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.

Is Your Business Struggling Financially?

Starting a business can be fun and exciting, but it can also have its ups and downs. Your business might go through periods of growth where business is booming, but you also might see times when you’re not bringing in any money and your business is struggling to hang on. However, sometimes these financial issues are more than just temporary. Often times, there are underlying issue that cause financial struggles.

Here are some signs your business may be facing some serious financial struggles.

1. Cash Flow isn’t Flowing Smoothly – Cash flow issues are common throughout the life of the business – they’re even considered normal. What’s not normal is when these cash issues become a routine. These cash flow issues can have a number of causes, but some of the most common include smaller profit margins, loss of sales, theft and allowing accounts receivables to get too backed up. For help understanding cash flow, look here!
2. Tax Troubles – Ah yes, taxes. Just like individuals, businesses too must pay taxes. Businesses usually have income tax on the federal and state levels, as well as sales tax and employee taxes. When your business starts struggling to make these payments, something isn’t quite right. By not being able to pay taxes, a business can find itself falling behind on other financial obligations, and might even find themselves in some hot water with the IRS.
3.  Mountains of Accounts Payable – It should go without saying that you need to pay your bills. Whether it be your vendors, your internet service provider or your cleaning company, these people need to be paid for their services. When you “pay” for these on credit, they go to the accounts payable ledger, and not paying them off can create quite a mountain of bills. Struggling to pay your bills is a huge red flag that your business is having serious financial struggles.
4. Aging Assets – Wear and tear happens – it’s part of a product’s life cycle. However, a lot of this can be prevented or lessened by working on the upkeep of your assets. By failing to take care of them, serious problems can arise. If you neglect your store front and let it look run down, this can turn customers away as it isn’t appealing. If you have manufacturing machinery that isn’t preforming smoothly anymore due to wear and tear, production may slow down, be incorrect or even stop altogether.
5. Bookkeeping Blunders – Bookkeeping is cool – it tells the story of where your business has been, where it is right now and where it could go in the future. Neglecting your books can lead to some serious financial complications. Without accurate records, you may not know how much money you actually have, and this can lead to uninformed decision making. Having accurate books can also help you discover any issues, such as fraud, that may arise.
6. Cobwebs in the Bank – When you have cobwebs in the bank – you know, an empty or really low account balance – your business can face some serious financial consequences. Having a low balance can lead to overdrafts, and overdrafts can lead to some nasty charges for spending money your business doesn’t have. If you keep encountering these fees and charges, you will just end up digging your business into an even deeper hole – one that may be impossible to get out of.
7. Missing in Action – There’s an old saying “when the going gets tough, the tough get going.” However, in your business, leaving is the last thing you want to do. Often times, when businesses face financial issues, the owners are hard to find or contact. They may be overwhelmed, or feel like a complete failure. However, this can just lead to more problems, such as a decaying reputation, confused employees and deterioration of the already terrible financial issues.
8.  Inventory Issues – If you are selling products, you want them to fly off the shelves. When your products aren’t selling like hot cakes and are instead sitting in inventory for long periods of time, this could be a sign of a major problem. If you’re holding on to too much inventory and not selling it, you’re basically spending money on storage. If you sell products that could spoil, keeping them in inventory too long can result in losing money off ruined items.
9. Empty Handed Employees – Your employees keep your business running smoothly. When you’re not able to pay these precious assets, you know your financials are struggling. Not being able to pay your employees can result in them leaving the company and even bad-mouthing about how they were treated. This can lead to more reputation issues. Without employees, it will be tricky for your business to remain successful.
10. Profit Problems – As a business, your main goal is likely to make a profit. Profit, in its simplest form, is when you have more revenue than expenses. Although an obvious sign that your business is struggling financially, this is an important one to keep in mind. If your profits, such as gross profit, operating profit or net profit aren’t looking pretty, something isn’t right. Along with your profits, you want to have high profit margins, which signify what percent of your revenue actually turns into profit for your business.

Finances keep your business up and running, but when your business has financial issues, everything can come crashing down in a hurry. Luckily, our numbers nerds understand these money problems, and are ready to help you dig your business out of the deep, dark hole of financial struggles.

The Hidden Monsters of Accounting

halloween-graphic-finalHappy Halloween! With it being the scariest time of the year, you are probably thinking about black cats, jack o’ lanterns and how to sneak away with a little bit of your child’s Halloween candy. However, you’re probably not thinking about another topic that can be frightening to some: accounting!

