You’ve heard the saying “Garbage In, Garbage Out” that implies poor quality input will always produce faulty output. A good business person reviews the balance sheet and income statement every month. They make decisions and adjust plans based on how actual results are tracking compared against the budget. Relying on inaccurate statements could cause you to make a bad choice.
Perhaps your business could stand some spring cleaning. Here are four things you can do to ensure your books are accurate and reliable.
Have a great bookkeeper and accountant. It is critical for your business to have an excellent bookkeeper. Don’t try to do it yourself or force a family member to do it if they don’t have the proper skills or training to keep your records straight. Both you and your bookkeeper need access to an accountant who can help establish sound accounting practices. Use them as a resource when making financial decisions and when you have questions about how to handle unusual or complicated transactions.
There is a cost to having good people in the right role. But in the case of your bookkeeper and accountant, the cost can be far higher with the wrong person in the role, regardless of how much or how little is paid.
Keep written accounting policies and procedures. Your accounting policies and procedures represent the recipe your business will follow to record the dollars and cents of your business activities. This includes things like your chart of accounts, job descriptions, and duties of accounting and recordkeeping staff. Your policies also define how you will account for things like depreciation, accounts receivable, bad debts, inventory, prepaid insurance, and all other routine transactions. Well-designed and written policies can keep your accounting consistent when onboarding staff and transitioning roles.
The procedures must provide for checks and balances that assure the major items on the balance sheet and income statement are accurate. If you’re reviewing the statements monthly—which is what we recommend–you’ll need to assure that the accounts are accurate every month. Don’t wait until the end of the year when the tax return is prepared. You are making important decisions based on the results shown on your financial statements. You must be confident that you are getting the true story.
Are your procedures properly designed and documented? Have they been evaluated by a knowledgeable accountant who understands the nuances of your business and your industry? Do you know if your policies and procedures are consistently followed? If you’re not sure, schedule a call with your accountant to discuss it.
Separate duties to limit risk of errors… or worse. Don’t put your business at risk by having one person do everything from counting the cash and checking in the inventory to recording transactions in the books and verifying that it’s all accurate. At a minimum, it is highly likely that mistakes will go undetected. Worse, intentional misrepresentations that hide internal theft would go undiscovered.
A better strategy is to separate certain duties. That is, have a one person handle the cash or goods, a different person record the transactions in the books, and a third person verify that everything is accurate and that the accounting procedures are followed. Unfortunately, for many businesses, there are just not enough people to separate the duties, so we rely on the integrity of a single person we trust to look after the back office. This creates unnecessary risk. Find a way to separate the duties of handling assets, recording transactions, and verifying accuracy.
Provide adequate supervision of recordkeeping. It’s hard to know that your bookkeeper and accountant are doing everything correctly when you’re not an accountant yourself. It is one of the most difficult areas to supervise. I believe this is one of the reasons people prefer to rely on integrity and trust, because they don’t know what the accounting folks should be doing to begin with. An experienced and knowledgeable outside accountant can help by regularly assisting with monthly or quarterly adjustments to the books. Don’t be afraid to ask their opinion of how the bookkeeper is doing. Ask for suggestions about procedures that would ensure accuracy.
I speak with hundreds of franchise owners every year. We talk about best practices, opportunities, and roadblocks. It seems that whenever there are 10 or more businesses represented in a room, there is at least one that has had a theft or embezzlement involving someone who was trusted too much. Someone who was just like family. And, in many cases, someone who actually <was> family.
Don’t make yourself a victim. Have a sound structure for your accounting processes and make sure it’s being followed.
These four things will help you keep your books accurate. Your financial information must also be timely. Your records need to be kept up to date. Always.
Got a problem? Get it fixed!
If your bookkeeper can’t produce financial statements within two weeks of the end of the month, make it a priority to find out what the problem is and fix it. Also expect to have your year-end financials complete shortly after year-end. Tell your accountant that this is important, and make sure everybody involved is committed to doing what it takes to make it happen.
Barbara Nuss is the president and founder of Profit Soup, a financial education organization specializing in providing services to franchisors and franchisees to enable them to trust their numbers, focus on priorities, make better decisions, and earn more profit. She can be reached at barbara.nuss@profitsoup.com or 206-282-3888.