In and Out

There is an old story that goes like this:

Two Skunks

Once there were two skunks, In and Out.

When In was in, Out was out,

and when Out was in, In was out.

One day Out was in, and In was Out.

So Mother Skunk told Out:

“Out, go out and bring In in.”

So Out went out and brought In in.

“How did you find In so fast?” asked Mother Skunk.

“It was easy,” Out said: “Instinct.”

I liked that story when I was a kid, it had a lilt to it. I liked that when In was In, Out was out, and vice versa. I liked that there was a surprise ending, and that it had to do with stinking.

And still, as an adult, I like the in-and-out concept. It explains the balance sheet. It explains debits and credits. When something comes In, it had to have come Out of something else. And vice versa. The whole system of double-entry accounting revolves around this concept. Things don’t just come out of nowhere, or go nowhere. If you are handed a set of financials with holes regarding where things came from or where they went, something stinks.

Many client simply use spreadsheets, or paper and pencil, which is a single-entry accounting system. Or they treat their accounting software as if it is a single-entry accounting system, and don’t understand why you insist on looking at their balance sheet.

Well, at some point in your life, you are going to have to explain this concept. Most likely you won’t speak directly about debits and credits, but you allude to their existence when you point to the client’s financials and ask for an explanation for a negative account balance, or ask how they came up with enough money to pay their mortgage if they made no income.

Some clients lose track of where things have gone “into” and so when later it is time to take the things “out” they take them out of the wrong place, leaving unresolved accounts open. They enter their credit card transactions into their credit card register, and then when they pay their credit card, they enter the credit card payment as an itemized list of new expenses, rather than a satisfaction of the debt. Or maybe they enter a receivable on their balance sheet and then leave the receivable open after the money has come in. Or they show up with a handful of receipts and tell you to enter them to reimburse themselves, not realizing those expenses were already entered. Or they won’t track their credit card transactions at all, thinking that such transactions “don’t count.”

You would be surprised to find out how many people do not know the names of their investors, what amounts they received, what the pay-back terms are, or why the information would be important to someone.

Just don’t be surprised when a client says, “why do you need a balance sheet? Isn’t the profit and loss all that you need?” And no matter how you try to explain that the balance sheet “proofs” the profit and loss, or that the balance sheet contains the profit and loss plus so much more – they still don’t see why you like the balance sheet so much better than the profit and loss.

The balance sheet is kind of like the checks and balances of a government, whose function it is to give some transparency to the functions of government, and to expose lies and pretenses and the over-extension of power. It gives a trained observer the ability to see if things “add up,” and to ask questions.

It is a marketing problem, truly, to market the balance sheet as an important financial document. Is there anyone who can come up with a good way to market it? A slogan, perhaps, with all the fashionable associations? How about, “keep your company stink free with this amazing, eco-balanced sheet.” How about, “Don’t hold the stink in, correct it with this balancing, clinically tested sheet.” How about, “Keep out the Denmark rot with this authentic, centuries-old invention of the balance-proofed sheet.” Or “follow your instincts with this sexy see-all balance sheet.” I want to hear people squeal with excitement and giggle when asked to produce a balance sheet. I want them to laugh with recognition when it is pointed out to them that something stinks.

Answering the Sphinx

 

“…it is the one riddle you do not know, not the thousand you do know, that will destroy you.” *

There are many legends of riddles with life or death consequences. The Sphinx in Greek literature. Gollum in Lord of the Rings. The Bridge Keeper in Monty Python and the Holy Grail.

Life is full of mysteries. Did this recipe fail because I followed it correctly or did it fail because I followed it incorrectly? If I followed it correctly did it fail because my taste buds are different than the author’s, or did it fail because there was a typo in it? If I followed it incorrectly, did I do so because I am a terrible cook, or did I just omit a step? If I omitted a step is it because I am too unorganized to be able to follow any recipe, or does it just require familiarity? Was the altitude too high? Was there an implied technique that wasn’t spelled out? Did I use an expired ingredient? Was my oven too hot?

Dealing with output gone wrong is endemic to computer programming. The uncertainty starts with the instructions – were the instructions I was trying to follow wrong, incomplete, required other techniques that weren’t spelled out, etc. If you are lucky enough to be able to find a second set of instructions written by someone else, you can compare the two. However, instructions for computer programs, like recipes, have a creative element to it – it is unlikely that two instructions will tackle the beast in exactly the same way, and so a straight comparison allowing you to find a typo in the instructions will be unlikely. It is easier for you to find a typo in your own program, rather than in the instructions. However, to find a typo in your own program requires self-confidence. It is not because you are a terrible cook. It is not because you have an innate character flaw like being disorganized. It is something you can do, if you just approach it methodically.

