Reading the Numbers�: Accounting Tells� the

Story of Your Bus�ines�s�Online Bonus Chapter

I hate accounting.There, I said it. And I mean it. I absolutely hate accounting.

I’m a high D/I personality, which means I can’t stand drowning in details. If you come into my office with a half-inch-thick printout of a spreadsheet without a one-page executive summary stapled to it, I’ll kick you out. And as I’ve worked with thousands of leaders and entrepreneurs over the years, I’ve found that most of them feel the same way. The millions of details in accounting often feel like quicksand to a hard-charging, get-it-done EntreLeader!

But let’s be clear: as much as I hate the accounting process, I absolutely love what accounting brings me—control and aware-ness. The number one reason small businesses fail is simple: cash-flow problems. Translation: crummy accounting. I don’t care how much you hate diving into the numbers; business owners who don’t stay on top of their accounting fail and close up shop. Then, you really won’t have to worry about the numbers, because you won’t have any.

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Rules of Engagement

I figured out a long time ago that if I’m going to win in business, I have to be proactive in the accounting process. One of my biggest mistakes in this company early on was keeping the bookkeeping at arm’s length. I’ve already told the story of how my family’s Disney vacation was interrupted by a call from the office saying that the IRS was about to shut us down because we hadn’t been paying our payroll taxes. I was shocked! The person keeping our books was feeding me false information every week, and I wasn’t plugged into the numbers enough to realize it. That disaster hap-pened only because I let our apparently incompetent bookkeeper do her own thing without my keeping a close eye on it. That will never happen again.

Since then, I’ve run my business based on two “rules of en-gagement” that characterize my relationship with accounting.

Rule 1: Be DiligentProverbs 27:23 says, “Be diligent to know the state of your flocks, and attend to your herds.” That little word “diligent” is key. That means in order to be successful, we have to be active, be engaged with the details of our business. No, I’m not saying that you have to be a CPA in order to be a good EntreLeader, but you also can’t allow your CPA to run your business for you—and a lot of CPAs will try to do just that. You, as the person in charge, remain re-sponsible for the welfare of your business, and that means you have to be diligent.

Diligence just means excellence plus discipline. You don’t have to spend all day every day poring over Excel sheets; you just need to dedicate some small amount of time and focused atten-tion to the books. You don’t have to be excellent in this area all the time, but you do need to strive for excellence in this area a few hours a month. That time is one of the best investments you can make in your business.

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Rule 2: Don’t Make Your Dream Conform to an Accounting SystemA lot of business owners lose their passion for business because they’ve tried to squeeze their dream to fit into some rigid ac-counting system. That’s a huge mistake! The accounting system should always bend and conform to your dream, not the other way around. The accounting is merely a servant to the main thing, your core passion and business. As soon as the accounting process starts calling the shots, you’ll start to hate coming in to work every day because you’re no longer in charge—the numbers are. At that point, you might as well hand the keys to the building over to the CPA and tell him to lock up when he’s done, because you’re already out of the picture.

Your accounting system has to conform to you, your dream, your passion, and your vision for the company. The job of ac-counting is to simply give you the information you need to take your company where you want it to go. But if you’re not careful, your accounting process can flood you with a ton of useless infor-mation that does nothing but keep your CPA happy at tax time. That’s great for him; it’s not so great for you.

There are two basic forms of accounting: cash-basis and ac-crual. Cash-basis accounting counts actual cash received and counts inventory at cost when you actually pay for it. Accrual count- ing counts inventory as an expense only when it is sold, and it counts receivables as income—as if you already had the money. There’s more to it than that, but that’s a quick and dirty definition.

I recommend most small businesses stay on cash-basis ac-counting for as long as possible, at least through the start-up stage. It’s just more straightforward, and it counts real money and expenses. Accrual can help with some things, but for the small-business owner, it can cause more headaches than it solves. I’ve al-ready said that in our company, we don’t consider a sale complete until we receive the check. We have to use accrual accounting, and it makes us count that receivable as income whether we have actu-ally received the money or not. The more deals you do, the greater the discrepancy between what you have to report as revenue and what you actually have in the bank.

