Can You Really Afford Not to Understand Your Budget? Get Off the Financial Treadmill with a Budget and Move Forward
Last week, we kicked off our series on increasing our financial knowledge and the tools needed to educate ourselves in observance of Financial Literacy Month. This week, we are starting with one of the basics – the process and tool without which a business could easily crumble. We’re talking about the importance not only of developing a budget, but developing your thorough understanding of the numbers behind it. At its most fundamental basis, understanding finance is, in fact, about mastering the business’s budget. Without it, there is no control over spending. And without control over spending, it is difficult (if not impossible) to plan for the future. And without a plan, how can a business reach its objectives or achieve its goals? Simply, it can’t.
There is only so far an incredible idea, enthusiasm, and optimism can take you in business. Without a carefully prepared budget, based on accurate information, you could be out of business before you begin, whether you are the owner of a small start-up or the finance manager of a large corporation. Absent clear direction, potholes surface all around you – revenue, expenditures, cash flow, strategic goals. A well-planned budget can pave the road for a smooth ride to financial longevity and success.
Numbers are Black and White; No Smoke and Mirrors Needed
Have you ever been in a financial meeting with someone who is at best unprepared and at worst clueless as to what the meeting is about? I have, and it is frustrating, to say the least. This is never more apparent than when someone is attempting a smoke and mirrors show, trying to distract you from their lack of knowledge. And, all you really want to ask is, “What do the numbers say? They’re black and white! There’s no need for all the gray.”
The issue often boils down to them either not having a budget at all, or having one with no understanding of how it came together or functions. It’s not a matter of a specific document. It’s a matter of understanding the implications of the numbers represented on that document. Absent that understanding, the person cannot communicate expectations and goals, set organizational objectives, assess or measure performance against those goals, gain insights, or allocate resources appropriately or strategically.
So, How Exactly Can a Budget Help?
Most people understand the essence of a budget – it is a financial plan that estimates revenue and expenses over a specified period of time, including cash flow, revenue, and expenses. But they do not understand where the numbers come from or the true benefits of understanding them. The ability of a business owner or manager to quickly identify available capital and expenditures, and anticipate future revenue is crucial to ensuring that resources are there when needed.
With a budget, a business can control its finances, ensure it can fund its current commitments, all well as future projects, and enable it to meet its objectives with decisions based on facts, not assumptions. Armed with this information, the owner or manager can concentrate on cash flow, reduce expenditures, and increase profits. It also allows him or her to speak to the organization’s accountant, key stakeholders, or potential investors confidently and accurately about the business’s overall financial health.
There are numerous benefits of budgeting. For example, budgets:
Provide revenue and expenditure estimates.
Highlight the strengths and weaknesses of the business.
Help set realistic expectations when planning out future years.
Minimize budget to actual variances.
Ensure money is allocated to appropriately support strategic objectives.
Ensure that the team involved in preparing them can effectively communicate with finance and accounting professionals, key stakeholders, and investors.
Help share the business’s vision with other team members.
Provide a tool to measure performance, comparing it to prior time periods and anticipating future ones.
Help ensure that a team has the resources needed to achieve its goals.
Running a business without a budget is like running on a treadmill – you are always working, but not going anywhere. If that feels like you, it’s time to hop off what keeps you moving, yet remaining in one place, and actually start moving forward. Remember, the budget process should be well planned out, informed, and include all of the responsible parties. It’s not just about improving your financial knowledge of the present, but about strengthening that knowledge to predict a brighter future. If you would like to discuss your budget and how to ensure it is working efficiently for you, or if you have other specific areas of concern, please click here to schedule a 30-minute free consultation.
In all my years as a CPA and a CFO, I do not recall anyone (ever) who has gotten excited about a financial audit. No one wants to pay for an audit (in money and time), prepare schedules for the auditors, or answer the millions of questions they ask. Who has time for all of that? I get it – they’re only thinking of the pain. In fact, most would likely prefer to have root canal without a pain killer rather than go through another audit.
The sad truth though, is that most financial records are not maintained in a proper manner. And, as such, they are not ready to be audited, causing increasing frustration, and yes, increasing work. This can be the result of –
1) Early-stage businesses trying to save money. These organizations look only at immediate cashflow and expenses, and not at the long-term needs of the organization. This limited view is very short-sided and often results in trouble down the road. Proper accounting records help you make the right decisions now. And the cost overages from a first-year audit due to the company not having the proper records can far exceed the savings incurred.
