Think of your business as being a big bucket. As you go along, you fill that bucket with everything you learn about your value proposition, your customers, employees, finances, and operations. At some point you may realize that you expend more energies and resources than necessary to progress. Your bucket is leaking! But where is it leaking from?
Truthful financial statements will invariably identify the culprit. For almost two decades, we’ve been designing, implementing and maintaining financial management systems for startups, small and medium-sized businesses. Over and over, we have found that there are four core contributors to your leaking bucket:
- Cash Flow
The first step is to learn how to understand your financial statements. Our expert CFO in residence wrote this educational piece for you: “How do Financial Statements Help Decision-Making”.
In this article, we will examine how your accounting could be leaking and how to fix it.
Here are some of the most common signs that your books are not as accurate as they should be:
- You are not staying on top of recording
- There are many line items on your P&L
- There is a large suspense account
- There is no breakdown of cost per goods, service or project
- You write off everything
- You are mingling personal and business accounts
- As an owner, you are not on payroll
- Cash seems to disappear
- Have a professional general accountant or controller set up your books for your bookkeeper to follow.
We all have a friend or acquaintance that want to help or maybe we can just do it ourselves. This is one of these things where you want to make sure that: a. it’s the best use of your time and b. that whomever take it on as the minimum skillset required. Regardless of who is doing the entries, make sure that your chart of account and opening balance are set by a professional. This minimal expense will save you a lot of potential troubles in the near future (taxes, bank, etc.)
- Close your books monthly
Performing month-end-closing enables the consistent production of financial statements. More importantly, it is an early identification mechanism of any accounting issues and a critical support of your management decision-making. Look at your monthly report and see where your performance can be improved.
- Reclassify “other expenses”
Many organizations have “other expenses” that are inconsistent or too small to really quantify, which is normal across income statements and balance sheets. If these “other” line items have high values, then you should find out what they are specifically, if you can. You’ll also want to know if these expenses are likely to recur and check with a controller or general accountant if they deserve their own account.
- Understand your cost/pricing per deliverable to do cost analysis.
It’s great to generate revenue and get new contract. It is your responsibility though to understand your cost and evaluate your outcome: How did you do? When service has been executed or product delivered, is your cost and profit consistent with what you anticipated? Cost accounting will generate this analysis.
Freebee: The obvious goal for most businesses is to sell their products and services at a profit. But it’s not always wise to calculate prices with a simple “X + Y” formula, where X is the product cost and Y is the profit margin. Strategic pricing takes more variables into account. Costs don’t matter at all to our customers. Don’t assume all customers are price conscious. The only thing that matters to your customers is the value of the product and benefits that they get from it. Ideally, prices should be set with that in mind instead of what our costs of getting or making the product are. In other words, set prices based on what a product or service is worth to the market rather than what it costs to deliver.
- Have a growth strategy in place
As a small business, your tax accountant’s mission is to minimize your tax liability. Great when you get started! However, as you scale, you will require access to sustainable capital to take advantage of new opportunities, expand, relocate, etc. By writing everything off, you may have a great business, but your books show no profit. With no profit to show, your business appears to be incapable of paying loan installment. Consult with a controller or CFO to work with your tax accountant to better plan for your tomorrow.
- Keep business and personal separate
As a small business owner, right pocket, left pocket, what’s the difference? Taking a salary or a draw or nothing what’s the difference?
By incorporating your organization, you create a separation, a veil, to protect yourself against business liability. By mingling personal and business expenses and accounts, you break that veil.
It is important to understand your true cost of operation: pay yourself and put the money back if need be.
- Implement internal controls
It is reported that from the 2016 ACFE’s Report To The Nations that the small business ranks highest in occupational fraud frequency at 30.1% compared to large corporations, government and non-profits. The biggest contributing factor is the lack of internal controls. The most common methods of fraud schemes in small business are on billing, wire transfer, expense reimbursement, payroll, cash, inventory, etc. As a rule of thumb, one person can’t enter vendors invoice, create clients invoice, or prepare payroll, etc., and cut the checks or report your taxes. Seek out the help of controller or CFO to establish these controls. This is another minimal and one-time expense that goes a long way.
In conclusion, stay on top of your financials, look at them monthly or weekly if needed, check that your results are what you hoped for, don’t mingle business and personal, and have a controller or CFO set them properly. In addition to helping you make better decisions for your business, a controller or CFO will ensure that you have sufficient internal controls. If you are not sure you have the right accounting system in place, let us assess that for you. Request a complimentary consultation.
Altima Business Solutions provides on-demand executives and on-demand solutions to startups, small and mid-sized businesses. We are the support behind your action and support you from decision-making to execution in the five fundamentals of business: capital, profit, critical path, sales and accountability.