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Just be careful here. Most accounting software will try to force you into an accrual accounting method, but don’t take that leap until you’re ready. Eventually, as your revenue grows and your company becomes more successful, you’ll have to shift to accrual for tax purposes. That’s the only reason my company does it this way. But I’d avoid it as long as you can.

Reports

Sometimes the old clichés are true. In crime dramas, when the investigators are trying to figure out who would benefit from a robbery or murder, what line do they say? “Follow the money.” The money trail tells a story, and if you follow that story, you’ll figure out what you need to know.

Business works the same way. A lot of EntreLeaders hate the idea of sifting through a stack of financial reports, but that’s only because they don’t understand what the reports really are. Ulti-mately, it’s not about math; instead, the financial reports tell a story, and that is the story of your business. Your job as the person in charge is to learn how to read and interpret that story.

Accounting has one—and only one—job, and that is to enable you to follow the money. Don’t use it for anything else. If you pick the right reports and watch them regularly, you can get this part of your month out of the way quickly. And when you really learn how to scan the reports and “read the story,” you may even start to enjoy the process! Okay, maybe not. But at least you won’t hate it as much.

There are six basic reports that you should check on a regular basis. Depending on your particular business, there may be oth-ers specific to your area, but most businesses should at least have these six reports on a weekly or monthly cycle:

1. Profit and Loss: The profit and loss, or P & L, sim-ply shows income minus expenses and the net profit or loss. If you run a company with several different divisions, departments, and product lines, you need a

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P & L for each area, as well as an overall P & L for the whole company.

2. Balance Sheets: The balance sheet is a simple docu-ment that shows the company’s net worth.

3. Receivables: This report shows all outstanding debts owed to the company.

4. Payables: The payables statement shows money you owe to others that has not yet been paid.

5. Checkbook Reconciliation: This is just a slightly ex-panded version of a home checkbook registry, show-ing the checkbook balanced.

6. Purchase Order: The purchase order, or PO, report lists all of the open purchase orders within the com-pany.

These reports should be simple, easy to understand at a glance, and on a single sheet of paper whenever possible. If you cannot pick up one of these reports and immediately know what’s going on in a particular area, drag your CPA or CFO into your office and fix the report. Remember, these reports are for your benefit. You’re the one who needs to be able to interpret them, so don’t let a heavy-handed accountant intimidate you with a binder full of numbers. If he or she can’t give you the numbers in a way that you can read in an instant, you may need a new accountant.

Review Promptly and Often

Because I’m not a detail guy, I get distracted pretty easily, espe-cially when I’m working on something I don’t really enjoy—like accounting. I swear, for some reason I get this inescapable need to clean my office, rearrange my bookshelves, clear out my in-box, and wax my car whenever I sit down to do the books. It’s not as bad these days because we have our accounting in pretty good order, but in the early days of the company, it was torture for me to stay in the chair long enough to review everything.

I was so good at getting distracted when I was supposed to be

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reviewing the books that I finally had to block off a set time on my calendar every week. Everybody in the office and my whole fam-ily knew that Friday mornings were dedicated to the accounting, and I wouldn’t let anyone or anything interfere with that chunk of time. I knew that if anything came through my door while I was looking at the books, I’d be done. I’d allow the distraction to get me out of the chair and I wouldn’t go back.

It sounds dramatic, but that’s what I had to do in order to stay on top of things. But that also meant I had to face it for only one or two hours a week. That’s manageable for anyone. It’s only when you let the books pile up that you create a time monster. If you skip your review for a few weeks, I promise you’ll lose more time than necessary and create more problems than you need be-cause of your procrastination. Do the accounting promptly and often. Get in, get out, and get on with your business.

That said, there are four time-sensitive guidelines you should follow to the letter. If you drop the ball on any of these because of distraction, disinterest, or just plain laziness, you’ll inject a poison into your business that could bring the whole thing down over time.