Some mysteries are unanswerable. Just today as I was folding laundry in the peace and quiet of my own room, suddenly there was an awful noise outside my room. A ruckus was running down the hall.  It collided against my closed door, fought the door knob and exploded into my room, where it immediately tripped and overturned the laundry basket. There it stood, one knee in a laundry basket, the other leg trying to bring itself and the basket upright, an undomesticated six-year old girl. And out of the mouth of this beast came the question, “are flies real?”

Many thoughts immediately ran through my mind at once. Why was my silence broken. Microbiology and basic life forms. Metaphysics and the nature of reality. Life in general, philosophy, and can a six-year understand these subjects (yes) and then immediately the corollary, will a six-year old stay still long enough to listen to a discourse on these subjects (no).

And so my answer was, “I don’t know. What do you think?”

To which the beast answered, in a beast-like fashion, “because the Evil One wanted something nice,” and untangled itself from the clothes and plastic woof and warp of the basket, and ran back from whence it came.

Leaving me with another set of many thoughts simultaneously running through my mind. Flies are for birds, and birds are not evil, flies are necessary in the food chain, why does she associate flies with evil, and where did she learn that word, evil, I have never used it, let alone the Evil One, is it just a normal disgust of flies, and since when does one answer a metaphysical question with religion? And what kind of religion frightens little children with images of the Evil One? And, it must be TV, and is she watching too much TV, and by golly what kind of connections is she making between real life and TV life, and the surrealism of it all, and is it preventing her from seeing nature for the purity and beauty that it is.

In retrospect, maybe she saw a reference to Lord of the Flies, and she has been watching Goosebumps non-stop today.

Which brings me back to life’s mysteries. You will be asked questions you cannot answer. In the legend of the Sphinx, most travelers simply avoided the path that led to the Sphinx in the first place. The first instinct when “enjoying the quiet” is to reject any interruption as an annoyance. When concentrating on the path at hand, questions are distracting. Why would Oedipus purposely seek out a Sphinx’s questions, knowing he could be made a fool, as in killed? Whether or not to interrupt your path by answering some monster’s riddle is a matter of priorities. Is it beneficial to you to help the monster (assuming the monster really desires the answer and is not just asking the question with the intent of putting you in an awkward spot) or is it better to kill or avoid monsters? Is it beneficial to the office to answer the incessant questions of your staff and clients?

And if you answer yes, what do you do when you get to the one riddle you do not know, the one that will destroy you, or at least your self image? Just remember, it is not because you are a terrible cook. It is not because you have an innate character flaw like being disorganized. It is something you can do.

If you just approach it methodically.

Take the most common email I get everyday, “I got a notice from the IRS. Why do I owe taxes? Are there any other taxes that I owe?”

To which a set of thoughts run through my head. What year. What form number. Is it really the IRS (lots of clients use government agencies names interchangeably). Is it for the person as an individual, or is it for their corporation. And even after I request and get a copy of the notice, there is the second half of the question – “are there any other taxes that I owe?” For me to answer that question requires me to pull government transcripts for the client as an individual, the client as a corporation, every year, every government agency, every likely type of tax (income tax, payroll tax, sales tax, city tax, property tax, what have you). However, it can be done. It just has to be approached methodically.

A good methodical approach to open questions, such as “is my tax return ready?” and “what should I do next?” is to use a checklist. To really know if a tax return is good enough to send a draft to the client to look over, and if there is any missing information or items that need to be asked of the client, use a checklist. I recommend the book The Checklist Manifesto: How to Get Things Right. Sure, I made fun of the book when I first saw its cover (the concept of stressing just one single simple concept). However, I still read it. It actually was an enjoyable read, discussing the evolution of certain famous checklists, and it disciplined me into making and using efficient checklists.

The challenge of creating a checklist is that the creation of a checklist requires real expertise. Sometimes if you are lucky enough to subscribe to a research database you can find a pre-made checklist. Otherwise you will need to compile one yourself by researching laws, instructions, commentaries, asking experts and remembering all mistakes you have made in the past leading up to your own hard-won knowledge. Because a checklist is often just a list of mistakes and omissions to find.

Of course, a checklist probably won’t help with those strange questions, like “are flies real?” where you don’t know why you are being asked a certain question. In such a case, instead of answering with your wealth of knowledge, ask yourself the more basic question behind the question. Why is this person asking this question?  Ask the question back to the person, and see what their own answer is.  If you understand where a person is coming from, you can build on their grasp of the world (or perhaps they will answer themselves and run back from whence they came).

What do you do when asked a question? Do you answer it?

*The Riddle-Master of Hed, 1976.

Accounting Basics

At age fifteen I found myself living on a tiny college campus comprising three hundred kids in the middle of the wilderness. The campus was at the top of the Berkshire mountains, a long way away from civilization.

