How to Ensure Your New Bookkeeper Has the Right Stuff

Just as The X Factor’s Simon Cowell judges singers without having singing talent of his own, you don’t need to understand bookkeeping to evaluate a potential bookkeeper’s level of knowledge before making the hiring decision.

Most small businesses seek bookkeepers with knowledge of QuickBooks, since this is the most popular accounting software. Bookkeepers without a full understanding of QuickBooks are soon in over their heads. Then you subsidize on-the-job learning or overpay for someone who isn’t able to keep up with transaction volume.

In the same way, you also may face problems with a bookkeeper who has QuickBooks skills but lacks accounting knowledge. QuickBooks can easily record duplications and other inaccuracies that require identification and correction; bookkeeping entries should establish clear audit trails.

Top-quality bookkeepers make sure financial statements look correct and are also capable of creating custom reports that can help you develop insights into your business results.

One method for assessing bookkeepers is to ask if they have certification from Intuit as a QuickBooks Certified Pro Advisor. Even better, ask your accountant to give you a few questions – and corresponding answers – about QuickBooks and basic accounting for use in testing potential bookkeeper hires.

By addressing these few crucial issues, you are ensuring that your bookkeeper knows the essentials for most common situations. Don’t hand over the responsibility for your business financial records to a bookkeeper without being reasonably certain that your new hire is proficient in these areas.

Essentials That Keep Your Business on Track

Unlike many of the numbers that measure human achievements, figures that identify sound business operations are remarkably consistent. While athletes’ records are regularly broken, the measures that reflect business success remain unchanged.

In order to use these financial benchmarks, you must first know what measures to collect. These are the absolute essentials:

Cash flow

Cash flow is a crucial figure in your financial arsenal. You decide future actions based on this, which is measured by subtracting the money going out from the funds coming in during any given period. Make sure that cash flow exceeds zero. Healthy top-tier businesses have positive cash flow.

Next, compile cash flow ratios by comparing last quarter’s cash flow to the immediately preceding quarter and to the same quarter a year ago. Look for ratios that are greater than 1. A negative number means your cash flow is declining and you should find out why.

Growth rates

Growing your business too fast usually foretells upcoming difficulties. Growth requires cash, and rapid sales increases necessitate a cash outflow for additional staff, equipment or space to serve more customers. In addition, as a business becomes larger, expensive changes to organizational processes and systems are required.

The amount of available cash is always limited. Additions of people and other resources should enhance profits rather than chase revenue growth.

Measure the rates of revenue growth and profit growth. Compare the two numbers. Try to maintain approximately equal growth rates for revenue and profit: That is, try to achieve a ratio of 1. When this situation exists, your business expenses are correctly tied to revenue growth.

Misaligned growth rates for revenue and profit signal a need to spend money you don’t have just to keep up with rising sales. The worst case occurs when revenue grows at a faster rate than profit. The eventual result is a shrinking profit margin. Thus, although revenue is increasing, you will spend yourself out of business.

Quick ratio

When reviewing the monthly financial statements of your business, start with a calculation of the “quick ratio.” This is the ratio of your current assets divided by current liabilities. The desirable quick ratio for most industries is 1 or more; this is the Holy Grail for any small business.

Current assets are all cash and accounts receivable plus any investments that are quickly convertible to cash. Current liabilities are accounts payable and other amounts your business owes in the next year. Make sure your financial statements accurately report these figures. You can uncover the components of all current assets and current liabilities in a discussion with your bookkeeper or accountant.

Reality check

Cash flow, growth rates and quick ratio are starting places for discovering the general direction your business is taking. After conducting these assessments, other financial measurements compiled with the aid of your accountant will help you understand the conditions that are contributing to any problems you may have identified using these essential measurements.