Common Troublemakers on the Books

By: Ryan Renner, Eide Bailly LLP

A while back, we discussed some ways to know when things go wrong on your books. When something goes wrong, it’s important to understand the root cause in order to hopefully avoid the problem altogether. While there are many pesky problem causers, the basic concepts of these generally apply to a lot of the most common errors.

Here are a couple of the most common troublemakers we see causing problems on the books.

Lack of Consistency

Often times, errors start in areas of the books that are unfamiliar or new to small business accountants (we can help you get familiar with them – just ask). When these processes aren’t completed consistently and accurately, this can lead to issues over the course of the year that, if not caught right away, can cause even bigger issues down the road.

One common example? Those pesky balance sheets. Balance sheets contain a lot of important information that can tell you where your business stands and where it’s going in the future. If you only reconcile them annually, or convert from a cash to accrual basis at the end of the year, you could end up forgetting what you did previously, and you might even be doing it a little differently. The problem? This can often lead to issues with your prior and current year balances being calculated differently, resulting in balances that don’t make sense.

The best way to correct this common issue and prevent it from taking over is to implement a consistent process over the course of the year. Consider setting up monthly or quarterly updates and reviews. This can help you keep information fresh in your mind (as opposed to trying to figure out how to record something in December that happened back in April), and can also help you remember how a process was completed previously. Although this might add time up front, it can help save time in the long run. Whether you spend your time trying to remember what occurred earlier in the year or trying to find an error caused by a change in your processes, your year-end can become much more efficient when you come up with a consistent process, leading to less errors on the books.

If implementing a consistent monthly process sounds confusing, know that you can always check with your accountant or auditor to make sure you’re doing things correctly from the start. They can help you make sure you’re on the right track, and can help make your process a breeze. 

Letting Issues Grow

Another common issue that leads to major problems on the books is letting issues go and deciding you will take care of them later. Once example is sitting back and ignoring small differences in the details, such as in your bank reconciliations. Generally, we see accountants noticing these small errors, spending a little bit of time of them and then letting them go if they can’t figure out what is going on. They usually push them off and just assume they will figure it out next month.

However, by letting them go and pushing them off until next month, these issues will only continue to grow. If allowed to sit and grow for too long, the issues can build up until you find your business with some serious problems. Although it may seem like a small, pesky task at the time, taking care of issues right away can save you time (and help you keep your calm) later in the future.

It’s also important to note that if these seemingly small issues keep popping up every month, even when you took care of them previously, you may have an even larger underlying problem. Don’t be afraid to seek out assistance when it comes to issues in your business – after all, you’ve invested a lot in it, and you want to make sure everything is in tip-top shape!

Entries from Your Accountants

Your accountants are there to help you and your business grow and be successful, and they really know their stuff. A common (and somewhat perplexing) issue we see is companies and organizations not booking entries from their accountants. Rather than taking the year-end tax or audit work information and putting it in the books, companies often ignore it or post it to the wrong period. Rather than waving this off, schedule time to talk to your accountant to make sure you fully understand what they’re telling you, and ask for help posting them to the books (numbers nerds enjoy helping you understand your finances!).

When it comes to your business, it’s likely you will run into a few speed bumps. When you run into these issues, work to identify what caused the problems in the first place. By identifying these issues and taking care of them right away, you protect your business from falling victim to common mistakes that can seriously impact the success of your business.

You Say Accountant, I Say Controller

You say tomato, I say tomāto. You say accountant, I say controller. Unlike tomato and tomāto, the terms accountant, controller, and chief financial officer (CFO) do have significant differences.

We could go into great detail on what makes them different (oh wait, we did). Instead, here’s a basic breakdown of the difference between the three:

  • An accountant is responsible for entering day-to-day transactions and performing basic accounting functions. These could include entering bills and invoices, running payroll, paying sales tax, etc.
  • A controller is responsible for the accuracy of the financial statements, preparing budgets, calculating financial ratios, etc.
  • A CFO is responsible for a forward looking perspective. They are involved in strategic planning and providing improvement recommendations based on the financial ratios provided by the controller.