1. Checkbooks have to be balanced within a week of receiving the bank statements. Honestly, I think it’s ridiculous that I even have to make this point, but I’m consistently amazed at the number of businesspeople who don’t do this basic accounting step regularly. If someone can’t be bothered to balance their company checkbook, I don’t even want to think about what their personal checkbook looks like!

2. P & Ls have to be closed by the seventh of the fol-lowing month. Demand that your departments have all their receipts in by the end of the month so your accounting team will have time to close out the books on time, every time. This is where you’ll identify the slackers on your leadership team. If you notice sloppy behavior in any department’s bookkeeping, put an end to it with clear (and enforced) consequences.

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3. Deposits should be cleared twice a week. Actually, feel free to clear your deposits more often than that, but twice a week is the bare minimum. There’s no value in batching your deposits weekly, and there’s nothing but danger in keeping all those checks around the office. Unless you own a bank, get the checks out of there!

4. All payables should be paid at least twice a month. Again, this is just the minimum. I’m such a nut about paying our bills on time that our company actually pays our payables weekly. My executive leadership team and I review all the payables as part of our Mon-day meeting, then Accounting cuts the checks every Tuesday like clockwork. Because our departments do such a good job with their PO reports, it takes us only a few minutes to scan through them all to make sure everything is in line and that we all know what we’re spending our money on.

Blessing and Peace

Pretend for a moment that you’re not the person in charge. Step back and look at your company’s accounting processes like you were reviewing an employee’s work. How does it look? Would you give that person a raise and a huge bonus for doing such a good job? Or would you see a mess and call someone out on the carpet? Never get so full of yourself as “the boss” that you can’t objectively review the job you’re doing. When it comes to accounting, you should do it with the same diligence and discipline you would if you were being paid to keep someone else’s books—and wanted to keep the job.

When it comes to accounting, you should do it with the same diligence and discipline you would if you were being paid to keep someone else’s books—and wanted to keep the job.

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Here’s a little test to give yourself from time to time: if you managed money for You Inc. the way you manage money now, would you fire you? If the answer is yes, please do not expect God to bless your business. God’s not in the business of blessing our stupidity. Doing dumb, sloppy things with your money and then expecting God to give you bigger opportunities to be even dumber with more money is like a teenager saying, “Dad, I know I’ve had four wrecks this month and that I’m a horrible driver, but will you buy me a new convertible?” No loving father would give us more of what he knows we can’t handle.

But when you are on top of things, when all the columns add up, all the papers are filed, the checkbook is balanced, and you know what’s coming in and what’s going out, peace settles on top of the business. Having the accounting done lays a foundation to spiritually prosper. It gives your whole business a solid footing. You get this overarching sense of peace that bleeds over to all of your other decisions, because you’re not always worrying about backed-up balance sheets and P & L reports stacked up on your desk. You breathe easier and relax; the tension just kind of drifts away and your whole body looks and feels more comfortable.

Budgeting for Businesses

We’ve already looked at some budgeting basics in chapter 9, “Fi-nancial Peace for Business.” Here are the main three points, just to recap what we discussed:

1. To win in business, you must plan your money on paper, on purpose, before the month begins. That’s called a budget, and it’s necessary whether you run a billion-dollar company or a one-man show from your kitchen table.

2. The EntreLeader has separate checking accounts for personal and business and never uses the wrong one. If your business is very small with simple accounting,

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this business checkbook registry is essentially your P & L.

3. Quarterly taxes can kill a business with sloppy accounting, so always set aside at least 25 percent of your monthly net profit in a separate tax savings account to cover your IRS quarterly estimates.

You need to do these three things no matter how big or small your business is. This may seem like pretty basic, com-monsense stuff, but again, I’m amazed at the number of small-business owners who have to close their doors just because they fumbled the simple tasks. As your business grows, your budgeting and accounting will get a bit more sophisticated, but don’t over-complicate things and always make sure you’ve covered the basics.

If you have multiple profit centers, you should consider them mini-businesses and require, at least, quarterly budgets from each one. My company has over a dozen profit centers, and you better believe that all of those vice presidents turn in detailed budgets to me outlining their projections for the coming quarter and year.

