Tuesday, July 5, 2011
Thirty Years of Jobbers – Chapter 4-1
Thirty years ago, bookkeepers used to list all business transactions in books called "ledgers." These transactions were accumulated in periods, usually quarterly, monthly and yearly; totaled, and used as yard sticks to measure a company's progress over a specified time period.
Occasionally, a "snapshot" of summaries derived from these transactions was taken, and it represented the condition of a business at any point in time. Bankers, vendors and other trading partners still rely on these "snapshots", commonly known as "Financial Statements" to determine if a company is profitable, solvent, in trouble, or mismanaging its funds.
Financial Statements are important, but for most small businesses today, financial statements are inadequate tools for running their day-to-day operations.
Accountants, vendors, bankers and high-level managers use financial statements to determine the overall financial health of a business. Jobbers still deal with bankers, vendors and accountants, but not many jobbers have professional accountants working inside their organizations. They usually rely on outside CPAs to point out problems that may be considered "red flags" by trading partners and of course, the much dreaded Internal Revenue Service.
This chapter is about how businesses use and misuse information. Keep in mind that although most jobbers see themselves as "small businesses", federal and state bookkeeping requirements force them into a class of business that is unlike the majority of those that most CPA firms and bankers are accustomed to dealing with. In order to survive in the 21st century, jobbers will need to learn how to seek out financial wizards who know how to handle and advise them in complicated business issues pertaining to their specific operations.
Recently a convenience store operator and client of mine was assessed nearly $60,000 in additional taxes, fines and penalties for understating his income on his tax return. His CPA never caught the fact that the IRS agent included the sales tax in my friend's income during her audit. The man just accepted his CPAs explanation that one of his employees must have made a mistake in posting the sales. A part-time computer operator caught the error a month later and saved this jobber a great deal of money and misery.
Things like this happen every day. Relying on only monthly and yearly financial statements can be dangerous.
I am not against financial statements mind you. They remain a necessary tool and need to be presented to the people that use them. But let's face it. The very nature of these reports limits their ability to help us manage day-to-day problems. A financial statement may give you an overall picture over a period in time, but the devil's in the details, and how you go about finding these little demons in by "micro-managing" your business.
The business of oil marketing is far too complicated to entrust your future to historical milestones. Imagine if a scientist, developing a vaccine for a deadly disease, only evaluated the outcome of his experiments once every month. Product businesses purchase on Monday is gone by Wednesday and it doesn't do much good to know how much you lost overall when you reach the end of the month. Today, business analysis requires a scrutiny that even Sherlock Holmes would consider ridiculous.