The college recruited its students out of tenth grade. The average age upon arrival was sixteen.  The college had two main sets of students. It had hippies, and it had punks. Mainly it was just these two diametrically opposed sets of outcasts existing at this school. The hippies had a great time. There were trees all around. The punks had an ok time. They didn’t have to be in high school. The only problem was the trees.

One day in a fit of exploration I started walking. The campus was surrounded by trees (did I mention the trees?). Other than the road that followed the main river down the mountain, the mountain was a vast forest. 137 miles to New York City down one side of the mountain.  139 miles to Boston down the other side.

I wasn’t on the road. I was at a random point on the outskirt of the campus, and I stepped into the forest. It was a beautiful winter afternoon, the birds were singing, there were brooks to walk over, the crisp smell of snow was in the air.

After a while, a heavy snow started falling. The afternoon was getting late, and I began thinking about finding my way back. I turned around to walk back in the direction I had come from, but I had no idea what direction.

I kept walking, and the daylight was fading. I wondered how far away I was from the campus, and if there was any chance of encountering a house or road. All I could do was keep walking til I either ended up somewhere useful or til I ran out of daylight.

I was a punk, I liked cities, crashing bodies, crashing music, crashing darkness. I could walk all night in the city and it was as safe as Heaven to me. But when you are alone, away from the city, away from people, against the elements, you die. There is no starker realization of death than when you realize you are alone on a mountain lost in a snowstorm in the dark.

If there was any disagreement in philosophy between the punks and the hippies, it was the trees. The hippies joined up for hiking and nature clubs. The punks hung out in the rec room and dorm rooms and played loud music. The punks couldn’t understand how the hippies liked the trees. The horror of being surrounded by trees.

When you are in such a situation, because every sense is on alert and your awareness is so high of everything around you, it is not too bad of a feeling, knowing you will die, it is just an intellectual fact, that eventually if you don’t get lucky, you will die. I kept walking.

I got lucky. A broad smile broke out on my face.  Far to my left, in the dark, I could see a thin tree, a blaze of paint upon its trunk. The thrill of connection with humanity. Some freaky hippie hiking club, who knows when, had explored these very woods and marked a trail. And very easily, very simply, I searched out the trail of blazes and impressed deeply upon myself the fact that some hippy group had saved my life.

I don’t know much about wilderness survival, but my ears will perk up if someone offers me some information about it. You never know when you need to learn the basics of a subject. The basics of wilderness survival are as follows: out of the three necessities (food, water, shelter), which should you learn about first? You approach the answer like this: How long can you survive without food?  You can survive for weeks without food. Water, a bit more important, a couple days: without it your brain dehydrates and you start hallucinating. Shelter, however, we are talking about death in a matter of hours.

A shelter, I learned later in my life, is not hard to make as long as you know the basics. The basics of a wilderness shelter is that it must be small, to trap in your body heat. You don’t need to learn how to weave branches into a wigwam or cut notches in sticks or anything fancy. You need to figure out some way to enclose yourself with enough debris, sticks, leaves, logs, broken evergreen branches, palm fronds, boxes, sweaters, snow blocks, whatever is at hand, and make as tiny a sleeping space amongst the rubble as possible, to insulate yourself.

And so, all the mystery of survival and overwhelm of the problem is solved with the most basic and easy to learn piece of knowledge.  Here I was, a young kid, certain there was no way that a body could survive alone in the winter lost on a mountain in a snowstorm. I was certain that even if I had been natively interested in the subject all my life, and trained in it by raw-woodchuck-eating parents, it would take years of training for me to learn enough to be able to survive a day or two in the mountains in a snowstorm. I would assume I would need to know how to trap a rabbit, purify water, skin a bear, sew a deerskin, build a hut, and, not being trained in such things, I would assume I would be unable to survive for the two days it would take for a search party to ultimately find me. And, without the knowledge of the basics, it would be true, I would die, as so many other people have when stranded in the wilderness, by not knowing how to insulate themselves from the cold.

And here we turn to accounting basics. Like every grand and overwhelming subject, accounting has one basic thing that must be learned first. Perk up your ears when you hear the basics, as the age-old story passed down from one accounting graduate to another goes, as such: an old, venerable accounting professor, head of the department, terror of the student body, is finally coming to the day of his retirement. He gives his last lecture, and in his closing words, he asks, “does anyone have any questions?” One student timidly raises his hand and asks, “Professor. Every day, at the start of class, you come into the room, walk up to the podium, open a drawer, look inside it, then close the drawer, then start your lecture. As far back in history as far as anyone can remember, you have always opened and looked inside this drawer before you start any lecture. Professor. What is in the drawer?” The professor obligingly looks down at his podium, opens the little drawer and slowly draws out a little slip of paper. He holds it up, pauses, and then in a soft voice, every student straining to catch his words, he reads it: “Debits on the left. Credits on the right.”