The most common budget-forecasting technique is simply using the past as an indicator of the future. Since most of our profit centers have been running for several years, we have a good long history to look at when budgeting. The VP of each area can look at the coming year with a reasonable projection of when the ups and downs will hit, and they plan accordingly. For example, if the department knows it will be making a big purchase at some point, the VP probably won’t schedule it for the worst month of the year. Or, if they’re planning their retained earnings, they may set a larger percentage aside during a high-income month like August or December to help cover expenses in a lean month like April. All businesses have these cycles, and the budget simply helps you plan for them in each area of your company.

I’m amazed at the number of small-business owners who have to close their doors just because they fumbled the simple tasks.

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Too many businesses only look at the P & L as their primary budgeting tool. I love the P & L, but I keep it in perspec-tive. The P & L is not an indicator of the future; it’s a look back at the past, what’s already happened. Running your business by only looking at the P & L is like driving your car only looking in the rearview mirror. It shows you where you’ve come from but doesn’t do a thing to show you where you’re heading. The budget is your windshield. It’s the only thing that actually shows you the road ahead of you and gives some direction about how to get where you want to go. Without it, you’re driving blind.

Two Types of Expenses

There are basically two types of expenses in business: fixed and variable. Fixed expenses are repetitive and stay the same. Things like rent, utilities, and salaries fall under fixed expenses, so these are generally considered overhead. It’s the stuff you have to pay for no matter what your revenues are. These are also the expenses that can sink your business. Be very, very wary of adding a fixed expense. They’re easy to add—like hiring a secretary to help with office work—but hard to subtract.

Variable expenses are more fun. These are usually income-producing and include items like commissions, postage, and cost of goods sold. I don’t mind spending a lot of money on inven-tory, for example, when our salespeople are moving that inven-tory. That is an expense that is making me money. I’ll also add a commissioned salesperson a lot faster than I’ll add a salaried receptionist. The sales guy gets paid only if he brings in revenue, but salaried employees seem to want a paycheck regardless. Use as many variable expenses as you can. I always say that I’d put the

The P & L is not an indicator of the future; it’s a look back at the past, what’s already happened. Running your business by only looking at the P & L is like driving your car only looking in the rearview mirror.

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receptionist on straight commission if I could figure out a way to do it!

Fixed costs and overhead build up slowly and subtly, so be careful. It’s easy to add a new employee one month and then rent a new storage unit a couple of months later. You add this little thing and that little thing, and eventually you’re suffering from death by a thousand cuts. This will take you down, so always see each individual decision and expense in light of the whole deal.

Profit-and-Loss Statements

Even though I come down hard on business owners who only look at P & L reports and don’t do an actual budget, I still think that the P & L is one of the most important—and definitely the most used—reports in business. It’s a great management tool because you can tell at a glance where your biggest opportunities and problems are across your company. So when you review a P & L, you should always be asking a lot of questions:

• Where does income come from?• What can I do to create income for hurting areas?• What can I do to maximize good-income areas?• What is the total of my fixed expenses and are they eat-

ing at my profit?• What is my largest expense and how can I cut it or make

it work harder?

A good P & L shows how a profit center really performed ver-sus what they budgeted. If one of my departments missed revenue projections by a half million dollars, that immediately jumps off the page. It also gives me the opportunity to talk to the depart-ment VP and find out what’s going on. Plus, it shows me how well my leaders are staying on top of their businesses and making course corrections throughout the month.

I love the P & L because it removes any emotion or preju-dice and shows exactly how each area is performing based on

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actual numbers. It keeps my team accountable to their own pro-jections and helps us measure the return on investment from our expenses. The EntreLeader should never have “expenses”; rather, they should have “investments.” So all money we spend in busi-ness should ultimately result in more profit. Some “investments” give a quick and measurable return, like advertising. Other “in-vestments” require more vision to see the ultimate profit return—like buying plants for the lobby or providing lunch once a week to your team, or giving charitable donations in the community. My opinion is all of those things affect morale, reputation, and team motivation, each of which will ultimately affect profit. Strange that doing the right thing is the right thing to do.

