Since retiring from my full-time pursuits a few years ago, my wife Jill and I have begun to go grocery shopping together. Well, perhaps “shopping together” is a misnomer. We enter the store together, to be sure; but I’m given a list and a hand basket, Jill takes a cart, and we go our separate ways. I spend the next 90 minutes alternately waiting for items to jump off the shelf into my basket and wondering where Jill is.
A few weeks ago, while wandering dazed through the snacks and chips aisle, my phone rang. The call was from a reader who wanted my recommendation for accounting software for her business. Relieved to be back in my own world, I sat on a bench in the front of the store and quizzed her about her business.
Her business model is a common one for a modern antiques business: a combination of estate sales, antique shows and Internet sales selling a mixture of consigned and purchased inventory. As we spoke, it became clear to me that although she was savvy about how to track her inventory and sales, she really didn’t fully grasp (although she suspected) how having a cohesive accounting system could transform her business.
I could relate to her dilemma. When I bought my first store back in the 1980s, I spent the first five years clueless about accounting. Like my caller, I knew how to track my sales and inventory and I could tell you in a heartbeat what my margins, expenses and profits were; even though my operating statements – and consequently my tax returns – differed from my calculations.
My first accountant owned a national small business accounting franchise and had a Master’s degree in accounting – which would seem to be a trustworthy combination. It wasn’t. I used the accounting forms that he gave me, and turned them in at the end of each month. At my first quarterly review, he exclaimed, “Your restoration shop is a goldmine! That’s where all your profits are . . . do more restoration work!”
At the second quarterly review, he said, “I don’t know what happened to your restoration profits; it seems that it’s your moving service that’s making all the money!” And so on. At each quarterly review he claimed that all my profits came from a different part of my business. In some seasons, even my retail store was a “goldmine.”
Of course, the problem was not sales, but how I was tracking my inventory and expenses. He never adequately explained any of this to me, despite my questions. Maybe he felt that if he kept me in the dark I would be more reliant on his services.
After two years of such nonsense, I changed accountants. I changed accountants every year or two thereafter, and I tried all of the major accounting software programs as well. After many years of trying to get a grip on my accounting, the real issue finally dawned on me: The problem wasn’t software or accountants; the problem was that I didn’t understand accounting. I could buy, sell and restore with the best of them, but I never really managed my business until I began to understand the mysteries of double-entry accounting.
Let me calm your fears: I’m not about to enter into a how-to on accounting. But I have to wonder after my conversation with my reader-caller if her business and others couldn’t be improved by a better understanding of how balance sheets, income statements and cash flow projections combine to form an image of a business’ operational health.
For example, here are a few things that your balance sheet (not your income statement) can tell you:
1. The odds that you will go bankrupt
2. The financial risk that lenders would assume in making you a loan
3. What your business might be worth if you were to sell it (Hint: This value is not “owners’ equity”)
4. How good a buyer you are
5. Whether or not you’re solvent (with or without money in the bank)
6. What the investment value of your business is
7. How efficiently you run your business.
All of the above items can be calculated by using “financial ratios.” There are other accounting ratios as well. Knowing how the pieces of the accounting puzzle fit together enabled me to see my individual business decisions in terms of their impact on my whole business.
Buying, selling, hiring, advertising and other decisions were no longer seen as independent acts whose consequences could only be determined in two months’ time when I got my statements back from the accountant. I could see the impact of possible decisions before my final decision was even made.
In coming weeks, my columns will focus on organizing your business accounting in a fashion that will give you some usable management tools. Nothing too deep or boring; I won’t discuss how to keep your books, I’ll leave that to the accountants.
Rather, I’ll examine how to track and interpret your costs, sales and expenses so that you can get meaningful results from your accountant – results that will help you become a better manager. Here are a few of the topics I’ll cover:
• Organizing your profit centers
• Playing “what if” with your own crystal ball
• Row with both oars in the water: income statement and balance sheet
• Using financial ratios to fine-tune your business
• Review of accounting software
Readers are encouraged to write or call with questions and issues; I want to be sure to address issues that are specific to antiques dealers.
Previously published in Antique Trader Magazine