August 7, 2019

Use Bookkeeping to Inform Your Business Decisions

Profit First Methodology
Ronald B. Allen

In any business, it is important that the bookkeeping is up to date and accurate. And, equally important for the success of a business, the bookkeeping needs to show a clear picture of all cash flow, assets, and liabilities. In business, you need to use the results of your bookkeeping to drive your business decisions. If your current bookkeeping is not up to the task (or it is simply the task you put off until absolutely last), it might be time to outsource it. Contact us at Exigo Business Solutions for a free analysis.

The Dream That Came True, But What About The Profits?

Your business was your dream and now it is a reality. You love what you do and do it with all of your heart and soul. If the satisfaction of a job well done were enough, you would be a totally happy person. But realistically, you want your business to make a profit as well. And, that is not happening…

You have lots of business and there are lots of sales. You seem to be making a lot of money. But, why don’t you have more (or any) profit? Many small business owners fall into the trap of believing that all they need to do is start making money, expand the business, and eventually profits will roll in. Sometimes that works. Usually, it does not.

There is an adage called Parkinson’s Law, first stated by Cyril Northcote Parkinson who was a British historian and writer. From his work in the British Civil Service, Mr. Parkinson observed repeatedly that when a job had a certain deadline, the work did not get done until the last minute. His “law” said that “work expands so as to fill the time available for its completion.” Various corollaries have been stated including the one saying that if a project has a budget, that budget will get used up every time in completing the task.

Parkinson’s Law applies to many small businesses today and not the British Civil Service of Parkinson’s era. The most important function of accurate, current, and clear bookkeeping is to help the business owner see where Parkinson’s Law is taking hold, and make necessary changes.

Using Profit First to Address and Deal with Excessive Expense

There is a certain fatalism to standard bookkeeping practice. Income minus expenses equals profit or loss. And, there you are. You planned carefully, worked your tail off, and made money in your business, but there is nothing left over. We at Exigo Business Solutions are here to tell you that you do not have to put up with that state of affairs.

You work hard to run your business. And, our business is to make yours more successful and more profitable. We use a different bookkeeping method called Profit First. It goes like this. Income minus profit equals expenses. The numbers are all the same but the end result will be vastly different.

By taking a profit with every bookkeeping cycle you start building cash reserves. And, you reduce the amount of money available for Parkinson’s Law to eat up. Many times in a small business, all it takes is to reset (or create) budgets for various business functions. This often is all you need to do because the Parkinson’s Law effect works as well to shrink the time spent on a task or the amount of money spent. In other words, when you employees have less time and less money to get a job done, they get creative and accomplish the task on time and with the money available.

When Parkinson’s does not seem to function adequately in reverse gear, you may need to be more assertive in your efforts but the results will be the same. You will profit first and then see your expenses adjust. As this scenario progresses, profit becomes a habit and you will continue to use your bookkeeping to drive your business decisions.

For this to work, all it requires is that you use the results of your bookkeeping to drive your business decisions. This works best with the Profit First approach and the Certified Profit First Professionals at Exigo Business can help you put this system into place and help you drive your profits to success.

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