We promise, it’s not that scary… we numbers nerds actually find it pretty fun! But, there are some monsters hiding in the accounting world that you should always be on the lookout for.

The Zombie — Assuming Profits Mean Cash Flow

It’s easy to make a sale (we’re talking either a sale of goods or services) and subtract your costs and then record the remaining amount as a profit. But if you’re allowing your customer to purchase on credit (meaning you are letting them pay you later), don’t be too fast to count it as cash in your pocket and spend it on your Halloween costume. What if it takes longer than expected to collect? What if you don’t collect? Now you have cash flow issues you weren’t anticipating.

It may be tempting to think profits and cash flow are the same, but by doing this, you’re giving yourself a twisted image of your company’s real condition and this can lead to even bigger problems down the road. Like a zombie, your financial statements (if you don’t understand them) can rise from the dead and scare you. If you need more help with this concept, check out this blog.

The Vampire – Not taking Bookkeeping Seriously

It’s easy to pretend bookkeeping doesn’t exist (just like vampires). However, if you’re not keeping accurate books, you might be in for major struggles that can be very painful in the future.

No matter the size of your business, investing in accurately tracking your business financials can be compared to garlic. That’s right, maintaining a good bookkeeping system can protect your business from the vampires who can suck your financials dry. Having accurate, timely financial statements also gives you confidence when making your business decisions. 

Frankenstein – Not Having a Clear Budget on Each Project

Does your company operate without a budget? And we’re not talking about the kind of budget you fill out at the beginning of the year and forget about the rest of the time. We’re talking about a rolling budget; the kind you reference and update throughout the year (ebbs and flows with the changes in your business). Operating without any financial guidance could result in a freaky experiment with the end product not being what you hoped for.

Operating without a clear budget can make it difficult for your company to keep in check, and can lead to spending a lot of your hard earned money unnecessarily (nobody wants to flush money down the toilet). Don’t throw everything into one pot and hope it turns out. It is best to have a rolling budget to start with the end in mind and to help provide a roadmap for getting there.

The Witch – Lack of Accountability

Do your people know what is expected of them? And do they know what they should be doing day-to-day to meet those expectations? Lacking accountability can lead to some serious confusion; it may be a struggle to figure out who’s flying around on which broom.

It is extremely important to define everyone’s roles and performance expectations. Not only that, tell them how they can meet those expectations by relating them to their day-to-day tasks. We’re talking about KPIs (key performance indicators). Need a refresh? Check out this blog.

And now a plug for accounting (let’s be honest, you knew that was coming). Having timely, accurate financial information is important as many KPIs are tied to financial information. Make sure you are holding your people accountable against accurate information.

The moral of dealing with this Halloween monster…having accountability in your business can help your people know which broom they should be flying and be able to fly them in the same direction.

The Ghost – Failing to Reconcile Your Books With the Bank

Failing to reconcile your accounts frequently can come back to haunt you. When you reconcile your books, you are ensuring an account balance is accurate and correct, and that it can be tied back to supporting documentation (such as your bank statement). Without reconciling your accounts, there could be a ghost hiding around the corner. Boo!

All accounts should be reconciled (especially the balance sheet), no matter the size. From cash to accounts payable, these accounts all have an impact on your financial situation. Small to mid-sized businesses should especially be sure to reconcile their books every month to ensure the accuracy of their financial information. And don’t be afraid to reconcile them more frequently. For example, if you are experiencing cash flow deficits or concerns, you may want to consider tracking your accounts receivable, accounts payable and cash more frequently just to keep those ghosts at bay.

The Mummy – Managing All Accounting Tasks In-House

It is a common misconception that handling all of your accounting activities in-house will allow you to save money. That’s not always the case. Depending on your situation, outsourcing might actually save you money. In some cases, outsourcing is less expensive than hiring internally (remember all the cost associated with your people, onboarding, training, wages, benefits, etc.). Not only that, a reputable outsourced accounting provider may save you money due to costly bookkeeping errors.

If your business is too busy getting wrapped up in all of the accounting details, you may struggle to pay attention to other important parts of the business, and this can hurt your company – whether in the loss of revenue, customers or even reputation. Outsourcing your accounting needs (we can help!) allows you to ensure the other parts of your business are running smoothly, and lets you get back to why you got into business in the first place.

 

Although these accounting monsters may be scary, they are avoidable. With the right knowledge and skills, your business can avoid these tricks and instead focus on the treats of timely, accurate financial information.

