Good Accounting Practices Must Be a Top Priority

Office staff doesn’t know enough about our accounting system, or accounting in general. The accounting department says they’re overwhelmed. If anyone in that department is out sick, they get really behind. Space is very limited in accounting, and they’re dealing with a lot of interruptions. We could be doing a better job with the numbers side of the business. Any suggestions?

Thoughts of the day: Pay attention when accounting says they’re overwhelmed, as their performance is essential to a healthy business. Putting accounting in an area where they can’t be easily disturbed is a really good idea. Look for opportunities to involve people from around the company in accounting functions. The more your people understand what makes the numbers work, the more they can help ensure a profitable year.

Share

Making Time for Finance

We have a billing accuracy and timeliness issue. It’s hard for me to tell what’s going on with our income, expenses, profits, loans and bank accounts. I don’t trust what I’m looking at, but I’m not sure how to fix it.

Thoughts of the Day:

As data gets entered into the accounting system, it is subjected to interpretation. In addition many companies have employees doing data entry who have not been formally trained in accounting practices, potentially leading to misclassification of expenses. Errors can pop up in unpredictable ways and lead to misrepresentation of what’s going on.

When it comes to data entry, there is potential for error everywhere:

  • prices to charge to clients
  • acceptance of bills from vendors and credit card companies
  • assignment of costs to proper cost categories
  • recording of expenses against cost centers
  • use of balance sheet versus income statement accounts

It is essential to make sure that reports are accurate and meaningful to the people who rely on them to interpret how the business is doing.

Start with approvals for entry into the accounting system. So often the accounting staff gets blamed for errors when the problem lies further up the chain.

As transactions become more automated, they move faster, with less of a paper trail. Charges from credit card firms and bank accounts get dumped into accounting systems as part of the reconciliation process. Vendors can send in bills that slip past traditional controls. A clerk in accounting may not know what’s legit and what’s in error.

Look at the steps bills go through. Decide who gives approval and who indicates what accounting categories are to be used. Make sure that both line management and accounting experts are involved in oversight.

Proof entries by category: revenue, cost of goods sold and overhead for the Income Statement; assets and liabilities for the Balance Sheet. Assign people responsibility to review sections of transactions. Correct transactions that double up – 2 months of rent in one month, nothing in the next.

In many companies invoices to customers automatically generate as soon as products are shipped, or as billable hours are input. Make sure sales and customer service oversee charges going to customers. Set up a system to of line management review in order to identify red flags, to catch and fix problems before they hit customers’ desks.

Separate reconciliation from data entry. When doing reconciliations formally record all questions for review and correction. Treat errors as teaching opportunities. Reduce errors by setting up memorized transactions. Identify and routinely focus on high-error rate categories.

Educate staff involved with data entry. If they do not have accounting training, make that part of their development plan. Once they have the basics down, encourage additional courses to increase their ability to contribute. Promote people who are persistent about getting reports to be accurate, weed out people who are just going through the motions.

Turn to accountants and business analysts for help setting up routines. Ask them to show you how to use the General Ledger, Transaction by Account and Reconciliation reports to proof entries. Set up periodic audits to spot check data.

Share reports with line managers and ask them to send in questions. They can spot things that, “don’t make sense” from their perspective. Create a form that managers can use to send back inquiries, which will allow people in accounting time to review questions and make corrections.

Don’t send the company down a path doomed to failure because plans are based on inaccurate information. Encourage people to question reports, rather than standing pat that once a report is printed it’s correct.  Insure that everyone up and down the line believes that the numbers are correct. Then you can confidently use historical data as a foundation for planning the future of the business.

 

Looking for a good book?  Financial Statements, A Step-by-Step Guide to Understanding and Creating Financial Reports, by Thomas R. Ittelson.

Want to print this article? Making Time for Finance

Share

Becoming Profitable by Predicting the Future

Get control by learning to predict the future instead of reacting to the past.

I keep getting into cash crunches. I’ve been paying off loans. Sales look good. But now it looks like I might have spent too much on improvements, and I’m wondering if my contracts are as profitable as I thought they were. What should I do?

Thoughts of the Day: Know you’re not alone. Cash is king. Figure out the difference between invoicing, cash coming in, expenses and cash going out. Get an accurate picture, and keep a lid on the extras.

Most business owners have a hard time predicting and managing cash flow. There are things you can do to see things more clearly. First and foremost, prioritize cash reserves.

Don’t pay off loans too quickly. I know interest on deposits is close to zero and interest charged for credit card debt and bank loans is much higher. Keep the company safe if things go wrong by having extra cash on hand. Until then, think of loan interest as a cost of doing business. Putting $1 towards cash reserves as you put $1 towards paying down debts allows you to accomplish a little bit of both.

Keeping track of cash flow is very different from looking at what’s on a Profit & Loss statement. The P&L might show your company has a great net income, when the actual cash picture is much less rosy. Changes to accounts receivable and accounts payable, bank account and loan principal balances can all impact cash without showing up on the P&L.

Look for cash flow shortfalls. List immediate and upcoming expenses. Realistically plan out customer payments. Add up old bills waiting to be paid. Compare money coming in and going out.

If you see shortfalls coming, you can do a few things. If you have extra capacity, sell into it. Cut back on unneeded expenses. Ask employees to use vacation when you’re slow. If you have to invest in equipment and materials well in advance of getting paid by clients, talk to your vendors about spreading out payments. Term out credit lines. Make sure every contract is profitable by including the cost of financing.

Many times owners accelerate spending at year end, in order to save on taxes. Forget it. There’s no telling what might happen in the first quarter. And you’re not going to save that much on taxes by tying up precious funds paying for expenses you didn’t need to make. If you’re tight on cash already, trying to save a few tax dollars by spending 3 or 4 x what you’re going to save makes no sense.

Make sure you have a good handle on accounts receivable. When you’re tight on cash it’s possible your clients might be in the same boat. That means they’re juggling who to pay and who to delay. Make sure your company gets paid sooner rather than later.

Have a good accounts receivable system. As soon as invoices go out, call the client’s accounting department to verify they received the bill. Find out how long they take to process checks and hold them to it. Focus on collecting accounts that are over 45 days past due.

If someone needs to authorize payments, email invoices directly to that person. Agree on how long they’ll take to approve the bill. Better yet set terms in your contract that define approval and payment timing. That gives you something to go by when it comes time to collect.

Be willing to be pushy and demanding. Don’t relax with existing customers. They can hold back funds just like new customers do.

Still not sure what to do? Confused by the picture you’re looking at. Call us, we’ll help you figure it out.

Looking for a good book? Guide to Cash Management: How to Avoid a Business Credit Crunch, by John Tennent.

pdf version

Share