Bookkeeping versus accounting versus management information.

So what does this all mean?

Well unashamedly this post is a little bit of self promotion, but my real intention is more about trying to provide information and education for you – the small business owner.

Many of you will have previously followed my posts at www.kundunconsulting.com.au. And many of you will be aware of my thoughts on bookkeepers. In fact many of you have argued the point with me about the role of the bookkeeper. I am however compelled to spell out the role of the bookkeeper versus the other financial advisors in your employ – whether internal or external.

Let me give you something to think about. Go to seek.com.au. Type in accountant. Check out the number of results. Now try bookkeeper. Is it the same?

Of course not. Accountants are a very in demand skill set for corporate Australia. Bookkeepers really aren’t – they are tied to the small business market.

So why do so many small business people hire bookkeepers to perform all of their financial related tasks? Does that mean that small business is so much smarter than Corporate Australia and can get bookkeepers to perform the tasks that they get accountants to perform?

The point of all this is that both bookkeepers and accountants have their roles to perform. The bookkeepers are there to provide simple DATA ENTRY with a knowledge of the basic accounting treatment of those transactions.

Accountants are there to take that data entry and complete the financial reporting required to supply management with the information that they need to manage the business. A very good accountant will then understand how that strategically links with the business and provide more value via the interpretation of that information to assist you to make decisions.

Now I need to say this very clearly to ensure that you have complete clarity:

Bookkeepers CANNOT produce management information or financial reports. They SHOULD NOT be completing these tasks or offering these services. Clients SHOULD NOT be expecting this from them.

So right now you are probably asking why the ramble. Well today I met with a new client who I was referred to by their external accountant – we will discuss this later in the week – who had some concerns about what the bookkeeper was doing.

The 2009 financial reports produced by the bookkeeper showed a profit of 319,000. However July had invoices from their suppliers of $112,000 which related to periods prior to July. In effect the bookkeeper had overstated the profit by 30%. After our review and the subsequent reconciliations and adjustments we were able to sit down with the owner of the business and provide a true gross profit figure which highlighted that there were issues in his estimating area. Subsequent decisions have allowed us to improve profits to a more comfortable level and this will now be a business managed with an eye on the financial implications of every decision – and done with CORRECT financial information.

He thought that his bookkeeper should have been able to deal with all of this – particularly as she offered those services when he engaged her. And as my rant above highlights this is not and should never be the case.

Yes I engage bookkeepers to perform tasks for clients – but that is never the financial reporting. As an accountant and advisor I review the work performed and create the adjustments that accrual accounting requires. I never expect the bookkeeper – even though they can do the work due to the training methods that I use – to complete accrual entries without supervision.

Bottom line is that you shouldn’t either.

Today I experienced the misnomer that is bookkeeping.

I have a client who due to wanting to reduce costs has his daughter perform the bookkeeping for his business. He pays her a small wage and she performs the bookkeeping to the best of her ability. She takes around 30 hours a week to trundle through the data entry, reconciliations and the run some reports for the business. My role was to assist the owner to understand the business and work on the direction that the business needed to take.

I have been working with the client for a couple of months and we came to preparing the first BAS statement, which I had asked to review prior to lodgement. As I was reviewing the data behind the budget I noticed that GST input credits were being claimed on everything!

Primarily my concern arose when I noticed that bank interest and bank fees were being recorded with GST. When I asked the bookkeeper why, the answer was that “someone” had told her too.

So here we are with a client who has been operating for 3 years with incorrect GST claims – and most likely many more incorrect income tax deductions and the like. Now have one of my team is going through transactions from the start of the business and identifying the corrections that need to be made to allow the BAS to be amended and the income tax returns to be corrected.

The amended returns will result in extra tax payable, and the associated interest and then he will have to pay my firms fees for the work to get it all in order. We cannot go back prior to 2007 as the data has been purged from his accounting system so he will just have to hope that an audit doesn’t occur as we cannot prove our position.

And here is the crux of the problem. My client was of the opinion that because his daughter had been to a few MYOB courses this qualified her as a bookkeeper.

Bookkeeping is a task that requires skill, care and knowledge about basic accounting principals. I have said many times that it is not accounting and you need to be aware of what a bookkeeper can and should be doing. I have put together a list of tasks that a bookkeeper should and should not be doing which can be found here.

Owners of small businesses have to ask themselves these questions when trying to understand the complexity of the accounting tasks involved in a business – any business. Most large corporate businesses have specialised accounts staff performing the day to day functions. They have accountants looking at the financial management of the firm and they have their tax accountants ensuring that they meet and minimise tax properly. Why then do many small business owners think that their once a year tax accountant can do all of that himself?

If you have a bookkeeper trying to do it all then you need to review their responsibilities and get them focussed on what they are skilled at delivering. You then need to look at the roles that are involved in your accounting functions and get people who are qualified to provide that input.

My client was lucky. We caught this now before an audit and we can fix it pretty quickly – can you say the same?