Managing the Outgo: Payables

I’ve already said that you should clear your payables twice a month, at a minimum. Too many companies drag this out and play games with their payables by holding on to their money until the last possible second. That’s why it’s not uncommon to see thirty-, sixty- and even ninety-day billing turnaround times. That practice just drives me crazy. If you buy something, here’s an idea: pay for it! If you’re not ready to pay for it, you’re not ready to buy it. That’s just as true in business as it is at home.

You can clear payables within two weeks if you did a budget and planned for the expense. If you’ve done the ac-counting basics on the front end, the payables simply happen as a natural event. There are no moments of crisis or sweat on the upper lip or frantic calls to the bank to make sure the money’s in the account. Forecasting, budgeting, and basic accounting processes eliminate all that. By the time the money is due, cut-ting the check should be a no-brainer.

There are no moments of crisis or sweat on the upper lip or frantic calls to the bank to make sure the money’s in the account. Forecasting, budgeting, and basic accounting processes eliminate all that.

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Payables should be allocated to a category and organized by account number. This is called a “chart of accounts,” a simple list of all the budget/expense categories and their corresponding ac-count numbers. Every payable on the books needs to be tied to an account number. That way it is easy to run reports using account-ing software, or even basic database software, to see how much you’re spending in any one category. So, if I want to know how much our Live Events department spent on billboards last month, I can run a report of that one category code and immediately see what we spent last month, year to date, last year, or whenever.

This also makes it easy to see the “profit per” something. We can track sales per unit, sales per hour on the phone, the average income per day per department, and just about anything else we need to know. For example, one of our e-mail newsletters, called Dave’s Deals, goes out once or twice a month and highlights a special offer on products. People have to sign up to receive it so we know they are people who want to hear about our sales. With the chart of accounts, we can not only see how much it costs us to send that e-mail, but we can also track the revenues that come in from one offer. That shows us how much, to the penny, each sub-scriber is worth. That is valuable information for planning future promotions and marketing campaigns around Dave’s Deals.

Managing the Income: Receivables

A “receivables report” is a list of people who owe your business, how much they owe, and the age of the bill. In other words, it is debt that someone owes your company—and you know how I feel about debt. So, in my opinion, the best way to manage receivables is to not have any. Avoid them completely by requiring payment before the product or service is given.

Every time I say that to a group of businesspeople in our live EntreLeadership workshops, I get the same response: “Well, you can’t do that in our business.” Sure you can. All it takes is a deci-sion to change your process and the backbone to follow through.

Believe me, this is not standard practice in my business, ei-

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ther. In the radio advertising industry, receivables are a total mess. Normally, an advertiser makes a deal with an ad agency, who then passes it on to the radio show. The show airs the spot and then bills the agency. The agency then bills the advertiser, who takes about thirty days to pay. Once they get the money, the agency pays the show. That could take months! No thanks. We require anyone advertising to pay within fifteen days of billing, includ-ing ad agencies. Some clients are required to prepay to advertise. None of that is standard in the industry and occasionally we have a potential client who won’t buy because of our terms. That is just fine with me because I am not a bank; I sell ads.

We occasionally allow some narrow billing terms. In those cases, the discussion goes something like this: “We’ll go ahead and run the spot and bill you on the first of the month. You will pay us by the fifth. If you don’t pay by the fifth, we’ll call you on the seventh. If you don’t answer the call or send a payment, we’ll take you off the air by the fifteenth.” That’s unheard of in the radio industry, but my team has this exact conversation with ad-vertisers every day. The bottom line is that I don’t run receivables; I’m not a bank. If you can’t pay me, you can’t be on my show. Is this really that hard?

Do we lose some advertisers because of this? Sure we do! And I’m totally okay with that. We’ve got plenty of advertisers who are lined up, cash in hand, to get on our show. I don’t want to waste my time with people who don’t want to pay me for the service I provide them.