Each of these positions relies on the other to get the information they need and to make your accounting and financial processes run more smoothly. Each has a distinct purpose and each is important for the financial health of your business.

Now we know what you’re thinking … there are THREE positions. Yep. But that doesn’t mean they’re three people. Technically, one person could perform all three positions. Often times in small businesses, this is exactly what happens.

The first position you will need is an accountant. Do not take this position lightly. One of the greatest needs of business is the need for good financials. Hire someone who has the knowledge and experience to do a good job, like someone who has experience working with your type of business, or has a strong financial background. If you hire the right person with the right experience, they can also serve as your controller. A CFO is needed when you begin to use your financials as a management tool.

Yet at a certain point, you need to begin to think about expanding your financial department and separating the roles. Knowing when to separate depends on your business. Consider who will be looking at your financials and the purpose for those financials.

So what if you’re just not ready for all three positions? Or, what if you are, but financially you’re not ready to hire all three. After all, recent research shows that a CFO can cost over $125,000.

Look into outsourcing it! A trusted business advisor or accounting firm can help you outsource any number of functions, from the day-to-day functions all the way to the CFO level. Not sure how to find the right advisor to help? Here are six questions you can start with.

By outsourcing these positions, you can free your time to work on your business. Plus, you’ll have a trained professional who can help you understand the importance of your finances and why they matter.

Tips for Year-End and a Smooth Audit Prep

By: Stephanie Berggren, Eide Bailly LLP

Year-end is always a hectic time. Your company is making sure that all required state and federal filings are done and internal documents are completed. Plus, to make things even crazier, you’re also starting to think about and prepare for your annual audit. Can you say overwhelming?

One question that is fairly common: How early is too early to start on year-end procedures? The answer? There’s no such thing as too early. We are in a world where activity happens every day that will affect your year-end and your audit, so paying attention and staying up to date is important.

So what does year-end preparation look like?

To get started, at a minimum, you should have a review process that documents when purchase orders are created, when bills are paid and when cash/checks are reviewed and deposited. This will help lay a solid foundation you can use to make sure you’re on the right track.

Monthly, you should be doing reconciliations for the following common accounts:

  • Bank accounts – this helps verify that all revenue and expenditure activity is captured in your records on a monthly basis.
  • Accounts receivable – this will help you make sure your customers are paying in a timely manner, and will also help with your collection procedures.
  • Accounts payable – this will help verify that amounts showing due are true payables and to make sure your vendors are getting paid timely. This may also help you take advantage of discounts given by your vendors for early payment.
  • Capital asset inventory – this will help establish that any capital outlays are added to your software and/or external schedule. This list is an audit necessity.
  • Payroll accounts (accruals and expenses) – this will help verify that payroll is being accounted for properly in the correct accounts.

Doing these tasks on a monthly basis establishes good review and control habits. It also gives you, or your accounting and finance team the ability to find and fix errors during the year – and before your auditors find them.

Now that we’ve reviewed what to do on a monthly basis, let’s discuss year-end. Annually, you should:

  • Review checks paid after year-end to make sure they are properly included in or excluded from your accounts payable ledger. This not only helps make sure your auditor isn’t finding any adjusting entries during their audit, but also helps ensure you have included all your expenses in the proper year.
  • Review old outstanding payables/credits to see if either payment was missed or if payments were misapplied.
  • Review your deposits received after year-end to make sure you applied payments to the correct customer and year.
  • Review old outstanding accounts receivable to see if an allowance is necessary for accounts that may not be collectible.
  • Update your capital asset listing for any disposals/deletions that have happened. This can be done by having each program/department/etc. do physical counts of their assets and submitting that to the finance department or selecting a lucky individual to verify the entire list.
  • Review year-end adjustments, usually prepaid, accruals, and current versus long term debt, which are required for the audit. This is the last part that has an impact on your findings if the auditor is the one posting these journal entries. Below are a list of accounts that are usually adjusted:
    • Prepaid rents, real estate taxes and insurance
    • Accrued payroll and taxes
    • Compensated absences
    • Long term debt (car and equipment loans)

Because you have accounted for your monthly procedures, your year-end procedures should become less burdensome since those issues were addressed throughout the year (and who doesn’t want an easier year-end?). With the confidence that your company gains from knowing you have reviewed and reconciled your financial information, you are able to concentrate on accurately and confidently preparing your financial statements.

