Setting up for Success: Part 2

Welcome to our “Setting up for Success: Part 2” blog post. Part one focused on selecting a basis for your accounting and determining what information you need to track in your business.

Now that you understand what you need to track, how do you track this important information?

You can start by developing your chart of accounts. We know what you’re thinking: “develop my what?!”

Your chart of accounts is a listing of accounts that are needed to prepare financial statements and reports. A typical structure looks like this:

1000-1999 Assets

            2000-2999 Liabilities 

            3000-3999 Equity

            4000-4999 Sales

            5000-5999 Cost of Goods Sold (COGS)

            6000-6999 Operating Expenses (General and Administrative)

            7000-7999 Other Income and Expense

            8000-8999 Income Tax Expense

Account numbered 1000-3999 are used in preparing the balance sheet, while numbers 4000-8999 are used in preparing the income statement, which focuses on profit and loss. Of course, the number of individual accounts within each category will depend on the specific needs of your business.

A good rule to keep practice is to try to use the least number of accounts to attain the financial information you need, and structure it for growth.

What do we mean by growth? Let’s take a closer look at the assets section:

1000 Petty Cash

            1005 Checking

            1010 Savings

            1100 Accounts Receivable

            1200 Inventory

            1300 Prepaid Expenses

            1400 Fixed Assets

            1450 Accumulated Depreciation

You probably noticed the account numbers aren’t in sequential order. This allows for room for growth in your business.

You can also use the chart of accounts to track different jobs, departments, segments, etc. For example, maybe your business has locations across the Midwest in Fargo, Minneapolis and Sioux Falls. You want to be able to see how profitable you are at each location. You can track each location by assigning a division number, such as 01-Fargo, 02-Minneapolis, 03-Sioux Falls, and then attaching each division number to each of the accounts, like this:

            4000-01 Sales

            4000-02 Sales

            4000-03 Sales

            5000-01 COGS

            5000-02 COGS

            5000-03 COGS

Now that you know what information you need and how to track it, you can select an accounting system to help you track and keep information in order.

There are two options for tracking your information: manually or electronically (think desktop or cloud based). While there is no right or wrong way, computerized accounting is usually more efficient, which is leading to manual accounting becoming a dinosaur in today’s accounting world. Cloud based accounting also gives you the freedom to access your information anytime, anywhere. Who doesn’t love simplicity and accessibility?

It’s important, as always, to remember that each business is different, so accounting systems usually aren’t one size fits all. Doing your research and truly understanding your business’ needs can help you select a system that gives you the best possible results.

If all of this seems overwhelming, fear not. We have the resources and talent to help you design an accounting system that can set your business up for success.

Three Components You Can’t Ignore

Like you, your business is alive. But is it thriving? Are you giving it the fuel it needs to grow?

Many components of business require the time of owners, founders and management. And three critical components stand out—accounting, culture and systems. Sure, it’s possible to make money without these, but it can be extremely difficult to grow or reach goals. Surprisingly, these three components are typically ignored or left to chance. Don’t leave your success to chance.

Accounting, culture and systems are equally important, although one might take priority over the other two, depending on your business and its current development stage. But no matter where you’re at, it’s important to be aware of how these three components contribute to your progress.

Accounting

Accounting is usually most ignored by small and beginning businesses. However, we’ve seen many well established, profitable companies that don’t have or can’t produce reliable financials on demand. Without that, management loses all ability to gain valuable information that’s provided in financial statements.

So, why is accounting often ignored? While each business likely has its own, unique reasons, there are some common themes we see. Often times, small businesses just can’t afford to have in house accounting people, so these functions get pushed to the back burner. Another common theme we see stems from lack of understanding. Accounting can be tricky, and when businesses don’t understand their numbers, they often times just ignore them and hope for the best. This can lead to some serious financial issues that, if ignored, can take a business downhill fast.

Culture

Culture is your company’s personality. It’s how your staff interacts with each other and customers. If you don’t identify and define your culture, you can stunt your business’s efforts to grow. For example, one business owner almost completely replaced her staff. Her former staff wanted to keep the “mom and pop” feel. In her long-range planning, which her former staff was part of, they identified strategies for growing the business, complete with revenue targets. It wasn’t until the owner began taking the necessary action to achieve the growth did she realize her staff wasn’t actually on board. Her views of change and growth for the company differed from her staff, which created a cultural nightmare.

It is imperative for everyone to believe and share the company culture. Maybe this means creating policies and procedures that directly align with your company culture, or hosting meetings and events to help your staff understand and adapt to the company culture. However you implement it, culture is too important to ignore – after all, your people are at the heart of your business.

Systems

Proper systems are more than writing down the process. The systems should be both quantifiable and qualified. Quantifiable means it should be set up to measure if things are being done the same way every time, and if the desired results are being achieved. A qualified system is one that’s performed the same way and the way it was written, even if you or management is not present. It should be pointed out that it’s not necessary to systematize your entire business. Focus on areas that create consistent and reoccurring frustrations, are important to the operation and growth of the business and where consistent results are needed.