Behind the Metrics: Accounts Payable & Accounts Receivable

This set of blogs will take you behind some of the metrics you should be measuring in your business. We’ll talk about what they are, what they really mean and more.

accounts-payable-behind-the-metricsToday we’re talking the ins and outs of your accounts … payable and receivable that is. To begin, let’s look at what they actually are:

            Accounts payable: Money owed by you to your vendors

            Accounts receivable: Money owed to you by your customers

 

Okay, so what does this really mean?

Accounts payable and accounts receivable are different sides of the same coin. When you talk about accounts payable, you’re discussing the money YOU owe. On the other side, accounts receivable measures how much money OTHERS owe you.

Let’s break it down …

Accounts Payable

When you buy goods or services from someone and don’t pay them for it at the time of transaction, you’re buying them on credit. This is tracked in your accounting system as an account payable. This seems like it should go without saying, but you need to pay these off within a given time to avoid incurring late fees and/or interest. Some vendors are even nice enough to offer discounts if you pay early.

Accounts payable are current liabilities; meaning the accounts payable due within a year However, we all know vendors typically don’t give you a year (most are due on receipt or within 30 days). There are other liabilities like short-term loans, payroll costs or income taxes for your business … but those are recorded elsewhere.

Accounts Receivable

Think of accounts receivable as your outstanding invoices. It’s like you’ve received an IOU from your customers. They have a legal obligation to pay you back.

Similar to accounts payable, the accounts receivable is a current asset … we’re talking at the most a year. But again, you likely aren’t going to give your customers a year to pay you back. If a company cannot collect on its accounts receivable, they do have options for recourse, including taking the debtor to court or handing over the debt collection to a third-party bill collector.

As a fun fact, if a company has bad debt (accounts receivable was recorded as income but payment was not received …learn more about why this would happen here), the IRS allows you to subtract it from your gross income on your income tax return. However, this is only as long as the debt was reported as income on a previous return. But if by chance your customer comes through (after you record it as bad debt), you will need to record a bad debt recovery (income) when the money is received.

So how do I track it?

Accounts Payable

To track your accounts payable, your numbers guru credits accounts payable when a bill is owed and debits accounts payable when the bill is paid.

Of course, we’re just talking here about the accounts payable section of your accounting system. In reality, the full tracking looks like this:

When an invoice is received, the invoice is recorded as a credit to Accounts Payable, AND a debit to another account(s) within your system like inventory or expense (cough, double entry accounting).

When an invoice is paid, the payment is recorded as a debit to Accounts Payable, AND a credit to cash (or in some cases credit card payable).

Accounts Receivable

To track your accounts receivable, your numbers guru debits accounts receivable when an invoice is create and credits accounts receivable when payment for the invoice is received.

Of course, we’re just talking here about the accounts receivable section of your accounting system. In reality, the full tracking looks like this:

When an invoice is create, the invoice is recorded as a debit to Accounts Receivable, AND a credit to another account(s) within your system like income.

When payment for the invoice is received, the payment is recorded as a credit to Accounts Receivable, AND a debit to cash.

Anything else?

Why yes in fact … let’s talk turnover.

Accounts Payable Turnover Ratio

In its simplest form, the accounts payable turnover ratio is a measurement of the rate you’re paying off your short-term debt to suppliers.

It’s calculated like this:

Total Supplier Purchases

Average Accounts Payable

This matters because this calculation allows your investors (and you) to see how often you pay your average payable amount to your vendors. When your turnover ratio falls, it means you’re taking longer than normal to pay off your short-term debts. When the turnover ratio rises, you’re paying off vendors at a faster rate.

Accounts Receivable Turnover Ratio

What this basically means is your ability to effectively extend credit and collect debts on those credits. In other words, how well are you collecting on the debts your customers owe you?

It’s calculated like this:

Net Credit Sales

Average Accounts Receivable

A high receivable turnover ratio often means your collection policies are effective and efficient. You have a good quantity of customers who pay off debts owed to you in a timely fashion. Or, it could mean you’re conservative with the amount of credit you extend.

A low ratio can tell you that you have a poor collection process or are being too generous with your extensions of credit. It could also mean you have customers who aren’t willing to pay off their debt, or are having difficulty doing so.

Big difference in your turnover numbers?

This can tell you a story about your cash flow; but these aren’t the only components of cash flow. For example if your accounts receivable turnover is low compared to your account payable turnover, it means you are paying your suppliers faster than your customers are paying you. This could create decreased cash flow and you might be feeling the pressure. However if your accounts receivable turnover is high compared to your accounts payable turnover, you might be seeing a cash influx. But it’s important to remember you have accounts payables coming due so don’t be quick to spend it all.

