Many years ago, as I was starting out in this business, I remember talking to a friend who, at the time, worked for a well-known auditing firm. We were talking about all the many foibles of people that he dealt with and the worst, he affirmed, were those who had “magic pencils.”
I’d never heard the term before and asked him to elaborate.
“Oh, you know, magic pencils – the ones that suddenly make a “5” into a “15” to be able to run a better number.”
How it Usually Happens
A magic pencil has been the first step in the demise of many, many companies. Magic pencils usually show up in a company after a period of time where they have been creating (or not creating!) accurate financials. Perhaps they have to show cash flow reports for a prospective partner or a loan. Maybe they are pressed for time one month so the end of the month reconciliation isn’t as thorough as they normally are.
All too often, those inaccuracies originate not out of malice or an intentional misrepresentation of the numbers as they are, but out of desperation – not enough time, not enough money, or just trying to keep the doors open for one more month.
The Real Problem
The real problem is that many times, once inaccurate financials begin to be used, owners often never reconcile the bogus financials with the correct ones. This, of course, leads to the owner or entrepreneur making critical decisions and assumptions based on inaccurate numbers from their own mistakes. This is one of the critical control points where a good, third-party bookkeeper can keep honest people honest and offer the advice needed to truly affect positive change in a business to make it successful.
If you have a magic pencil on your desk, you need to throw it away right now if you wish to continue doing business and make your business successful.
Not all inaccuracies stem from magic pencils
Sometimes they are just busy owners. Some of the myriads of examples that we see all the time at BookKeepWithUs are:
- Buying items or services for the business with personal monies and not making the necessary reconciliations
- Using a business account for personal purchases and not tracking the transactions
- Failing to properly enter and classify cash receipts
- Billing for a product or service and failing to classify the month it was sold
- Receiving staggered payments for a long-term job and only allocating expenses to one particular month
- Failing to classify expenses based on the department or property which generated them
Stop The Pain
The best news is that you can stop the pain. Right now. It might hurt a little, but in the long run, you will be operating at a much higher level since you have truly accurate numbers from which to base your actions.
More importantly, you’ll be able to take that information and make the most of it when it comes to building and growing your business – one based on facts, not guesses.
By: Chris Groote
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