Accounting is one the most commonly outsourced competencies in small business. Busy entrepreneurs either don’t want to spend the time or aren’t confident in handling the books and decide it is easier to have an in-house bookkeeper or professional accountant in charge. It is also very common for these same entrepreneurs to pay dearly for that decision.
Accounting is the function that records the financial history of the business. Managed correctly, it provides an accurate record of money in and money out, such that it is easy to identify many internal problems through the financial reports produced by these records. Managed incorrectly, it is a waste of time, a misleading mess of false information, and potentially the difference between the ultimate success or failure of the organization.
Like any other profession, there are certainly tricks of the accounting trade that are best managed by, well, the professionals. But the fundamentals of accounting should be familiar to every entrepreneur. The way your books are set up and the accounts that are used to track income and expenses should be well known to the business owner, such that you could take over the tasks if necessary (or at least train a new bookkeeper).
The position of bookkeeper in a small business is the number one opportunity for don’t assume that just because your bookkeeper is “like family” that they won’t rip you off. It happens all the time. There are a million reasons that people skim cash from their workplace, and not all of those folks are hardened criminals. The best way to avoid any potential of employees or contractors stealing from you is to understand what is going on with your accounting system. Embezzlement is far easier for an employee or outsource professional who holds all the ‘t let someone else set up and manage your books on their own. At an absolute minimum, sit side-by-side with your bookkeeper or accountant while the accounts are established and make sure you absolutely understand every line.
In addition, accounting must be completely accurate to be useful. In many cases, business owners rely on periodic financial reports from the bookkeeper to assess the health of the venture. However, if the books are not kept correctly (all entries correctly assigned to appropriate categories, entries checked for accuracy), the reports are completely useless. And, should you need to secure second round financing, you could spend up to thousands of dollars to hire an accountant to clean up the books before a bank will even talk to you.
There are all kinds of horror stories that start with the business owner relinquishing all responsibility for their own accounting system. Embezzlement is a common one, as are tax problems and employee issues. One business owner in Chicago learned the hard way not to trust others with every detail of his accounting system. After 13 years in business, his home theater installation venture was growing at a steady pace. When the recession hit, the owner reviewed his financial statements …