plastic. The loud, unreliable engine, cramped interior, and stinky exhaust made every ride uncomfortable. Plus, it lacked a fuel pump and fuel gauge. You can imagine the safety ratings.
Within two years after the Berlin Wall fell, Trabants were no longer made. The East Berliners upgraded to better, safer vehicles.
Photo Credit: Trabi Museum Berlin
These old school cars remind me of bookkeeping spreadsheets. Spreadsheets are great for start-ups in a lean phase. Both are cheap and cover the basic needs. But even though you can use one, should you?
Here are four questions you should ask to see if it’s time for an accounting upgrade.
Checkpoint Charlie was a crossing point between East and West Berlin before the Berlin Wall fell. Now it’s a popular tourist stop.
1. Are you behind on your books?
If you’re months behind on your books then you shouldn't do them.
Treating your business books as an afterthought is a recipe for disaster. You should update them at least monthly (weekly is ideal for most). Otherwise, the information isn’t relevant or useful in tracking your results. Without that data, you cannot test if a product or service is viable, profitable, or if any changes add value or not. And you can forget about managing growth, increasing profit, or catching mistakes.
The longer you wait to enter the data the harder it will be.
You’ll forget details like which products sold, why you bought something, and who you went had lunch with and why. To justify tax deductions, you need all the receipts. They tend to fade or disappear. In the case of an audit, missing receipts and poor books can be very expensive.
The biggest problem I see here is a lack of interest. Bookkeeping and taxes are the worst part of owning a business, according to research by SCORE. Especially if you don't know how to do it or lack a good system, bookkeeping can chew up a lot of time. The same study found that 40% of entrepreneurs spend 80+ hours a year on bookkeeping and taxes. That’s two full weeks that they could have focused on growing their business!
It’s time to upgrade your accounting and find a pro if you don’t keep up with your books every month. Most biz owners don’t want to wade through receipts and journal entries, but they need the data. It’s best to hire a professional who can do it well and help you interpret the data. Besides, as the boss, if it’s not your best skill or contribution to the business, you shouldn’t be doing it.
2. Are your spreadsheets overgrown and out-of-control?
It is possible to use spreadsheets to manage your books, but it is time-consuming and prone to errors. If you dislike bookkeeping and taxes, it will be extra tedious. Like driving a Trabant, you could, but should you?
To use spreadsheets, you must know the accounting framework and be strict with the data. Create a master spreadsheet with all transactions. Include cash activity, transfers between accounts, and all bank and credit card accounts. If you discover an error, update the master file and all others with that transaction.
To collaborate with others, you need to be extra careful. Only one person at a time should have permission to make changes. Otherwise, you may end up with two versions of a spreadsheet. And merging them together later may elicit a migraine.
To make a report, like a Profit and Loss, you need a separate workbook. To create the report, you need several tabs with details, summaries, formulas, and links. To do analysis or forecast, you’ll need to open a fresh workbook with several tabs to do all the calculations. Within months, you’ll have devoted copious hours to created dozens of spreadsheets.
Besides the complexity, skill, and time necessary, the biggest problem are typos. Spreadsheets are prone to errors. In fact, the Tuck School of Business at Dartmouth College found that 94% of spreadsheets contain errors.
Spreadsheets are genius for organizing data, but they don't have a set hierarchy. They are a temporary solution until you find a better tool and someone who knows how to use it.
Even if you make pristine spreadsheets and are a fantastic bookkeeper, you need a better system.
3. Can you afford to upgrade?
East Berlin cross-walk light. Note the man is wearing a hat.
I promise this isn't a trick question, but it is like the chicken and the egg. You need to spend money to increase your sales. But spending money means you need more sales to cover the costs and still turn a profit.
This is a dilemma you’ll encounter every time you hire or outsource. Everyone who works for you, in whatever capacity, should add value to your business. Either they increase sales or profit, or they free up your time to do the work that will increase sales and profit.
It is imperative to know the value of your time and where you spend it. I’ve helped many new entrepreneurs who don’t know either. Here are some Bellwether questions I like to ask to determine if someone can afford to hire help:
When was the last time you overdrew your bank account?
