Bookkeeping is frequently undervalued by businesses and sometimes Bookkeepers themselves!
Underestimating and devaluing the role of bookkeeping in a business may give the false impression that you have saved money by reducing your bookkeeping costs. Taking this view could actually cost you more money, and in more ways than one.
Double entry bookkeeping is the process of recording transactions in the financial records of a business entity and dates back approximately 500 years. It was first written about by an Italian monk called Luca Pacioli who was a Mathematician and friend of Leonardo da Vinci. To be a good Bookkeeper takes a special personality; you have to love it, live it and breathe it.
In the past manual ledgers such as a cash book, day books and general ledgers were used to record the double entry, but today accounting programs record the double entry automatically when a transaction is posted.
Unfortunately it is not uncommon for a Bookkeeper not to understand double entry bookkeeping and this can limit their understanding as they cannot comprehend the relationship between debits and credits and how the accounts build up from the source transactions. This can cost your business money in several ways due to posting errors and inaccurate bookkeeping leading to inaccurate accounts. A good bookkeeper will understand double entry bookkeeping and be able to post transactions correctly. If your accounting audit trail is full of corrections then maybe your bookkeeper is lacking the skills required for the role.
As well as a complete understanding of double entry bookkeeping a good bookkeeper should have an enquiring mind, take ownership of the books and welcome responsibility. Any bookkeeper who doesn’t check and challenge data and values is not fulfilling the role and is probably more of a data entry clerk than a true bookkeeper.
Case Study 1:
A specialist manufacturing business had great hi-tech products and was supplying some well-known blue chip plc’s with high-end high value electronics but the business had significant cash flow problems and asked me to produce management accounts and assist in securing increased financing in the form of a bank overdraft.
The first questions I asked were:
- Why do you need to incur additional finance costs?
- What have you done to improve cash flow without increasing borrowing costs?
I reviewed the bookkeeping and long story short, the bookkeeper wasn’t checking the unit prices on supplier invoices. One particular key supplier had recognised this and were increasing their prices weekly. I reviewed and analysed the unit prices by product and invoice going back to the last agreed price list. In five months the supplier had overcharged by more than £17,000. As a graph the overcharges were rising exponentially and if left to carry on unchecked it may have closed the business.
Case Study 2:
With the increase of purchase invoices being sent via email, it is ever more vital to have controls in place to authorise invoices and to reconcile supplier accounts. This is essential for good bookkeeping. It may seem like basics for a competent bookkeeper to implement and conduct these bookkeeping procedures but far too often bad bookkeepers take the easy option and do as little as possible.
I have noticed that bookkeepers are receiving purchase invoices via email and printing off multiple copies or receiving further copies via email and processing the duplicates. If you or your bookkeeper do not have bookkeeping procedures and controls in place, then you risk paying invoices that are overcharged, not approved or even paying invoices twice.
With poor procedures and poor bookkeeping the costs can add up very quickly, and in one example an unapproved invoice for circa £7,500 was input for payment without checking and in actual fact was overcharged by circa £3,000. In addition a duplicate invoice was input for payment, again unchecked, for circa £90. As you can see each single error can cost a small amount or a large amount, but generally where there are no bookkeeping controls, there are multiple bookkeeping errors of varying amounts.
So, what is the true value of a good bookkeeping system then? A good bookkeeper will be tenacious, methodical, experienced, and efficient. Coupled with a good bookkeeping procedure they will save you money.