A yardstick to measure your accounting system

A Yardstick to Evaluate
Your Book Keeping System

by L. Kenway BComm CPB Retired

Published March 2009 | Edited June 1, 2024

Is your book keeping system doing the best job it can for you? Do you have the right accounting system for your business?

Back in May 1991, Lisa Kleinholz wrote an article for Home Office Computing on evaluating small business bookkeeping systems entitled, "Keeping the books: how 5 businesses do it". (She's a successful mystery novelist now.)

The systems evaluation yardstick she used, and how to proceed with the evaluation was simple (which I always like) and is still valid today for small businesses ... so here it is in much less elegant prose.

System Criteria

To determine if you have a good book keeping system that meets the needs of your business, judge your current system (or the one you are currently thinking of implementing) by these five yardsticks:

Is the program software the right size? Like Goldilocks and the Three Bears, it shouldn't be too big or too small but just right for you! You need to mark your calendar to reassess this criteria annually.
How easy is it for you enter to data? Does it save time and clerical errors by adding columns and numbers for you?
Can you understand the language it speaks and the program's functionality? By this I mean, is it an integrated system or do you need an accounting background to understand how the separate modules work (most large businesses use modular systems)? Is it user friendly even if you don't have an accounting background?
Do you get useful reporting (but not too much) ... like how much you are making and spending AND why? See the five questions Lisa felt small business owners needed answered
... and I'm adding one of my own criteria ... Does it meet government record retention requirements? Whether your information is on paper or is stored in an electronic version ... it is your responsibility, in the event of a tax audit, to retain records that an auditor can access.

The success or failure of a business often comes down to two things: how you decided to keep your company’s books; and how well you kept them.

Lisa Kleinholz

How to Evaluate Your Book Keeping System

Whether you are just starting out or have been in business awhile, how do you know if your accounting system (the method you use to track your business finances … from each receipt to your tax preparation) is the right one for your business?

It’s best to keep it as simple as possible for your size and needs of your business. But there are just so many choices.

Do you need a formal filing system or will an informal receipts method work?
Do you do your books yourself … or hire a bookkeeper?
If you decide to hire, should you go part-time, full-time, on the premises, off the premises, employee or freelance?
Do you use an accounting software program ... online in the cloud or offline on your desktop … or a spreadsheet ... or do it manually?
If you do choose to leverage today's technology, which product or app is the best for your business?

So before you can evaluate your accounting system, you need to stop right now and do a bit of information gathering.

Give some thought to these questions

Get a pencil and paper (or your tablet). Thinking about your current accounting system, give some thought to these questions:

What is your business?
What are your business information needs?
What are your problems with your existing system? ... or things you can't do but wish you could.

Sip some water while you actually take the time to answer the questions about your book keeping system before you move on. I really do mean take the time to answer the questions. Brian Tracy, a best selling author and coach, always says, "Think on paper, think on paper, think on paper."

... Use the picture from a gorgeous summer day at the lake to relax and focus.

SIDEBAR:

This was my view from my kitchen window for sixteen years. I have now downsized and moved from northern British Columbia to the Columbia Valley in southeastern British Columbia. My view is now of the Rocky Mountains to the east and the Purcell Mountains to the west. Lake Windermere is a twenty minute drive.

In this picture, if you look closely, you can see the devastation the pine beetle has caused to our area around 2004. See all the dead trees? Thousands of trees had to be taken down because they became a major fire hazard. Once the barrier from the trees were gone, the wind storms picked up for about five years until the wind break could reestablish itself.

... But I digress so back to our topic - book keeping system criteria and evaluation.

END SIDEBAR

What Are Your Needs? What Are Your Problems?

By the end of this chat, I hope you will have a solution (or at least some ideas) that meets your needs and solves the problems you are experiencing with your current accounting system. Okay ...

... Are you stuck? How about these possibilities:

What is your business?

I love ________ (fill in the blank) about my business.
This business drives me to want to _________ (finish the thought).
I started my business because ___________ (go on ... tell me! Say it out loud so you can hear it for yourself.)

What are your business needs?

track expenses
track different categories of income
track results of advertising and marketing efforts
file all taxes on time and accurately
reports to manage my business
track trends on sales
process payroll (if you have employees)

What are your problems?

system is too complicated for a non-accountant
program language is not user friendly - uses terms like debits and credits
system has more features than I need - it is too big for my business
no reports because I have a manual system ... all that data going to waste!

I've got to ask ... doesn't it feel good to be working on your business instead of in it? Your book keeping system will thank you too!

Five Questions That Need Asking

To determine if you have a good book keeping system that meets the needs of your business, Lisa suggested your system should answer these five questions:

(1) Are you charging enough?

Practically any organized system will let you see if your revenue coming in covers your business expenses (including your draw) with some extra room left for a profit. Even simple systems will let know what your profit margin is.

(2) Are you spending too much?

Your system should let you break down your expenses by type so you can see where your largest outlays are. You need this important information if you are going to control your costs. Cutting costs may make sense in the short run but take the time to think about how will it affect your long range plans for your business?

(3) Are you monitoring your cash flow?

Projecting your cash flow three to six months into the future will give you a heads up if a cash squeeze is coming. It gives you time to be proactive; perhaps plan a sale to bring in business during the slow period.

(4) Are you focusing your energy prudently?

If your accounting system is doing it’s job, you should be able to see where your highest profits are so you can direct your time and money there instead of on the less profitable parts of your business. Or maybe you can brainstorm to see if there is a way to increase your profits in these areas.

(5) Are there red flags warning of problems ahead?

Your book keeping system should produce comparative reports (see below) so that you can use your history to run your business more effectively now and make strategic decisions for the future.

What is a comparative income statement or a comparative balance sheet?

A comparative statement means that the current period figures are being compared to a previous period. The comparative period may be the prior period (compare this month to last month) or it could be for the same time period in the previous year (compare this month to the same month last year). It helps you put the numbers in perspective and allows you to watch for trends (sales are down but expenses are up) so you can be proactive in managing your business.

It's been great chatting with you.

Your Tutor

Bookkeeping Essentials › Developing Your Accounting System › Evaluation Criteria

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A Yardstick to EvaluateYour Book Keeping System