Now is a great time to review the process in which your financial statements are prepared. This time of year, many businesses are gathering their records to prepare a tax return. As a tax preparer we deal with financial records in all kinds of shape. Some I trust and some can be a nightmare.
Here’s some basic guidelines to improve the accuracy of your business financial statements.
Don’t mix personal activity and business. If you keep everything in only business accounts – checking, credit card, etc. it is easier to gather the information. It is easier to keep the IRS out of your personal activity.
Keep them up to date. It is very difficult to remember what happened yesterday, much less what happened 6 months ago.
Use your financial statements. The more you use the them the more accurate the information will be. Review them at least monthly and make sure they are telling you the same story that you are seeing every day.
Protect your cash & customers payments. Watch your bank account online. Review the process. Do not have someone signing checks, issuing customer invoices, making deposits and maintaining the business financial records – unless that person is you. Internal control procedures are put in place to keep people honest.
Month end closing – each month I recommend the business owner do the following
- Review the monthly bank reconciliation report. Make sure it is current and there isn’t a lot of old activity on it.
- Review the Accounts Receivable aging report. Do these customers still owe you money?
- Get a Balance Sheet –
- review the assets. Note your cash balance, how much customers owe you and the equipment that your company has recorded. If there are other accounts – do you know what they are? If not ask.
- Review the liabilities. Note credit card balance, accounts payable and payroll liabilities. Do they look reasonable? Who has a credit card and how is the expense approved? Are payroll liabilities being paid?
- Review a Profit & Loss or Income Statement.
- Compare this month to the same month last year. Are the close or has something changed? Compare year to date to last year’s year to date. Again – are the numbers close or has something changed? If so, dig deeper and find out why. Review sales. Did everything get billed? Did the business complete the sale? Review when a customer gets invoiced and how it is recorded. Review Gross Margin /Gross profit. Is this what you are expecting? Watch timing on this one. It is important to record the sale the same month the expenses for that sale are recorded.
- Review overhead. Review a month-by-month profit & loss. Compare each month. Are the costs similar each month?
Financial statements are tools to manage a business. They are used to value a business, project future profits and a way to measure success. The more accurate they are the more reliable they become. I hate to make decisions on wrong information. Now is the time to review your process.
By Mary Guldan-Lindstrom, CPA