Why does your business need an bookkeeper? A reason that no bookkeeper will ever tell you!
Common Practices
You have probably heard all the common reasons as to why you need proper accounting. These include:
- Well kept accounting books determine the value of your business.
- If you are looking for a credit facility, banks will audit your accounting practices.
- Your journal entries do determine your corporate tax and the government will audit your accounting practices.
All these reasons are true. Yet most businesses, large or small, view accounting as something that they are forced to do, not something that adds value. When a small business owner shops for a bookkeeping service, usually the cheapest bookkeeper gets the contract. There is very little consideration paid to the quality of the bookkeeper. To the business owner its all the same! Add invoice here, subtract one there, and we are done.
Accountants Point of View
From the point of view of someone that provides bookkeeping/accounting service, a sell to a business owner that they need accounting services because it determines business value and access to credit facility is tough. Virtually all small businesses do not actively seek debt nor are they are ever planning to sell.
There is one value proposition that an accountant/bookkeeper can put an emphasis on that is very dear to all business owners, yet it never gets mentioned. The reason it never gets mentioned is because it is a very tedious and time consuming problem to solve.
The Real Reason
From my professional experience as a corporate accountant, I’ve seen multinational, as well as, mom and pop shops struggle from the same thing: payment reconciliation. Yes! This is the reason why you need a bookkeeper and this is also something that a bookkeeper does not want to discuss at length because it is difficult to do!
If you are a do it yourself business owner that uses, lets say, FreshBooks for your accounting needs then invoicing cannot be easier. You enter an invoice, it processes and we are done. If someone wants a refund, you click refund and you refund the money. Easy right?
If you are doing 10 invoices per month, yeah its pretty easy. If you are in a retail business doing 10 invoices per hour, then not so much! The sales will be entered into a batch and get posted as one entry into accounting system. For example:
Oct 10 Sales: $10,000
As time goes on, some of your customers will ask for a refund for one reason or another. Lets say some customers did request a refund and your bookkeeper shows you a report for October:
Sales October
Sales $300,000
Returns: $60,000
Net Sales October: $240,000
Most business owners are happy with this type of calculation. Some will ask for details on returns which will look something like this:
Refund to Customer A: Payment Method Visa: $35
Refund to Customer B: Payment Method Cheque: $500
Refund Chargeback: Payment Method Visa: $75
Refund to Customer C: Payment Method Master Card: $45
And the list will go on and on… Can you spot any issue with the sample above? If you were a business owner would you question anything? You are probably thinking we need reasons as to why refunds were performed. Why did we refund issuing a $500 cheque; did the bookkeeper bring this to the owners attention before issuing a refund?
Problem Explained
Without being immersed into payments reconciliation, it is very difficult to spot a monster that is hiding in an example above. The question that you as a business owner should be asking is “What is a chargeback?”. The answer is it is an automated way by credit card companies to issue a refund to a disputed transaction. A buyer initiates them and has to give some sort of proof as to why the sale was invalid. The credit card company will then automatically take money out of merchants bank account.
To many business owners this is big news that credit cards can do that. Unless you are familiar with accounting and reconciliation process, your questioning likely to stop here. However, this is a big mistake to stop questioning your bookkeeper here!
When a chargeback is seen in the bank, it does not automatically flow into your accounting software. What this means, you do not know which transaction is being refunded. In order to have this detail, accountant has to go in manually to a payment processer interface and find the chargeback in question. Once chargeback is found, it will have few details like general reason why the chargeback was performed and a customer name.
In the payment processor interface, there will be an option for you as a vendor to respond to a credit card company and if successful, money will be deposited back into your back account. This is very important because remember that credit card company does not know what is actually happening. The customer could have bought your product, still have it and request a chargeback by showing receipt to the credit card company and convincing them that you as a vendor have agreed to a refund! You could be giving away your merchandise for free without even realizing it!
From the accounting point of view, even if the chargeback is valid, you need to match that refund to a specific transaction and record it as soon as possible. Why? Imagine you agreed with the customer that you owe them a refund for a poor service. Nothing wrong with that, it happens. Now what can happen is you issue a refund and a customer goes to a credit card company and requests a chargeback. From the point of view of a credit card company its a legitimate refund and executes a chargeback. If your bookkeeper never matches a chargeback to a specific customer, he/she will take the request for a refund from you and execute that as well. As a result, a customer will get a double refund! Once from chargeback and once from you directly.
Conclusion
Those are great examples provided above, but do they actually happen in real life? ALL THE TIME! Not only that, there is a whole army of scammers who know this trick and prey on businesses. This is why many businesses will not issue a refund by a different method of payment other than the one you have used to purchase the product. This allows accounting to match payments and refunds more easily to specific transactions. Businesses also will not issue a refund the same day if they use different ERP systems by different departments. Usually ERP will sync at midnight. Only when the company is sure they have accounted for all the funds flowing in for a specific date, they will start issuing refunds that pertain to that date.
As for small business owners… they are oblivious to the danger they are exposing themselves when they contract with understaffed or unskilled bookkeepers. In my example above, a $75 chargeback could be for a product that never came back and customer never expressed intent to return. It could be that we already issued a refund for that customer but because we never matched it to a particular transaction we are now refunding this customer again. There can be tens or hundreds of chargebacks for any amounts.
From a point of a bookkeeper it is much easier for me to quote a customer to bill for only 20 hours of work, knowing full well that I will not be reconciling payments fully than quoting minimum of 35 hours of work if I were to do full reconciliation. If I quote 35 hours of work I will lose the contract to a firm that quoted 20. To a business owner accounting is just making entries, they will choose whoever charges less. Many business owners do not understand the dangers and complexities involved in accounting. This is why one of the most important reasons why you need a bookkeeper never gets told.
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