So You Think Your Books are Clean?

Clean books – What does that really mean? Your financial accounting records, the “books” we reference, are a window into the health of your business. They represent the results of operations, and help guide strategy and measure execution of initiatives. However, they are only as useful as the underlying information, processes and procedures that comprise the accounting and finance department. In Signature Analytics’ decades of combined experience with small business accounting, we have seen some real horror stories.

Definitions – It’s All in the Name
First, let’s start with some high-level definitions of accounting – You may have heard some of these:

  • Balance Sheet vs. Income Statement – One measures results at a point in time, the other over a period of time.
  • Accrual vs. Cash Basis – One tries to match revenue and expense to the period they are incurred, the other when they are received or paid.
  • Tax vs. Book – Tax compliance is regulatory focused, like tax law, and often bears little resemblance to actual financial results of the business. Think “accelerated depreciation” or “disallowed deductions.”

Further definitions and discussions around these are the subject of a future blog post, but without a clear understanding of these concepts, horrors can develop.

What Is “Accounting,” Really?
In one respect, accounting can be looked at as the “reconciliation engine” of your operations. We record the transactions generated by the day to day activities, and we compare or reconcile to outside information. Bank and credit card statements, customer and vendor statements, lease and loan payment schedules are all examples of independent information that is used to “confirm” the data in your records with things happening “around” your accounting department. Without a consistent reconciliation process, horrors can fester and grow.

Horror Scenes – Ripped From the Headlines!
Here are some real world examples of things we have seen:

  • Customer payments that do not match invoice amounts. When a customer pays less than owed on an invoice, and no credit memo is generated to account for the difference, you may think your customers owe you more money than they do. Without reconciling to customer statements, these amounts may build up significantly over time. We rarely see a customer pay too much – although see the next point!
  • Vendor payments that are duplicated. Without consistent use of document numbers in the financials, bills can be entered more than once for the same charges, and duplicate payments can be made. We have also seen bills paid by credit card, and then also paid by check.
  • Expenses booked to fixed asset accounts. Computer, office and auto expenses can often get entered with the fixed asset account associated with these types of equipment. These are reflected on the balance sheet, implying additional equipment purchases, understating the expenses on the income statement.
  • Depreciation of fixed assets missing or not consistent. We often find that depreciation entries are incorrect or missing on the monthly financials, as either new purchases are not reflected in the calculations, or the entry is made yearly after the tax return is generated, or not at all!
  • Vacation or PTO accrual missing or inaccurate. If you have a time off policy, the expense associated with the granting of the time off should be recognized when incurred, not taken. As these policies often have long waiting periods, and people can accumulate large balances over time, this can amount to a significant amount of liability. We usually see the expense recognized when taken, if recognized at all.

What is the impact?

All of these scenarios result in reports that have a large variation from month to month, even year to year. Users of the financial statements rely upon coherent and consistent application of accounting policies and procedures. These can be financial institutions that have or will lend money, accounting firms that perform reviews or audits, and investors that own part of the company. They all rely on consistency as an evaluation of risk. The less risk, the better the results. Clean out your financial dark closet before you need these outside resources to grow your business.

Signature Analytics can help with your accounting records! Our talented, experienced accountants and financial analysts can complement your existing accounting employees, or act as your entire accounting department (CFO to staff accountant). We provide the ongoing accounting support and financial analysis necessary to more effectively run your company, analyze operations, and guide business decisions to help you grow. Contact us today.

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