Good reason to hate spreadsheets

Rob Maurin
Small business accounting
Wednesday, Oct 6th, 2010
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“Wrong information with credibility is worse than no information at all.”

Most small businesses in North America use spreadsheets or shoeboxes to “organize” their financial information. Most small business owners hate spreadsheets, but they use them anyway because, well, they hate accounting applications more.

But the question for some small businesses remains: Why do you need a more than a spreadsheet? Does it really make a difference? Check out a recent blog post by Bill Inmon, a data warehouse guy who contributes to B-eye-Network.com. His attention is on big businesses, but the implications are easy to extrapolate to small businesses, too.

He paints an amusing (though troublingly accurate) scenario that goes like so:

Big Company has a meeting with Sales, Marketing, Accounting, Manufacturing and Finance. Each department brings a spreadsheet with compelling information. But the information doesn’t jibe. Each department built their own spreadsheet, and maybe the data isn’t identical, or maybe the reporting periods aren’t aligned, or maybe they did their calculations differently. But come meeting time, the various spreadsheets indicate that Big Company needs to hire 50% more staff, or lay off 10% of staff, and everything in between.

Which leads to Inmon’s punch line, which I excerpted above:

The spreadsheet, in fact, may be a liability when incorrect information is presented on it. When incorrect information is presented on a spreadsheet, it achieves the cachet of credibility, even when it is not credible information at all. And wrong information with credibility is worse than no information at all.

What Inmon says about big business holds for your small business, too. It’s easy to draw the wrong conclusions when you’re only looking at part of the picture. The beauty of an accounting application for small businesses, like Wave Accounting, is that the data -- on which you're basing your day-to-day business decisions -- lives cohesively in one place, and the reports that are generated are done right. With less work than you’d put into a spreadsheet, you’ll have much more business intelligence, and the quality will be better. You’ll have a better grasp of basic details (like who has paid you, and who is well past due). Your banker will be able to get a proper picture of how successful your business is, improving your ability to get a loan. The info you can get from an accounting application can totally change your understanding of your business when presented in a way that makes sense.

We’ll soon be rolling out some tutorials on what metrics a small business needs to follow, so please stay tuned for more.

(This entry originally appeared in an earlier version of the Wave Accounting blog for small business.)

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Comments

Sometimes accounting spreadsheets are the answer for small businesses.
Spreadsheets are widely used and understood by most business people, so it comes as no great surprise that accounting spreadsheets are a popular choice for many small businesses.
All businesses need to keep accounting records; both for compliance and management purposes, and for many smaller businesses, simple accounting spreadsheets are all that are required.
Let’s just outline exactly what essential financial records a small enterprise needs to keep.
If we analyse this, there are four basic requirements:
1. You need to record Bank, Cash and other money transactions. This means a simple analysed listing of Receipts and Payments. These records are collectively known as a ‘Cash Book’, and they need to be correctly added up and reconciled (matched and agreed) to Bank Statements etc.
2. All of your sales invoices to customers and all of your purchase invoices from suppliers will also need to be listed, summed and analysed. These lists are referred to as a ‘Sales Day Book’ and a ‘Purchase Day Book’.
3. You need to monitor and control your monies received against Sales Invoices (Debtor Management) and monies paid to your suppliers in respect of their Purchase Invoices.
4. You need to review, analyse, correct and control these primary records to achieve a basic level of financial reporting and control.
If you can both understand and accurately maintain these basic bookkeeping tasks, then, you are a long way towards achieving a basic level of financial control.
Simple tasks, performed well, and on a timely basis are all that many small businesses require.
There is little need to invest time or money in anything more sophisticated, bookkeeping software can be as simple as this, and the information provided will be of significant financial benefit to the business owner.
The ability to manage these straightforward monthly listings will provide you with a platform to bringing together the 12 monthly worksheets into a consolidated workbook. You will now have a bookkeeping spreadsheet which contains a Cash Book, a Sales Day Book and a Purchase Day Book. You will certainly have sufficient data for the preparation of rudimentary accounting reports.
Finally, if you have accountancy skills, then Business Taxation, Year End and other Compliance requirements could be built into your system.
However, in my experience most small businesses will to leave this final step to their accountants. So, unless you fully understand concepts such as accruals, prepayments, depreciation, opening trial balances, capital allowances, disallowable expenditure, etc., then leave this final stage to the professionals.
As long as the bookkeeping spreadsheets are well designed; can comply with current TAX requirements; and are fully reconciled, then for many small enterprises and self- employed individuals, accounting spreadsheets are workable bookkeeping solution.
Shane Udall — Tuesday, April 10th, 12:06

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