Why Are My Accounting Records a Mess?
The purpose of this post is not to admonish you for financial illiteracy or placing trust in others. It is to instill in you a discipline that will ensure you have good accounting records – which should form the basis of all of the 'fun' stuff like planning for the future and counting up all the money you made.
Over the years I've found that businesses are started by all types of individuals but that they generally fall into three categories:
- The serial entrepreneur (the person that just like starting, running, and selling businesses).
- The sales person (really good at selling anything and fell into an opportunity)
- The practitioner – in other words, the person that was good at a particular craft and went out on their own (e.g. an engineer, an architect)
Unfortunately, more often than not these three types of people don't usually have strong accounting and finance backgrounds, nor do they have any desire to obtain these skills. So, they trust other people – who may or may not know what they are doing.
Most businesses north of $1m in sales should have an internal person helping out with the bookkeeping function – either in house or part-time. Any business north of $3m - $4m should consider having a stronger full-time person (e.g. controller) and anyone north of $10m or so should consider a small business CFO. The techniques that follow are a month end accounting process that, if followed, will allow you to make more informed decisions. Use this checklist when evaluating the performance of your own accounting support, and consider getting some outside help (but still use this checklist) if you are keeping your own books.
- Do retained earnings agree with my tax return (or do I understand exactly why it's different). You don't have a good starting point if this isn't right.
- Cash accounts are reconciled and agree with bank statements – items that are NOT reconciled are investigated.
- Fixed assets are appropriately capitalized (meaning that you look at accounts in your profit and loss for lease payments and other purchases that should be capitalized).
- Other assets are appropriately stated (in other words, if you have an asset account that hasn't changed, look into whether or not it's still realistic – is inventory actually what you have in stock at cost?).
- Credit cards are reconciled.
- Unrelated party loans (e.g. lines of credit, bank loans) agree to statements and interest is booked appropriately.
- Related party loans (e.g. intercompany) agree on both sets of accounting records (if you own more than one company and loan money back and forth).
- No negative assets and no negative liabilities.
- If your balance sheet is accurate (steps 1 – 8) review your profit and loss statement. Are expenses within tolerable thresholds relative to prior years and periods?
If you do all this, you know you've got good data and you can make decisions. It also ensures that, when asked, you can produce financials at a moment's notice for interested parties.