Is your bank account balance steady, growing, or decreasing month to month?
What’s a rough estimate of your monthly revenue and expenses?
How much do you pay yourself?
These questions help me understand your cash flow. It’s a rough estimation, but it tells me what services you need and a rough budget. You don’t want to spend every penny you make, and you need to pay yourself.
Growth happens in steps, not in a straight line.
You will feel a pinch when you add more expenses, but, if it’s a good investment, you should see your income go up over time.
Next month I'm explaining how to calculate what you can afford to spend on any particular item or service. If you're unsure and would like a simple calculator, be sure to check back here or jump on this list and know when it’s live.
4. Have you received any surprise bills recently?
Unexpected bills are another sign that you need a financial pro. At this point, it’s obvious that important financial tasks are falling through the cracks. Your scrappy, old spreadsheet isn’t able to keep up. A surprise bill could be an unexpected vendor statement, tax deadline, or late fees. It's like salt in the wound when you had the money to pay a bill but not the time or awareness.
Another common, avoidable unexpected bill relates to income taxes. If you file your return, have a big balance due, and didn't save a dollar throughout the year, you need help.
On the reverse side, you could be missing opportunities to make or save money. Watching for promotions, catching bounced payments, and chasing unpaid invoices are important tasks. A financial pro can help you preserve cash, the oxygen of business.
When these surprises arise, it’s usually one or a combination of three problems.
First, the current system doesn’t fit all your needs. It could be an accounting system or another process, like how you manage mail and your email inbox. Efficient systems save a ton of money and stress and ensure nothing slips through the cracks.
Second, you don't have enough time to stay on top of your finances. Entrepreneurs are often overwhelmed with all the tasks and responsibilities. You have a business to run and a million things to do. Keeping track of deadlines is difficult and like you’re chained to a hamster wheel. They keep coming and at some point, you’ll trip and get a fine.
On a side note, when you feel super pressed for time, you don’t have the mental bandwidth to do your best work. You need whitespace to be creative and to take a holistic approach to manage your business. If you feel like there’s never enough time in the day, check out this blog on how to create more margin in your schedule.
Third, you don’t know how to manage your finances. It’s not intuitive and you probably study it in school. You’re not a tax pro, so you wouldn’t know how to estimate taxes. You’re not a CPA, so you don’t know all the lingo on a vendor statement (definitely not the fine print). You’re not a QuickBooks expert, so it’s tough to find outstanding invoices and upcoming bills due.
You don’t know what you don’t know, and that’s okay. You need a wide breadth of knowledge to run a business. You don’t need to be an expert in every aspect. You oversee all operations and bring on experts to fine-tune each one. When you feel the limitations of your own knowledge, it’s another sign that you need a pro on your team.
My first car was a cheap, used Saturn. It wasn’t great; it didn’t even have automatic locks or windows. It wasn’t the safest, either. I broke a tire rod in a 25-mph fender-bender and the autobody shop declared it totaled. Now, I’ve upgraded to a modest Mazda3. It has automatic locks and windows, great safety features, and fits all my needs.
It was okay to start out with a cheap option while I got started, but that was no long-term solution. The same goes for your business’s financial management. You may start with a Trabant or Saturn, but in time you’ll need a more state of the art solution.
Grafitti art of a Trabi busting through the Berlin Wall, painted on one of the few remaining sections. Image: Senatsverwaltung für Stadtentwicklung. East Side Gallery, Berlin.
These questions will help you determine when you need to upgrade your books and use a pro.
Am I behind on my books?
Are my spreadsheets out of control?
Can I afford it?
What is it costing me in surprise bills and missed income to not upgrade?
A good accountant will help you increase profit and save on taxes. The benefits of working together compound over time. Indirectly, you’ll save more money than you pay. For example, an accountant increases our odds of staying in business beyond five years from 50% to 85%. Knowledge and support are critical to your business’s survival.
Deciding to upgrade your current accounting system and work with a pro is a huge decision. Your relationship with your financial advisor is critical. As your business grows, you will need to hire someone.