Trust me. Learn the most basic important concepts first and you will be able to stay alive long enough for a search party to find you.

Bookkeepers on a Shoestring Budget

I mentioned, in a prior blog, the arrogance of bookkeepers who feel superior to their clients. I find it humorous that these bookkeepers, who are making far less money than their clients, consider those clients low class because of the clients’ inability to budget. “Why does this bozo keep bouncing checks and is always unable to pay the bills? It’s like pigs at the feeding trough – $15,000 comes in and it is spent on food and gadgets before the end of the day, before I can even pay a single bill. I could survive on $15,000 for a whole year, this jerk can’t survive on it for a day.”

Budgeting is native to a bookkeeper, but don’t expect a bookkeeper to create a budget report. Do you see the budget exercise at the top of this page? (From workbook titled “Personal Finance” by Karl S.Biedenweg – Mark Twain Media – 1999). It is targeted for 5th to 8th graders. It is probably the reason nobody makes a budget. It is painful and overwhelming. I know of no bookkeeper who would want to do that exercise. Why? It is too ambiguous. To a 5th grader, it is also pointless. In my private opinion, it also doesn’t have the essential element of budgeting: ruthlessness.

Let me tell you how a bookkeeper learns to budget. A bookkeeper records bank deposits, bank withdrawals, bills and bill payments. A bookkeeper sees how much money comes in and a bookkeeper doesn’t like negative numbers. It is as simple as that.

Let’s go over these points.

Point number one. A bookkeeper records bank transactions. Why record bank transactions when the bank does that for you and provides you full reports? The reason a bookkeeper records bank transactions is because the bank doesn’t know about outstanding items that have been initiated: checks that have been written but haven’t cleared, scheduled mortgage payments, credit card and utility auto-pays, etc. In addition, the bookkeeper doesn’t know about things the bank has initiated, or unexpected parties have initiated – bank fees, ex-wives or hackers getting into the account un-authorized. By comparing their own records to the bank’s records they can isolate the items they disagree with.

Point number two. A bookkeeper records bills. Why record bills? Because vendors get mad. And when vendors get mad, they resort to things like charging interest, cutting off service, reporting to a credit bureau, breaking a kneecap. All things that make it difficult to operate. Also, bills give a sobering picture how encumbered the money in the bank is.

Point number three. A bookkeeper sees how much money comes in. What does this mean? It means that a bookkeeper knows the limit of what can be withdrawn. It does not mean that the bookkeeper is authorized to make more money for the client or to collect more bill payments for the client. Of course, some bookkeepers are authorized to do those things. Especially if they are doing their own books or running their own business. But let’s keep it simple. Let’s consider that the bookkeeper cannot just go out and mint money. So by seeing how much money comes in, the bookkeeper knows the limit of what can be withdrawn.

Point number four. A bookkeeper doesn’t like negative numbers. This is the secret to their superiority. You see, the less money that comes in, the more closely a bookkeeper has to watch the bank balance, the more micro-managing a bookkeeper has to do. Now, a budget assumes a goal. But a bookkeeper’s goal is simply to keep the numbers positive. The client’s goal may be to reward themself, impress their neighbor, see the world, be more comfortable, who knows. A bookkeeper’s goal is much more simple. Just keep the numbers positive.

When I mentioned “ruthlessness” as an essential ingredient of budgeting, I simply mean having passion about one’s goal. That silly 5th grade exercise at the top of the page? Makes no sense. Why is the goal to buy a dream house when currently there are already house payments on the budget? Does this imply there is currently a house already owned? Then why not sell the house and use the cash for a down payment to buy the dream house? Or is the mortgage upside-down? Or if there is no house currently, is this an exercise to see if house payments are affordable? Compared with what? The current rent payments? Living with mom? And how realistic of a passion is this to this 5th grader? That’s what I mean by ruthlessness – just passion.

There are various ways to obtain a goal, including going into debt, including being generous, including having children, and including intangibles. These are strategies way beyond the province of a bookkeeper. Such strategies are created by business tycoons, saints, leaders, and visionaries. Any method to get to a goal, in my mind, is a valid budget. I have witnessed budget approaches of all types, and they are all individually tailored for the risk aversion and risk appetite of their creator.

Bookkeepers have a passion for keeping numbers positive. It is not the end-all and be-all of the universe, but it is their point of pride. I would like bookkeepers to help others obtain positive numbers, yet realize there are many methods of obtaining positive numbers, not just the method that they themselves stumbled upon. And I would like anyone floundering with the problem of keeping their money in the black to at least learn how to (1) record bank transactions (2) record bills and payments (3) see how much money is coming in and (4) limit their spending accordingly. It is at least one way to budget, and it is the most basic to start with.

I would like to hear as many insights and opinions as possible about budgeting.