Year-end work can be time consuming and sometimes tricky. If you need to save time or need help figuring out where to begin, let us know. Ours numbers nerds are no stranger to this type of work – and they even enjoy doing it!

 

Meet the Team: Amber Ferrie (@berferrie)

fgo_ferrie (2)What is my role? My role is to help business owners write the next chapter in their lives and their business’ adventures. That may be selling, transitioning to a management team or a succession plan involving family. When businesses are going through transitions, I come in to help guide them through.

Why are numbers important for business? Numbers tell the story of where you have been, where you are and where you are going. Understanding the numbers associated with your business can help you capitalize on certain opportunities and/or avoid disasters that may be lurking. Buyers always want to hear the story of your business, but they also crave the numbers and love metrics. Understanding these for yourself can help your business have a huge advantage.

Why do I enjoy what I do? Selling your business is a huge deal (no pun intended) not only from a financial perspective, but also from an emotional stand point. Being a CPA, this is one area that you can use more than just your love for numbers. You also see the personal side of transitioning a business and I find that incredibly interesting. Nothing in the M&A world is black and white. Each situation between a buyer and a seller is unique and has its own characteristics and challenges. Seeing all of those play out can be really fun.

#MidwestIsBest The majority of my work is actually not in the immediate area, but that doesn’t mean I don’t feel the love around here. The Midwest in general is an underserved market in the M&A world, and I see a lot of opportunity to serve these fabulous businesses. I truly believe these people and businesses are the best, and Eide Bailly is lucky we get to work with them.

 

Spring Cleaning for Your Business

mark your calendars.pngIn a perfect world, everything in your business would be neat, organized and perfectly filed away. You would have every little document filed away or trashed, and the recycling bin wouldn’t have to worry about going out of commission. Piles of paper wouldn’t exist, and you could actually see what color your desk is.

Sound too good to be true? It probably is … if your business looks like this, please fill us in on your secrets! In the real world, running a business requires a lot of documents, papers, forms and records which often get piled up because it’s tough to know what should stay and what should go.

Luckily, we’re here to help you get started with your business’s spring cleaning so you know what you should keep and what needs to be thrown.

Record retention is tricky and even a little bit stressful. What if you throw out a document you will need down the road? There are even some documents the law requires you to hang on to that you don’t want to lose. If you get rid of something that you shouldn’t have, it can create a mess for doing taxes or payroll, and could even result in legal fines and sanctions. Yikes!

As scary as it sounds, don’t let this pressure you in to keeping everything forever. Sometimes hanging on to all these papers can be a real pain (not to mention a huge mess), so it’s important to know when to keep and when to throw. Luckily, your friendly numbers nerds are here to share with you this handy cheat sheet to help you decide what to weed out!

Always remember the guide, although pretty awesome, might vary depending on the certain circumstances of your business. Consider using the guide to help you develop a record retention policy to fit your business and get your spring cleaning off to a fresh start.

Strategies for Success

As you begin your business, or even as you’re running it day-to-day, it’s important to consider strategy. Putting strategies in place can help you stay on track and achieve your goals.

When developing success strategies for your business, there are three common strategies you can focus on to help your business.

1. Profit Strategy. It might seem obvious to focus your attention on profit, but it comes down to how deliberate you are in making plans to reach this goal. Have you thought about how much profit you are aiming for each week, month or year? How about your sales plans to achieve these goals? P.S. For more on all things profit, check out this blog.