The moral of the story …

Accounts receivable and accounts payable (and their respective turnover ratios) tell a part of your company’s story. By examining them and continually measuring them, you can see ways to adjust course, change methods or improve systems in order to help make you a more successful business.

 

 

Changing Times: An Accounting History Lesson

A long, long time ago, when ancient civilizations ruled the earth, accounting came in to being … at least that’s what Wikipedia tells us. Needless to say, accounting is a tried and true profession. It’s also being affected by technology … just like everything else.

Ledgers & liquid paper

When I was younger, my mom was the bookkeeper for our farm, as well for a few other side projects. In her role as a bookkeeper, she kept track of everything by hand. She would use hard black ledger books with 14 column paper and record things in pencil. Hence the need for the best pencils on the market … as good as accountants are, sometimes you need to erase things and redo them. My mom even had liquid paper, the same color as the green ledger paper (because accountants are anal like that).

Accounting software

Fast forward a few (okay a little more than a few) years and I’m an accounting professional. In my 14 years in the profession, I’ve never used 14 column paper. I’ve had a couple clients hanging on to it, but they’ve always been rare. Rather, I typically use accounting software to help my clients with their financials (looking at you QuickBooks).

The advent of accounting software allowed businesses to operate more efficiently and changed the way accountants and business owners worked. You could open your snail mail and key in the necessary information, then print off checks to get the bills paid. The systems could even print invoices and track payments from your customers, all of which came in the mail.

The initial accounting software was somewhat easy to use, affordable and did all the basics … without the need to put pencil to paper.

Automation & efficiency

Somewhere along this path, we realized that paper copies could easily be replaced by paperless technology and increased automation. So technology changed accounting again. Rather than having a specific “accounting computer,” technology and applications moved to the cloud and could be accessed from anywhere, including your mobile phone.

Today, accountants and bookkeepers can access real time information faster than ever. They can take a picture on their phone and have it uploaded and coded instantly into their books. Bill pay is now automated and invoices magically appear via email, directly from your cloud accounting system. Point of sale systems are helping retail businesses, and talking directly to your accounting system.

When all this technology works together, it’s accounting magic. You now have interacting systems that record data in real time and allow you to have clean books and accurate financials in order to make sound business decisions. In other words, you have instant access to your numbers … and that’s a good thing.

The moral of the story

While all of this technology is making us more efficient, it’s also eliminating the human factor. No more licking envelopes and mailing paper bills, or keying in data at the end of the month. But this isn’t necessarily a bad thing. Technology is allowing bookkeepers, accountants and business owners to focus on what matters and not get wrapped up in the busy work.

Yes, it’s scary because it sounds like some of your staff (maybe even you) are being replaced by technology. Trust me, I understand (remember, I’m an accountant too). But it’s really okay. What technology is doing is automating the parts of the process that were subject to human error and making them more precise. This allows us numbers nerds to devote more time to analyzing the numbers and getting them in your hands must faster. It’s helping you make smarter business decisions.

 

 

Your Financial Cast of Characters

Your finances tell a story. It’s an intriguing and exciting one (trust me, it really is). Within that story there are different characters, each of whom play a different role. Sometimes these are all the same people. If you’re lucky, you get to work with more than one number nerd day-to-day.

It’s important to understand each of the characters in your financial story. Just as each founder or CEO is not the same, neither are the financial individuals in your organization. They each have a special skill set and way of thinking, but all can contribute to the overall success of your organization.

Chief Financial Officer

This is your top level financial person. They’re responsible for oversight of your finances, as well as strategy for your business. Read, you want them on your side as you map out long-term growth and eventual exit. They can help you see big picture while managing the day-to-day.

Roles include:

  • Supervisor – A CFO oversees the administrative accounting functions/processes to ensure they are running smoothly (yes, there are different types of accounting functions).
  • Planner – A CFO keeps a watchful eye on the inflow and outflows and provides you with the information you need to make decisions surrounding investments, purchases, next steps, etc.
  • Interpreter – A CFO helps you understand the numbers in a meaningful way. In other words, it’s part of their job to help you get it and understand why it matters.
  • Navigator – A CFO helps guide your business toward strategic growth, identifying areas of improvement, as well as any threats that may be lurking around.

