What would it be like for you if you only had one leg?
How would walking work for you? Probably more like a hop I suspect!!
This is how many people think about the money side of their business.
They never think about the ‘other side’ of what they’re doing.
Cause and effect never enter their minds because they’re completely focused on the single task at hand.
Let me give you an example:
When you make a sale, what do you get?
The answer you may have come up with was CASH,
but in most circumstances you get an account receivable.
It is a two step process to get to CASH!
How about when you make purchases?
Most of you would hope you could get the goods on account
and then at a later stage pay the supplier.
Again this is a two step process.
Now the fun begins in bringing these two types of transaction together.
In a business most people want to know what their profit and loss account shows them so they try and match their sales and purchases together to see what profit they made.
BIG PROBLEM
For many people this is a complete miss match because they use a two step process for their sales and a one step process for their purchases.
What do I mean by this?
Most computer programmes automatically do a two step process for sales.
When it comes to purchases the same is offered but people choose to ignore the accounts until someone is screaming at them to pay and then AFTER paying they enter the amount into their books.
Think about it. What sort of profit and loss account is this going to produce?
A miss match of sales and purchases which will tell the business owner absolutely nothing about their real profitability!
The learning here is to make sure that you use the same process for sales and purchases in your books. There is another step which I’ll talk about in the next post which relates to matching real sales against cost of sales. This is different to purchases so look for part 2 in this series.