2. Resource Management. Resources here refer to human and capital. You know, the people and things the business depends on to make a profit. Some businesses are heavy on human resources, such as service oriented businesses, while others are heavy on natural and capital resources, such as manufacturing or technology companies. Furthermore, some businesses even require a good dose of both. No matter what type of business you’re running, your resources are extremely valuable. If you don’t take care of them, you risk the negative impact it can have on your business’s bottom line.

So what do resource management strategies look like? Human resource management can take on many shapes and forms. Maybe it’s developing an employee wellness program to keep your employees healthy, or offering special perks like free lunches or themed days in the office. There are a lot of options when it comes to keeping one of your most important resources, your people, happy. (If you’re struggling with this part of the strategy, let us know – our outsourced HR practices are pretty great!)

It’s also important to have a strategy in place to manage your capital. Capital, which can be anything from the tangible machinery and buildings a business owns to the financial assets of the company, is essentially the backbone of your business. For your physical capital, it’s good to have strategies in place which determine when to renovate or upgrade items as they get worn down. You should also have a game plan in place for your financial capital. Consider creating a strategy that helps you determine which assets can be used for which projects, and which assets should be left alone to grow and invest.

3. Market Alignment. Having a strategy in place to fit in the market and give people what they want is a major key to having a successful business. You want your product or service to line up with the needs and desires of your potential customers – otherwise, no one will buy.

So how do you put together this type of strategy? First and foremost, it’s important to understand who your target market is. Once you know who you’re trying to reach, you can further develop your strategy of how to reach them.

When developing this strategy, it’s also important to keep in mind the possibility and impact of change. People always want something newer, faster, better, etc. Try to develop a strategy that is flexible and allows for change when it is needed. This can help you stay up to date with the market and ensure your business is always ready for the next big thing.

The moral of the story

Setting strategies early on, and taking the time to think through them, can help you set your business on the right path to grow into the dreams you have for it. Strategies help develop the tactics and plans needed to perform your mission, achieve your vision and reach your goals.

 

Even in 2017, Cash is Still King

We’ve all heard the phrase “cash is king”, and we’ve even written a blog about it, but what does it really mean? In the business world, it means even a company with a healthy equity balance can get into trouble if their cash balance cannot support short term operations.

Here’s an example to help illustrate our point. The below table shows three scenarios. In each scenario, the company has $4,500 in current assets, $1,500 in current debt, and $7,000 in equity. The income statement remains unchanged in each scenario, however management in Company C is managing their working capital better, due to a larger chunk of their current assets coming from cash.

Publication1

How Long Until We Get Paid?

One of the best ways to understand how to improve cash and working capital management is to monitor “Days to Cash.” Days to cash measures how long it takes for a company to convert resource inputs into cash flows.

The days to cash formula measures the amount of time from when inventory is first purchased and the company has a cash outlay (payment period), how long it is held (turnover period) and how long until the customers pay their receivable balance (collection period)Publication1

In other words, where the balance in accounts receivable is greater and cash is down (scenario A), the collection period is 49 days, as compared to the 21 days noted in scenario C. With the turnover period and payment period the same in each scenario, it is easy to see how the balances in receivables and cash impact the number of days until the entity has cash deposited in the bank.

Why Do Good Companies Run Out of Cash?

There are many reasons a company runs out of cash. Sometimes, it is due to poor collection policies or overspending on equipment and inventory. Other times, it is based on how the company is structured; entities like colleges and universities are able to collect tuition dollars before the students start school, padding the cash balance. Yet other entities run out of cash because of their successes. These companies may grow too fast and their cash gets tied up in inventory or receivables.

With low interest rates and payments being automated and billed over longer periods of time, it might seem like cash isn’t worth all that much on the balance sheet anymore. However, the above example doesn’t lie: to keep your business operating smoothly, you need to remember that cash is king. Our team is available to help you manage your money and keep cash flowing smoothly through your business.