The CFO is essential to the story of your business because they oversee a crucial aspect of you being in business (cough money). They also help you understand your business and its strengths/weaknesses and how to leverage those strengths and improve the weaknesses in order to achieve what you’ve set out to do.

They are big picture thinkers (hence why we keep using the word strategy). They are not responsible for day-to-day task related financial work. That falls to our next few characters.

Controller

This is the individual who is responsible for overseeing the day-to-day task related financial work. Their main role is oversight of the company’s finances, ensuring their timeliness and accuracy, as well as responsibility for the accounting department team.

Responsibilities of a controller will include:

  • Accounting system set-up and maintenance
  • Financial statement preparation and reporting
  • Bank and credit statement reconciliation
  • Oversight of the accounting staff, including supervision and training
  • Budgeting
  • Procedure documentation
  • Payroll
  • Accounts payable and receivable
  • General ledger maintenance
  • Tax compliance

The controller is the gatekeeper of the financial information, bridging the gap between data entry (coming up next) and strategy.

Bookkeeper

We have now arrived at our final character in your accounting journey: the bookkeeper. This person is essential because they complete the day-to-day task related work.

Their responsibilities include:

  • Everyday business transaction processing
  • Task related reporting (such as sales tax, payroll, etc.)
  • Maintenance of supporting documentation (such as invoices, bills, receipts, Form W-9s, exemption certificates, credit applications, etc.)

A bookkeeper is like a storehouse of information about your business. They know things like chart of accounts, procedures related to functions such as accounts payable and receivable, maintain invoices and more. They are not however, expected to make strategic business decisions based on this information.

So who do you need?

Each of these characters supports a specific role in your organization. But as a small business or startup, you might not have the finances necessary to hire all the financial people (ironic isn’t it).

Here’s the good news: you can outsource a lot of this at a relatively low cost until you’re at the stage where you’re comfortable moving it in house.

What’s important is to know the importance (and necessity) of understanding your finances and your financial journey. Then find a trusted business advisor, or advisors, to help you along the way.

The Need for Good Books

It’s time to talk records … and no, we’re not talking about filing cabinets full of paper. We’re talking about records in terms of financial records, also known as your books. Before you hit the snooze button, let’s first talk about a few reasons why keeping accurate financial records (also known as good books) is so important.

Accurate bookkeeping allows you to make sound business decisions.

Your books keep you in touch with your business’ operations and obligations. They will also help you see problems before they occur.

Here’s just a few things good books will help you answer:

  • How is my cash flow? Are vendors being paid on time? Are customers paying me on time?
  • Do I have too much money tied up in inventory? Or do I have adequate inventory to fulfill sales orders?
  • Do I need to purchase new equipment? Do I have the ability to purchase new equipment given the current state of my finances?
  • Do I need to hire additional help? Will I be able to pay said help?
  • Which areas of my business are successful? Which areas need improvement?
  • Can I cut my costs in any areas?
  • Am I following my budget?
  • How does my profitability compare to others in my industry? (Don’t forget, profitability isn’t the same thing as cash flow)

Accurate books are critical when it comes to tax time.

Tax time isn’t so fun when you haven’t had accurate bookkeeping. After all, good books allow you to report accurate revenue, keep track of deductible expenses, calculate gain or loss on sold property and support items reported on your tax return (read, in case you get audited). All of these things are good to know and have at tax time.

Accurate financial records help others, like your bank.

Without good books, your bank won’t be able to make lending decisions for your organization. Don’t believe us? Read up on what this bank has to say.

So now that you know why it’s important, here’s a few things to consider on your record journey:

Implementing a bookkeeping system.

  • Keep it simple!
  • Maintain books that have the right level of detail depending on the complexity of your business.
  • Make sure you have the essential information you need on a timely basis. If you don’t have access to timely information, even the most accurate records won’t help you a whole lot.
  • Compare current data with historical data to check your progress. (cough benchmarking cough)

Need some more help with setting up your books?? We’ve written two blogs on this for you: Part 1 and Part 2.

Find the right tool/partner.

As a reminder, before you make a decision regarding accounting software, make sure you understand your needs.

There several different types of software that can help you track your records. Many are cloud based accounting programs (QuickBooks, Zero, Wave, FreshBooks, Bill.com … to name a few) that allow you to access your information from almost anywhere for a small monthly fee.

If you’re not sure of how to set up your books, or you need just a little more help understanding and updating, talk to a reputable CPA firm. They can be a trusted ally on your business journey, especially if you visit them more than once a year.