Timing is everything

You can kill a great joke with bad timing. And, you can kill great bookkeeping with bad timing, too. Bookkeeping is not just about entering the numbers; it’s about entering the numbers at the right time.

If a customer pays you to do some work, their money should be reflected in the month you actually deliver the product or service. This sounds basic but it’s often ignored. Here’s why it’s important:

Let’s say you sell a product for $25 but it costs you $15 to make it.

Last month, you made and sold 3 products. So your production costs were $45 and your revenue was $75.

This month and next month are forecasted to be about the same. However, a customer from next month pays in advance.

• If you incorrectly assign that prepaid revenue to this month then you’ll have earned $100 and only paid $45 in production costs. It will look like a really profitable month! But next month you’ll only earn $50 with production costs of $45 and that won’t make anyone happy.

• If you correctly assign that prepaid revenue to next month then you’ll have earned $75 from $45 in production costs this month and $75 from $45 production costs next month.

When I spell it out like that, it makes sense, doesn’t it? By assigning revenue to the month it is earned, you get a clearer picture of your business. There aren’t any wild swings. It makes your accounting easier, clearer, and truer, and it helps you to forecast more accurately when you are planning for the year to come.

Okay, knowing it is one thing. But how do you actually do it in an accounting system? Stay tuned to an upcoming blog and I’ll show you how.