In my experience, companies that emphasize getting solid financial statements on a consistent basis face a higher propensity for success. You may be surprised that a little Accounting 101 will go a long way to moving in the right direction with your accounting. In essence, every solid accounting system has the same characteristics:
1. Data entry with a purpose
2. Period end reconciliations
3. Meaningful reports
4. Timely analysis
Data entry with a purpose
The first "touch" someone has with an accounting system is with the data entry. This could be as simple as the office manager recording transactions into the accounting software. When entering transactions there are a few thoughts: Make sure that transactions are entered. This means that all invoices, collections, charges and payments are recorded. When they are recorded, they must be recorded consistently, and according to a plan. Also make sure that the person doing the data entry has a printed chart of accounts to refer to if he or she has questions.
Period end reconciliations
A common misconception is that once the data is entered, correct financial statements are simply printed from the accounting software for interpretation. One of the most crucial procedures of getting accurate financial reporting is the reconciliation process. A company should reconcile all balance sheet accounts and selected income statement accounts provide a tool to ensure accuracy of the financial statements at the end of the accounting cycle. Part of our on-boarding process for new clients includes a review of the reconciliations that are done to ensure that business owners have a system in place to receive timely reporting of their financial data. It never ceases to amaze me that no matter how adamant an owner is that the financial statements are correct, they are still wrong because certain accounts just don't reconcile.
What is a reconciliation anyway, you ask?
When you reconcile an account, you are verifying the accuracy by corroborating the balance with an outside source. Most of you are familiar with a bank statement. Reconciling the bank statement allows you to confirm that each transaction recorded on the bank statement is also recorded, and recorded correctly, in the accounting system. It also identifies items that are recorded in the system that have not yet hit the bank. A common oversight is checks that have been recorded in the accounting system and not yet been reflected on the bank statement that are "old" for instance, a check you wrote to a vendor three years ago that has not yet been cashed. Chances are they are never going to cash it, and if they tried, the bank would not honor it because it is stale dated. You should investigate these because you might may find that you really don't owe them. Beware the Nevada Unclaimed Property division, which wants the funds if you owe the money and can't find the person whom you owe.
When you look at the balances on the balance sheet, you should be able to answer the following questions as of the statement date:
Cash "Is this the amount of cash in my account?"
Accounts receivable "Is this how much my customers owe me?" You should be able to look at the individual aged receivables to know.
Fixed assets "Is this the total purchase price for the assets including sales tax, delivery and installation?" This should tie to the invoices for the assets.
Accounts payable "Is this how much I owe my vendors?" You should be able to look at the individual aged payables to know.
Loans payable "Is this the amount I owe the bank/creditor?" You should be able to tie this to the monthly loan statement or amortization schedule.
Meaningful reports
Each line item on your financial statements should give the user insight to make decisions regarding the business. For example, you should track revenue by segments that you measure. If you don't care about the amount, drop it into "other revenue." I have seen countless financial statements that have an insane level of detail that makes them pages and pages long, but adds no value to the reader.
If there are meaningful metrics in your industry, make sure you measure it. For example, most companies need to know what their labor is, both in total and as a percent. We subscribe to a service that allowa service that allows us to do a benchmarking analysis to compare operations toyour business to other similar businesses and analyze where your business is in comparison to others. This one step alone has made our clients millions of dollars.
If labor is split into accounting labor, marketing, etc., you probably don't know what your total labor costs are. A best practice is to have a dashboard that captures the essential elements of a financial statement.
Common dashboard items might include:
* Cash balance
* Days' sales in accounts receivable
* Sales, cost of goods sold, gross profit, general and administrative expenses, net income, both in totals, and percents
* New business
* Customer satisfaction survey results, etc.
The idea here is that if you don't measure it, you can't manage it. Ensuring that your financial reporting packages can easily identify where the company standsis allows management to quickly make good decisions.
Timely analysis
OK information today is exponentially better than great information next year. Don't lose sight that financial statements are designed to allow you to manage. If you are not getting the information in a timely fashion, you can't effectively manage. The lost income from making a decision to cut costs later rather than sooner can never be recovered.
In conclusion, following these simple steps will allow you to better understand your business. The good news is: I believe that a business following these steps not only has peace of mind but also is more successful overall. Based on experience, 80 percent of companies that we work with that follow these steps are successful. At best, 25 percent of companies that don't are successful. We live in Nevada, play the odds! If you need help, we have a dedicated staff to get your system up and operational.
This memo is not designed to answer specific questions. Contact your tax advisor to get details on your specific situation.
Mike Bosma founded Bosma Group, a CPA firm dedicated to serving closely held growing businesses. Bosma Group specializes in property tax. Contact Mike at 775-786-4900 or by email at mbosma@thebosmagroup.com
