It’s that time of year: Closing the books on last year, and filing taxes. Tasks viewed by many as necessary evils. The odds are, unless an outside auditor conducts a full audit or review of your financial statements, your accounting is not in tip-top shape. Thus, an accounting tune-up now is a great opportunity to improve your business operations.
Here are 8 tips for owners for an accounting tune-up:
Tip # 1: A CPA’s compilation is not a clean bill of health
Many small businesses have an outside CPA prepare a compilation statement. This is often done in connection with filing company taxes. Sometimes banks or other lenders require this statement.
But beware: The compilation statement does not carry a CPA’s stamp of approval. It is simply a company’s books formatted by the CPA. Unlike audits or reviews, compiled statements do not confer a greater degree of accuracy than non-compiled statements. So, do not gain a false sense of confidence in your accounting just because you have CPA compiled statements.
Tip # 2: Take a fresh look and challenge old assumptions
Too often, the answer to the question of why something is done a certain way is: That is how it has always been done. Use fresh eyes in looking at your company’s accounting systems and processes.
Also, understand the purpose for the financial statements being produced. Are they for a bank loan? Or, are they only for tax preparation? Depending on the use, the way information is collected and presented can be different.
One example: Management style reports that facilitate analytical review may be more appropriate if your primary use of accounting is to help you run the business.
Tip # 3: Clean up the chart of accounts
The chart of accounts is the system of organizing your company’s books. Often, over a period of time some accounts are no longer needed. And other times, new ones are. The way the chart of accounts is organized can make the accounting information more or less useful.
Take the time to review the chart of accounts, and update it to suit today’s needs.
Tip # 4: Close books and reconcile accounts monthly
Unless you are closing your books monthly, with reconciliation of accounts and bank statements, there is risk of things getting out of hand. The monthly close is the ideal time to step back and think about the business. It is surprising how many businesses we see that do not do this.
Tip # 5: Pay attention to the sub-accounts
Remembering the old adage that the devil is in the details, give close scrutiny to inventory, accounts receivable, and accounts payable sub-accounts. Each business is of course different. Determine the most sensitive and important areas for your business. Have your accounting system set up to be sure you get the right level of detail to have your finger on what is going on in those areas.
Tip # 6: Use forecasts and budgets
Budgets and forecasts — especially when they are tied to a business or growth plan — are very powerful tools. They are critical to creating and supporting a culture of accountability. They go a long way toward allowing owners to make intelligent business decisions.
If you don’t currently have or use a system of forecast and budget, this is the time to start.
Tip # 7: Think beyond bookkeeping when developing KPIs
While accounting is geared toward financial measures and metrics, your accounting system can help you manage and track other key performance indicators. Your management dashboard should not be limited to only financial measures. You need to determine the most important non-financial measures of health of your business. Then build those metrics into your tracking and accounting systems. Part of monthly reporting should be not just financial, but management information as well.
Tip # 8: Once tuned up, have the right person in the driver’s seat
You don’t need a fulltime CFO to be successful when it comes to financial management. Many companies cannot afford that level of talent. But take great care to be sure you have the right talent managing the accounting and financial processes of your business. This can mean using a part-time or fractional CFO. Or, beefing up your skills so that you have greater understanding of what the numbers are telling you about business health and future implications.
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Tuning up your accounting processes and systems can go a long way to making your life easier. And, to making your business stronger by having a better corporate infrastructure.