To sum it all up, all components of your business are important. Your accounting needs, culture and systems and processes are three components that stand out because unfortunately, they are often ignored. By devoting more time, effort and resources into these, you can help your business stay on track for growth and continued success.

*Shameless plug: These three components may seem confusing, scary and downright challenging, but it doesn’t have to be that way. We have talented professionals who dedicate their time and skills to helping your business succeed. If you need help, let us know!

When it Comes to Accounting, Communication is Key

By: Kristie Rants, Eide Bailly LLP

We get it: the thought of sitting down and talking with your accountant might be a little scary. After all, all they do all day is sit and stare at numbers and do math, and their jargon and lingo is hard, if not impossible, to understand, right?

Not exactly.

While the thought of having conversations with your accountant might be intimidating, it really shouldn’t be. More often than not, your friendly number cruncher wants to talk to you, too (and we promise to use words that make sense)!

To help the conversation go smoothly, we came up with some tips to help you have successful conversations with your accountant.

Communication is key

  • First and foremost: figure out the best method for communicating with your accountant. Whether it’s in person, email or even Skype, agree on what works best for both of you.
  • Decide on frequency for communicating. Some businesses may need to have meetings weekly, while others may be on a monthly schedule. This is usually driven by business needs.
  • Make sure you’re both on the same page. It’s important that your accountant understands your business, just as you should be able to understand what they’re talking about. If you are unsure about the topic being discussed, don’t nod your head – ask more questions!
  • Establish a relationship. Create an environment where both you and your accountant are comfortable with each other. When you have a solid relationship with your accountant, it’s often easier to ask whatever is on your mind, no matter how basic it may seem.

 

Be prepared

  • Come prepared to each meeting. Make sure you have organized and complete information to share. If you’re not sure what exactly to bring, ask your accountant. He or she can give you a list of documents and information that might be needed.
  • Be prepared to share any changes occurring in your business. This keeps your accountant in the know and decreases the likelihood of any unwanted surprises in the future.
  • Ask questions throughout the year and as they arise rather than holding them all in. It’s easier to remember and examine information right away, rather than waiting six months down the road.
  • If your accountant sends out newsletters, articles, etc., read them! These often contain current and important information that can impact your business. If your accountant thinks it’s important, you should give it a read as well.

Accountants wear many hats

  • Your accountant likely has access to many resources to help you with any phase of your business. Your accountant can do all sorts of tax planning, whether you’re interested in putting away additional money in a retirement plan or wondering what your options are for depreciating equipment. Maybe a cost segregation study to accelerate depreciation or a 179d study makes sense for you!
  • Accountants can even help train you or your staff. Ask them if they offer an on-site service. Sometimes a few hours of training makes all of the difference. (Shameless plug: our accounting coach services do just that)!
  • Consider what stage your business is in. If you’re thinking about selling (or buying) or even retiring, your accountant can likely help you or introduce you to someone who can get you on the right track for a successful transition. They have the expertise to help you succeed.

The moral of the story…

Communicating with accountants can seem intimidating and confusing. Using these tips can help you have successful conversations. If you’re still intimidated, reach out. We promise to help you understand the accounting side of your business so you can get back to doing what you love.

Meet the Team: Stephanie Berggren

StephWhat is my role? My role is to help business owners by sharing and teaching what I love – accounting. Owners can focus on the fun stuff, like making their business grow, while my team and I can provide the accounting skills and knowledge to help them make smart growth decisions. My team and I can help them interpret the story the numbers are telling so they can have a better understanding of where their business is and where it’s going.

Why are numbers important for business?  Numbers are the story of your business. They tell the owner important statistics that, when understood and applied correctly, can help the business owner make informed decisions. Numbers tell the business owner what works and what doesn’t.

Why do I want you to succeed? When you succeed, we all succeed. I love the feeling of seeing businesses I worked with become successful. It develops a sense of pride in what I’ve accomplished, but also makes me excited to see where your business will go next!

#ILoveSmallBiz – Small businesses truly make the world go round. From job opportunities to innovative ideas, small businesses provide success and growth opportunities for our communities, which is a win-win for everyone.

Preparing for Month End

It’s the end of the month, which means it’s time to see how your business did. All you have to do is run the magical reports out of your accounting system, and you get to see how much money you made, right? Probably not. Technology has made things a lot easier and gives us quicker access to our information, but there are still certain items that need to be taken care of, or at least looked at, when each month ends.

Every organization should strive to be able to produce timely and accurate financial information within a reasonable period of time after a month has ended. This information is vital to understanding your business and allows you to make informed decisions—that’s what you want, right? The best way to do this is to create a monthly close process. The process should be thoughtful, documented and communicated to all parties involved.

