Where did it go?

Money is not magic. More money allows you to do more things. To have more money you need to increase your income (revenue) or decrease your spending (expenses). Many people concentrate on increasing the income with only minimum effort devoted to the expense side. Knowing where the money went can be hugely beneficial.

Whether you are concerned with personal or corporate finances the more information you have the better decisions you can make. The first recommendation most personal finance advisors make is to record each expense for a month. Don't make any changes in your spending habits just record what you spend. At the end of the month you have a snapshot of your life.

Businesses do the same with their accounting systems. Accounting turns numbers into information. Your accounting system is the best tool you have for managing your business. Group the expenses in appropriate categories such as rent, salaries, advertising, Research & Development, utilities, education and phone. At the end of the month, you will have a picture of what you considered important. You might think that marketing your products is your highest priority but if your advertising expense is low so is your commitment to marketing.

In the article on Time Management I talked about the importance of knowing your goals. By definition, goals are in the future. Your accounting system shows you the past in a very accurate way. There is no 'I meant to' or 'I thought we did'. The numbers show exactly what you did. The numbers show what you decided was important. The numbers show how closely you match the goals.

The accounting system is also a communication tool for the rest of your management team and employees. Other than salaries, all numbers should be available to all staff members.

Time is the biggest multiplier of money. Time can work for or against you. Money takes time to accumulate. You want to use money in ways that will generate more revenue in the future. This may be something simple as a savings account or it might be investing in more equipment or training so your staff can be more productive. This greater productivity will generate more revenue that can be invested in still more revenue generating endeavors. This concept is called compounding which is frequently called the eighth wonder of the world.

Accountants love to talk about the matching principle. You can't just look at the numbers and feel good because you made more money than you spent. Your accounting system should be setup so you can match your revenue to your expenses. For example you may sell a product that you manufactured from raw materials and then charge the customer a fee to train them on how to use the final product. You need to match the revenue from the sale to the raw material expense and the training income to the salary expense of the trainer.

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