When my partner and I filled up our first shoebox with receipts, invoices and other business documents, we realized we need a second shoebox. We were a new small firm growing rapidly, the money was coming in faster than we could count it and bills were tossed into the shoebox. Unpaid vendors would come to our office door demanding immediate payment. Of course we cut checks for the vendors screaming the loudest and would seldom rummage through the shoebox, now collecting dust, to reconcile the original invoice with the service or product we supposedly received from the vendorat the door.
What we should have realized, was that we needed a good accounting system and not a second shoebox. The shoebox method was costing us money.
All too often many small start-up businesses use shoeboxes or file folders to store receipts, invoices and other accounting documents. Some use the shoebox method as a temporary stop-gap measure prior to setting up their new accounting system.
A good accounting system will collect, organize and record important business transactions, acting as the basis for analyzing the success or failure of your business.
Key functions of a Good Accounting System
Chart of Accounts Management
Financial Statements generation
Tools for Financial analysis
When my partner and I finally started using our new accounting system, the new system revealed some very poor business practices.
Expense Creep – We were not tracking our expenses and we were burning up our cash resources at a much higher rate than we realized. We even paid some vendors in error twice, once at the door and again off the invoice in the shoebox.
Accounts Receivable Neglect – We discovered we neglected to collect on our accounts receivable. We were not tracking or collecting our accounts receivables. Some customers owned us money for billings over 90 days.
Cash Flow Problems – We thought we were swimming in cash but quickly discovered that the path we were on was going to create a cash crunch in the coming quarter. The new accounting system helped us identify this trend.
Hidden Costs – Our bookkeeping and accounting costs were reduced. Our invoicing, accounts payable, accounts receivable and cash flow were now organized and compiled for year-end reporting and ready for tax preparation. The accounting system helped to organize our expenses for tax return purposes.
Security of Business Data – Our shoebox was not fireproof, nor waterproof and could easily be mistaken by the janitorial service as trash. Business data is the precious inventory of information for calculating the success or failure of your business. We transferred our data to a service that provided a secure off-sight location.
Audit Risk – With the new accounting system in place our files were organized, transactions were easy to trace and all financial matters were in order. We survived our first government audit. I am certain the audit would not have gone well under the old shoebox system.
The new accounting system also provided us with financial analysis tools. We were able to create budgets more accurately and review our performance on a more frequent basis. Our quarterly “check-up” for tracking expenses were compressed to a monthly and finally a weekly “check-up” for tracking both revenue and expenses.
Remember that business ownership comes with many responsibilities and one of them is the responsibility of establishing a good sound accounting system. As you can see a good sound accounting system can save your business from failure. The professional appearance of your company’s books when trying to acquire financing will go a long way. Please do not bring a shoebox of invoices, receipts and a couple of tax returns to your banker or investor. Shoebox accounting can cost you your business. Ditch the shoebox and start out with a sound accounting system.
James Ellis is a business instructor at Central Oregon Community College with a background in finance and accounting.