Several years ago, one of my departments got in a mess be-cause they were trying to manage receivables. We have a network of Endorsed Local Providers (ELPs) across the country. They are insurance, real estate, and investing professionals that we endorse. We send the ELPs leads from our website and provide coaching and support, and in return, they pay us a monthly fee to be part of the network. For years, they paid the fee by mailing a check in every month. The fee is pretty minor, so individually it’s not much money. But once we spread that across several thousand ELPs, we looked up and saw that a major chunk of our revenue was tied up

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in receivables every month. It took days to process all the checks and to track down those few ELPs who didn’t send their check in.

The VP of that department had a brainstorm. He decided he had had enough of chasing down all the checks, so from that point forward, all ELPs were required to pay their fee automatically through an electronic bank draft on the first of the month. We were a little worried that the ELPs would push back on us, but every one of them went for it, except for four—and guess what? Those were four of the ones who never paid their bill anyway. Oh rats, I hated losing those. Not really.

With one change, we eliminated most of the receivables we had coming in to the company every month. Now, instead of chas-ing down a thousand checks, we just hit the “Enter” key on the first of the month and all those fees automatically jump into our bank account. We get paid, the ELPs don’t have to mess with sending in these checks, and we cut out a few people who didn’t pay us. Everybody wins!

If a “no receivables” policy really won’t work in your busi-ness (but I challenge you to figure out how to make it work), the next best receivable is short-term, something under thirty days. If the business has receivables that run longer than thirty days, careful budgeting is required. Long receivables and short payables create a cash shortage that can cause a profitable business to fail.

In my world, I see this most in publishing. The vast majority of the books you see on retail shelves are all distributed through the same book distributor. It’s a pain to work in this system, but if I want my books on the shelves at your local major bookstore, I have to do it this way. The process goes like this: We ship the distributor a stack of books to send to bookstores. The distributor takes the books and has ninety days to pay us for them.

The problem for us is that we pay to print the books. When do you think the printer wants to get paid? He’s not going to wait for us to eventually get our money from the distributor. We have to pay him when he delivers the books to us. However, we won’t get paid on the sale of the books for months because of the distribu-tion process. That means we have to be incredibly diligent with

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our accounting and budgeting so that we have the money to pay the printer while we wait months on a check from the distributor. Can you tell that I really hate receivables?

That’s a big example from a big industry, so let me give you an-other example that may hit closer to home. I put a new screened-in porch on my house several years ago. It was gorgeous and very high-end, with cherry hardwoods and all the finishing touches. The initial bid was a lot more than I expected. I choked a little bit and asked, “What will it be made out of? Gold?”

The contractor calmly and professionally sat back and said, “And we’ll require twenty-five percent up front before we start working. That will cover most of the materials, so if something unexpected happens and the job is called off, we’ll at least break even.” I was trying to process that when he hit me with “If we do this job for you, you’ll be my bank. We don’t borrow money.” How in the world is Dave Ramsey—the “Debt Is Dumb” guy—supposed to argue with that?

So I paid them 25 percent up front, then another 50 percent halfway through the job. At that point, I had paid for 75 percent of the job, and he was only half finished. That’s very unusual in construction, but this guy pulled it off. He had already covered all the materials and labor, so my final payment of 25 percent at the end of the job was pure profit for him. He was able to do his final punch list with no pressure and no concern about the bill. It really became one of the best purchasing and contracting ex-periences of my life—and that porch became one of our favorite places.

Conclusion

This chapter is a lot different from the rest of the book—it’s all meat and potatoes. It’s hard to make accounting sound fun, but leaving out these principles entirely can wreck your business. The accounting doesn’t have to dominate your week, but you do need to make it a priority to cover the essentials:

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1. Do accounting early and often. 2. Use cash-basis accounting whenever possible and for

as long as possible. 3. Budget to plan ahead and look forward. 4. Use the P & L statements to look backward at what

really happened. 5. Keep fixed overhead down. 6. Watch the pull between payables and receivables.

That’s your cash flow.

Do these few things no matter how big or small your company is, and you’ll be on the right track to grow your business to new heights.

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