How to Create a Monthly Close Process

  1. Record daily transactions. It might seem straight-forward, but accurately recording day-to-day transactions is the basis for all financial reports. Ideally these transactions should be recorded when they happen, which incorporates much of the work into the daily operations instead of waiting until the end of the month. Recording these transactions daily also allows you to see some very important information throughout the month, such as who owes you money or who you owe money to. A little extra daily work amounts to saved time at month-end.
  2. Record monthly journal entries. Some entries don’t fall into the daily transactions category. These transactions, such as recording accrued expenses, amortization or depreciation expenses, are often only recorded once a month to present accurate monthly financial statements. Let your system work for you—set up it up to help remind you and automate some of these recurring entries.
  3. Reconcile balance sheet accounts. The first account you should reconcile is the cash account. What exactly is reconciling? Well, it’s the process of making sure you’ve captured all transactions. Nearly every accounting system has a built-in reconciliation feature, and going through this exercise is the easiest way to uncover any missing transactions since cash is a part of most transactions. Once cash is reconciled and any missing transactions are recorded, you can move on to reconciling other balance sheet accounts, like credit cards, accounts receivable and accounts payable.
  4. Review revenue and expense accounts. This step is often overlooked by business owners because they generally feel they’re watching them enough during the month. Why look at it again at month-end? We’re not saying that you need to go through every revenue or expense transaction, but take a quick look through the balances in the revenue and expense accounts and assess if they look reasonable or not. This can help make sure things have been recorded in the right period, or on the right date.
  5. Prepare financial statements and have management review. Now that you’ve recorded all the transactions and made sure everything looks good, you’re ready to put together the financial statements. Most of the time, you can run a basic financial statement directly out of your accounting system. Consider running a balance sheet, income statement, accounts receivable aging, and accounts payable aging. After this, it’s important to have them reviewed and approved by management: the owner, the CFO or the Director of Finance.
  6. Close the accounting system. You’ve made it to the final step—yes! After the financial statements are approved, it’s important to close the month in the accounting software. This prevents future transactions from accidentally being recorded in this month, and keeps people from accidentally changing a transaction.

Following these steps will get you on the way to your goal: Generating accurate and timely financial records. It puts the right information into your hands and allows you to make informed business decisions. If this sounds too intimidating, we’re happy to help. We have the expertise and technology to help ease the headaches. Plus, we’re accounting nerds (really, we love numbers) and think this is fun!

Red Flags of Fraud

In today’s day and age, fraud is occurring all around us. The impact fraud has on your business can be devastating. In fact, The Association of Certified Fraud Examiners’ Global Fraud Study found the typical organization loses a median of 5% of revenue each year due to fraud. Small businesses have it even worse. The same study found companies with fewer than 100 employees lose a median of $155,000 each year due to fraud, compared to a median loss of $120,000 for businesses with 100 or more workers.

These statistics are scary, and fraud can undoubtedly wreak havoc on your business if you don’t catch it.

So how do you prevent fraud from happening in your small business? There are five common areas where red flags of fraud may pop up.

  • Common Sense Flags – These flags are usually obvious, but sometimes overlooked. Some of the most common include:
    • Complaints from other employees regarding an employee
    • Unexplained amounts of overtime
    • Employees who have a history of lying
  • Behavioral Flags – These flags may be easy to recognize by the way an employee is behaving. Examples include:
    • Spending too much time at work – the employee rarely takes vacations and/or never misses work
    • The employee won’t let other employees help them with their workload, even if they’re overwhelmed
    • An employee who manages financial records is extremely protective over the records
  • Accounting Flags – The accounting department has many areas where fraud can be committed. After all, this is where the money is. Be on the lookout for some of these red flags:
    • The business is unexplainably unprofitable
    • You’re noticing cash flow issues
    • There are issues with missing and adjusted inventory balances
    • Account balances aren’t reconciling
    • Unexplained adjustment entries on the books
    • Financial statement trends and ratios don’t make much sense
  • Documentation Flags – Keeping up with documents that go in and out of the business can help you catch fraud in your business. Common issues may include:
    • Excessive credit memos
    • Original documents have been messed with (invoices, vendor statements, bank statements), whether it’s electronically or whited out on a hard copy
    • Deposit slips and receipts that are MIA
    • An excessive amount of accounts receivable being written off
  • Internal Control FlagsYour internal controls are where your business operates on the daily. This leaves a large area where fraud can be occurring. Watch out for these issues:
    • Expense reimbursements do not match up with receipts
    • Background checks on key employees are not being performed
    • A single employee has control of the company check book
    • Internal controls are non-existent or inconsistently enforced
    • Company credit cards are easily accessible to everyone (and support for those expenses is not submitted)

 

Fraud can have a devastating impact on your business, and can be extremely hard to recover from. By keeping an eye out for these red flags, as well as other issues that don’t seem quite right, you can help prevent your business from falling victim to fraud.

A version of this blog was first produced by our Forensics team on eidebailly.com.

 

Final_infogaphic_web_Fraud Red Flags

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.