Do you clean out your closets as part of your spring cleaning each year?
That’s a pretty good ritual that most folks tend to follow because that’s where all the clutter tends to accumulate over the course of the year. So, as we look at doing spring cleaning to get our financial house in order, let’s look at some of the more neglected areas, starting with our accounting.
Accounting and Bookkeeping are Not the Same.
Bookkeeping is just recording transactions and recording transactions doesn’t really give you any information if those transactions aren’t recorded properly.
In accounting, there is some level of thought and expertise that is used for recording your transactions. For example, say you have a car loan and you’re making a payment on it. Well, that needs to be set up on your balance sheet as a liability to the bank that you’re repaying. The entire amount does not show up as an expense on your P&L, because proper accounting reflects it as a reduction of the amount owed to the bank.
However, if you lease the car, then the expense for the lease payment is recorded on the P&L as expense because you’re just paying for the use of that asset over time, and you don’t own it.
So, getting your financial house in order is like decluttering your closet, because cleaning up your financial records and reports is similar to cleaning up a closet – one that has accumulated a bunch of transactions that were recorded improperly over the past year, maybe by someone who didn’t have the level of expertise to be able to discern what those transactions were and what the proper accounting would be for them.
Some of that cleaning-up process is fundamentally doing the accounting and bookkeeping. And that, my friends, will lead you to a clean, de-cluttered closet of financial statements so that you can make better decisions in your business as you continue to grow profitably.