For must SBOs, accounting and bookkeeping are their nemeses. SBOs usually believe they can handle their own bookkeeping and rarely have a professional do it. Consequently very little bookkeeping actually takes place until an accountant is finally hired to prepare a tax return a year later. By this time the bookkeeping is of no value to the SBO as it is water under the bridge, and it may be too late to rectify the situation. To make matters worse, critical records may have been lost, which may make it impossible to create an accurate set of books.

       In this day and age, when we have such accessibility to computers, there is no excuse for not keeping a good set of books. When I first started my law practice in the 70s, reconciling my bank statement was a difficult and time-consuming task that took hours. Bookkeeping had to be delegated to an accountant or bookkeeping service, as there simply wasn’t time to run a business and keep accurate books. Usually by the time the bookkeeper provided financial reports, it was too late for them to be of any value in avoiding cash flow problems.

       With the advent of computers, many programs were developed to assist bookkeepers with their tedious job. These programs, however, were difficult to learn and often temperamental. I remember cursing the ones I used on a regular basis and wondering if they actually saved any time. They did save time though, because they eliminated the need for doing any kind of math, which I’ve found many SBOs avoid at any cost.

Then there was Quicken®, and I thought God had shined down on all of us. It was so simple and made bookkeeping so easy that I quickly began pulling my financial reports every morning. If anything didn’t look right, I could immediately get to the bottom of it.

So today when you can write a check and do your bookkeeping at the same time with Quicken® or Quickbooks® or one of many other bookkeeping programs, every SBO has the ability to effortlessly keep an accurate set of books and can pull up a financial report at any time. This is a tremendous tool for the SBO and solves one of his greatest problems. Yet many SBOs still don’t keep books and still operate their businesses in the dark. This is just crazy.

I don’t know if they are lazy, scared of new technology, or afraid to face the truth about their business. They say ignorance is bliss, but the SBO’s bliss will be short lived as the fabric of the business begins to give way. It is imperative that SBO get on top of their bookkeeping. This used to be a problem; today it is easy. If you are not doing bookkeeping, stop what you're doing right now, and go buy a bookkeeping program that does your bookkeeping every time you write a check. Then spend a day or a week, if that’s what it takes to learn the program, and your bookkeeping problems will be over. Don’t ever write a manual check again!

Once you learn the program and know how to pull up the reports you will need from time to time, you can delegate the actual bookkeeping to someone else and get back to whatever aspect of your small business you do best. But get the program and learn how to use it properly, and you will be well on the way to making your small business prosper.

     Another related issue is record keeping. Very frequently I will represent SBOs who are being audited by the IRS. If the truth were known, they would owe no taxes, but unfortunately they quite often have not kept records of their income and expenses, so when they are asked to prove the deductions they have taken they are out of luck. Every year thousands of SBOs pay hundreds of thousands of dollars in taxes they don’t owe, simply because they were too lazy to get receipts, keep their invoices after they paid their bills, and keep their bank statements.

In an audit, if you can’t prove your deductions, the IRS will disallow them. Conversely they will charge the SBO with income for every dollar that shows up as a deposit even if, in reality, the deposit is a redeposit or transfer of money already considered as income. If you can’t prove the source of the deposit, it will be considered income and you may end up paying taxes on it twice.

Avoiding overpayment of your taxes, however, is not the only reason SBOs should keep all their records. Records are needed in litigation if you are trying to prove a claim against someone, or defending a claim asserted against you. Recently our firm has contacted all of our clients to see if they took the diet drug Fen-Phen. For those who took they drug for six months or more, it is likely they will be entitled to $500,000 in compensatory damages. All they have to do is produce doctor or prescription records showing that they used the drug for this period. Unfortunately most of those who are eligible to recover this money don’t have any records to substantiate their claim. Instead, they have to hope the pharmacy or doctor has the records. Many people will not recover a dime even though they took the drug for the minimum period. This is a shame and could easily have been avoided.

Record keeping can be very time consuming and tedious work if you do a good job. But record keeping doesn’t have to be all that organized to be effective. Sure, it would be best if you kept a file for every creditor, supplier, customer, and employee, and stored them neatly in a file cabinet, but that isn’t absolutely necessary. The key factor is that the record must be kept. To do that all you need is a box. When a bill is paid, a bank statement reconciled or correspondence received, simply throw it in the box. When the box gets full, seal it up, date it, and get a new box. Continue to throw all your receipts, invoices, check registers, and any other written records in your storage box instead of the trash can.

Down the road if you have an audit or need to prove a claim, you can go to the storage box, dig through it, and find what you need. So from now on, don’t through away any business receipts. Simply throw them in a storage box and forget about them.

Even with a good accounting program, you’ll still need an accountant to do your taxes. But the cost of the accountant will be much less, because they won’t have to do a year’s worth of accounting before they can do the tax return. If you are reorganizing your business, it is of critical importance that you hire an accountant to do your bookkeeping and to prepare monthly financial reports to provide to the court.

With the help of an accountant, the SBO can monitor the progress in turning the businesses around. If he is not progressing, together they will figure out what further adjustments are needed to make it happen. Trying to reorganize a business without accurate financial statements is like trying to ride a bucking bronco blindfolded—a rather futile and perilous undertaking. And doing it without professional help is foolish and shortsighted.

Hiring an accountant is a little different than hiring an attorney. Most accounting firms will have the expertise to do your accounting and tax preparation. What you need to look for in an accountant is whether he is strictly a numbers man, or will he be able to give you practical advice in structuring and running your business? Will he simply be an agent for the IRS, or will he be on the lookout for ways to reduce your taxes?

Once your accountant has been selected, he needs to help you prepare a realistic budget and provide you with monthly financial reports so you can see if you are keeping within your budget goals. Sadly, few SBOs see monthly financial reports, and fewer yet ever get around to doing a budget. Yet, to successfully reorganize, these types of reports must be prepared religiously and studied carefully as soon as they come out.

Many SBO will not understand the financial statements that their accountants produce. Part of the accountant’s job is to teach the SBO what the balance sheet and income statement mean. If you don’t understand the reports your bookkeeper or accountant has prepared, ask questions and keep asking questions until you do understand.

If the monthly financial statements show that you are not meeting your budget goals, ask your accountant what you can do to get in line with your budget. If the problem is beyond his expertise, you may need to hire a business consultant.

Again, you have to be careful in the selection of a business consultant. Don’t ever hire the one your banker or other secured creditor refers to you. He or she may be a spy for the creditor whose objective is to squeeze as much cash out of you as they can, before you go under.

Business consultants can be found at colleges and universities, in the yellow pages, on the internet, or in business journals. Try to find one with experience in your industry, if possible. The consultant's goal should be to help you with marketing and business operations that are outside the scope of your attorney’s and accountant’s expertise.

Business consultants often must literally go to work for the SBO for a time to really get a handle on the business and its challenges. Usually they are much less expensive than the accountant or attorney, so it is practical to have them for ten or twenty hours a week if need be. They can train the SBO in proper business practices, bookkeeping, budgeting, and marketing. They can train employees and help the SBO find customers and vendors that will help ensure successful operations in the future.

In a recent case, an SBO died and left his business to his two sons. Fortunately, one of the sons worked in the business but, even so, his father handled most of the critical operations, so neither had the expertise to keep the business going. Although the attorney and accountant were available for consultation, the sons needed additional help. A business consultant was called in and went on-sight to help get the business under control, and then to teach the sons how to successfully run it. After six months, not only was the business still around, it was thriving and even operating more efficiently than when their father had been in charge.

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