I am often amazed at how many people assure me that it is until we start going through a few simple exercises to find out. I have discovered entire bank accounts left off of a set of books. Payroll inaccurate, Sales taxes not correct or by simply looking in the Sales tax payable account and seeing when they are normally paid I have alerted clients that they are late. The following steps will ensure that you are able to prevent and detect many easy to avoid issues mitigating the actual accuracy and reliability of your financial information. It’s always better to be sure, right? Especially when it comes to your financial information.
# 1: Reconcile all bank accounts and all credit card accounts every month.
If it leaves your bank account it shows up on the bank statement and if it was charged on your card it shows up on your credit card statement. The one sure way to catch anything suspicious is to reconcile your accounts. Many companies do not reconcile their credit card accounts. A credit card is a bank account. In fact in very specific terms it is a “negative” bank account. You take money out first, then make your deposits. Especially since we are all using credit cards to pay for things on the internet it is so important to use this simple task to verify that everything charged was supposed to be as well as making sure that everything that was charged is booked on your set of books. And here’s a bonus tip – do not use your debit card for online purchases – with a credit card you have more recourse in case of a fraudulent charge.
In my own direct personal experience it was through the reconciliation process that I uncovered over $20,000 in theft at one company. The previous accountant was pushing the numbers through so he didn’t catch it. When I took over it was bugging me that the deposits weren’t matching up. The manager at one of the locations was keeping the cash and only depositing the checks.
#2: If your reconciliation is off download a CSV file from your bank – it’s easier to format the data for quick reconciliation.
Every bank offers a CVS download format. If yours doesn’t, switch banks immediately!! This opens in excel enabling you to sort it and group it very quickly. Many bank statements are poorly formatted. In excel you can create your own bank statement grouping deposits together, checks with numbers, and then EFT’s (Electronic Funds Transfers) which is how I code any outgoing funds that clear without a check #. This makes the reconciliation very fast. Of course I am available for consult if you would like a demonstration of this.
#3: Run a monthly (column formatted) Balance Sheet and P&L and review each account, each month.
In QuickBooks you can run a Balance Sheet and P&L for the year to date, then choose the drop down labeled “Columns”. Choose ‘Month’ This gives you a much more meaningful look at the numbers on both and many other reports. Here is an example:
This view enables you to see trends very quickly and as a business owner you are likely to know intuitively if what you are looking at makes sense or not. Do this for the Balance Sheet and Profit and Loss and review it every month. You can even export this to excel to expand upon it, make notes or just to keep track of changes from one month to the next.
#4: Project your income, expenses, and cash flow and compare with the actual each month.
As mentioned in #3, you can export the financial reports into excel. I highly recommend doing that and then rolling that forward into a projection where you estimate what your income and expenses will be. Even if you think it is purely speculative, be conservative in your estimates. Just doing this will make the review of your actual financial information much more meaningful. I have also found that when I have my projections done and I look at them throughout the month it makes a HUGE difference in terms of keeping my attention on the results of my operation. The closer I pay attention, the closer the outcome is to my projected numbers. This also acts as a great gauge for how hard I am working. When I am behind I can usually put in some more hours and get on target. When I am doing better than projections I have a choice – I can push even harder capitalizing perhaps off of some momentum or I can use the knowledge to give myself a break which I often need because I put in a ridiculous amount of hours as it is. Sometimes I will use the day to write content like this which is time I do not get paid for immediately or directly.
#5: When you are reviewing your accounts each month (in QuickBooks) double click an account balance, then total by payee.
Picking up on where #3 leaves off – the best way to do this (especially if you use QuickBooks) is to go down your balance sheet and then your P&L reviewing every account balance and it’s contents. You should do this on the total year to date so you can see the entire year in each account. For the bank accounts just check that they are reconciled to the last closed month and make sure the reconciled balance equals the ending balance on the corresponding bank statement. For Accounts Receivable run an aging. For everything else, double click the balance and then use the drop downs on the top of the report to total by payee. This will give you great information right away, and what will really stand out is anything that doesn’t belong in that account. The great thing about QuickBooks is that you can double click any amounts that do not belong and change it to the correct account in a flash.
#6: Before looking at the numbers, think about and even write down what you expect to see. Look for significant variances.
The projections help with this, but when it is time to review you should spend a few minutes before even looking at the projections or any reports thinking about what has been going on in your company. Write down some notes. Were sales up or down? Did you collect a lot of old receivables? Are there any significant uncollected balances? Did you take on anything significant. Doing this before you review the numbers will give you an unbiased idea about what you can expect to see.
#7: When you are looking at the numbers think about what was going on operationally. Do the numbers appear to reflect things accurately?
Number 6 of course prepares you for number 7. Now as you are reviewing the numbers keep the notes you made in # 6 out and see if everything makes sense based on what you expected to see. If anything looks substantially different than what you expected you should take a deeper look at the transactions and satisfy yourself with an explanation that makes sense. This is a great way to identify problems before they even become problems.
#8: Have someone else review it and compare notes. You are more likely to catch things you may otherwise have missed.
The more eyes the better. Obviously this should be somebody you trust. If your company is big enough then you already have your CEO and CFO – these are the logical two people who should be looking at this. Often times especially if we are looking at numbers all day our eyes get tired and we can miss things. Having someone else look it over as a double check is a really easy step that can save you hours of having to fix problems that can be prevented.
#9: Check the ‘usual suspect’ accounts for plugged numbers – Suspense, Un-categorized, Open Balance equity.
Many times bookkeepers will post entries in accounts that really mean “I don’t know where this goes”. Either the intention is to ask later and often times it is forgotten or the intention is to simply ignore it. Check to be sure that these issues are all addressed and that every item is posted in an appropriate account. You never know who is going to be looking at your financial statements. Even though it may seem like a small issue it goes to the overall credibility of the financial statements. Sort of like having a typo on a resume – the reader loses confidence when they see this sort of thing. If it can make the difference between getting the financing you seek and not, it would be a real shame if something like this were the reason you didn’t get the financing.
#10: Make Sure Payroll Liabilities are zeroing out.
Remember that the title of this article refers to accuracy. Payroll liabilities are supposed to zero out each pay period. There is also supposed to be activity in there. Witholdings come in when employees are paid and they go out when the taxes are sent to the government. If there are balances or if there is no activity this is a good indication that payroll is inaccurate. Since payroll is usually the largest expense in any company this becomes really important to have accurate.