Why even small businesses need systems

Larger businesses have systems in place that help prevent errors and fraud. Your boss may have to sign your expense account and someone else may oversee what he or she does. An outside accountant audits the books and there may even be a detailed policies and procedures manual that requires you to do certain things in specific ways.

Movies sometimes make fun of the overhead that some businesses add to their employees workload with forms and paperwork. The famous "TPS" form from the movie "Office Space" is a great example and many people swear that there are real life examples that are just as ludicrous.

If you are a very small business, perhaps even a sole proprietor working out of your home as I am, you may not feel that you need any systems at all. You are the sales executive, the worker bee, the accountant, the billing clerk and the head of payroll: why would you need systems?

Because even you can screw up

I know, it's hard to imagine, isn't it? How could you forget that a customer hasn't paid or, even worse, that you have forgotten to bill a customer? Bloody unlikely, right?

No, it really isn't. I've made that kind of mistake myself. In the rest of this article, I'm going to tell you some of the systems I have in place for my small business and why I have them.

Billing

I have quite a few different things that I sell, and each of them has a possibility of the invoicing step being missed. As each thing is different, I need different systems, but the basic idea is always the same: an independent way of checking.

1. Prepaid support

I might sell prepaid time and charge off time worked against that time, but I also sell fixed length support - say for a month or a year. It is very important that I do charge off hours used in the first case and not so important in the second, but in both cases it is very important that I send renewal offers when the original purchase expires.

I maintain a database with a web interface that tracks hours and time. It's easy enough (because I write my own code) to have that send email reminders to re-invoice customers and of course it will keep pestering me until I tell it that the bill has been sent.

2. Travel and other expenses

If I have to go visit one of those customers, I may need to charge them for travel expenses. If there is actual out of pocket expense, that is tracked another way because of the expense, but it could be simply automobile mileage. For the convenience of both my customers and myself, I bill that monthly. How can I make sure that it has been billed?

The database can help, because it differentiates between on-site and Internet access work, so on a monthly basis it produces a mileage report. That tells me who should be billed, but it doesn't tell me that they actually were billed.

To confirm that, I use the Quickbooks "Sales by Item" report. That gives me a list of sales invoices that were for the item "Mileage". I can compare that to what the database says I should have charged and resolve any discrepancy.

However, that still leaves open the possibility of forgetting to record it in the database, so I also record any physical visit on my office desk calendar. I use that record as another check that all mileage billing went out. That calendar also helps me check that I have recorded time against prepaid hours when I need to.

For miscellaneous expenses, I make a photocopy of all receipts and put those in a "To be billed" folder. I should have more checking on that, but these are rare situations, so I've not put in any extra auditing.

3. License renewals

These are conceptually similar to support agreements. In this case, it's someone else's database and the period is always yearly. They tell me when my customer's licenses are about to expire, but I can't trust that they haven't made a mistake.

I therefore turn to Quickbooks Sales by Item report again, but this time for the upcoming month one year ago. This shows me the customers that were invoiced last year and that can be checked against the report from the other database.

4. New licenses

This is the one that gives me nightmares. In this case, I may actually purchase a license before I have even invoiced the customer. If I forget to invoice, I'm out of pocket the cost of the license. I therefore have multiple systems in place for this.

First, when I buy the license, I will get an email confirming the order. I have an email rule in place that automatically labels (Gmail label) any such email with a special mark. Additionally, I manually forward these to myself and add a "$$$" to the beginning of the subject. Between those two markers, I can easily review what should have been invoiced and compare it to Quickbooks "Sales by item" for the past month.

I can also get an orders report from the company I where buy the licenses. That is another comparison that I can check against.

Getting the money

Of course QuickBooks has a Accounts Receivable aging report. However, I also keep a paper copy of every invoice produced. These are filed by date in an Accounts Receivable file.

Invoices cannot be removed from that file until they have a photocopy of the check or other payment stapled to them and, in the case of licenses, a photocopy of the licenses purchased. Only then can they go to the customer files.

The photocopy of the check serves two purposes. Mistakes can be made filling out deposit tickets and a careless bank teller or a badly written check can cause a different amount than expected to appear in your bank statement. Of course I reconcile the statement every month; in the very rare cases where there has been a discrepancy, I can quickly find a copy of the check or payment and see where the error is.

The requirement for a license attachment helps prevent the case of a customer paying me for that license but I have neglected to purchase it for them. Of course I'd expect them to notice any such error, but I'd prefer not to be embarrassed in that way, so I have that system in place also.

Finally, I reconcile the Quickbooks report with what is in the paper file. Obviously, they need to match always.

Compulsive?

This may all seem overly compulsive to you, but this is money. More importantly to me, it's MY money. Checking and double checking that everything gets billed and that all orders are filled is very important.

In general, you should examine your own procedures and consider how you'd want it done if you had someone else doing it. Presumably you trust that employee, but you would still want to apply audit trails and checks to be sure that everything is accounted for. You should do exactly the same oversight when the "employee" is actually you.