2) Lack of acquisition integration. This requires the auditors to audit several systems, requiring extra work and time, and thereby increasing the fees.
3) Changes in personnel. This often results in a disarray of the financial information, as there are generally issues with training new personnel and maintaining continuity in the financial process. Continuity is essential for consistency in accounting, as well as a strong foundation of GAAP (Generally Accepted Accounting Principles).
4) A system conversion occurred in the current fiscal year and the historical information is not easily available to audit.
Often, the reason any relationship does not go well is a lack of understanding and respect for the other party. This is no different than with an audit. Once you understand the purpose of an audit and the rules and constraints under which an auditor must operate, you will be more apt to lean into the process, prepare your company more thoroughly, and have a far better experience with the audit and auditors.
While there may be many reasons for a financial audit, they all have the same two main objectives – to answer the following questions:
1) Are the financial statements for the period audited prepared in accordance with GAAP?
2) Is the company a going concern and able to remain a viable business?
Affirmative answers to these questions are keys to an organization’s financial success.
It is important to note that the auditor cannot prepare the financials and audit them. Doing so would be a violation of the independence rules, and is unethical. Through an audit, you receive an independent fresh set of eyes looking at the financial books and process. As a result, the auditors may:
a. Recommend improvements in processes that save time or enhance controls, or
b. Find potential fraud.
After understanding the types of audits and the benefits, it is important to understand why an organization is required to have an annual financial audit. In most instances, the audit will fall under one of the following:
1) Some lending institutions/banks require it.
2) Some investors, private equity, or other types of investors may require it.
3) The company is publicly traded.
4) The company has undergone a public offering, which includes crowd-funding.
Although financial audits are the most commonly referred to audits, you should be aware that there are other types. For example, a forensic audit is used to determine if fraud is present within an organization or under other sets of circumstances, such as a high-profile divorce. If you suspect fraud, you should request and pay for an audit of this nature, and NOT rely on a financial audit. As discussed above, detecting fraud is not one of the primary objectives of the financial audit.
It’s a new year – time for reconciled accounts, fresh books and records, and even a fresh perspective. It’s time for the perception of audits to shift from only thinking of the work involved in preparing for them to the enormous benefits that can be uncovered from the audits themselves. In essence, it forces an organization (and its officers and directors) to stay organized and honest about its financial well-being. With this frame of mind, maybe more will choose an audit over a root canal after all.
Do you need help preparing for an upcoming audit? If you are either preparing for a first-year audit and/or you have had some significant changes in the organization over the past year, let’s work together to set you up for success by ensuring you are prepared. Barker Associates has extensive experience working with organizations to prepare the many schedules and memos required for an audit, helping them keep the costs under control. Use this link to my calendar to choose the best time for your free 30-minute audit consultation.
There were more firsts this year than any of us care to count. Some issues, however, have been around for a very long time and aren’t going anywhere. In fact, many are more important than ever before. Financial strategies and solutions, infrastructure, investor relations, and negotiations simply do not quarantine themselves, even during a global pandemic. Rather, the pandemic forced us to be even more diligent when it comes not only to our physical health, but also to our financial health.
Before we start crunching the numbers of 2021, we thought it was a good time to reflect back on the topics we found most crucial in 2020. Click below for some refreshers, as you prepare for the new year:
Getting to Day Zero: The importance of “Day Zero” being top of mind at the beginning of each month for proactive organizations.
Help Investors Spend Their Money: How the amount of money in the hands of Private Equity and Venture Capital firms substantially increased over recent years – the total money raised in 2008 was $392 billion as compared to $740 billion raised in 2019.
Essential Infrastructure: The right infrastructure is critical to generate data about your business during the due diligence process with potential investors.
Negotiate from a Position of Knowledge: Valuation is the value an investor would place on your company if you were to seek investment funding. Your company can be valued based on what someone will pay for it or what the market will bear.
Times Have Changed, or Have They?: With all of the year’s changes, one thing that hasn’t changed is the core fundamentals of business. In order to survive (pre- or post-pandemic), a business must have a product or service that solves a problem and can financially make a profit.
Oh No Not Again: The importance of having a clear vision and financial roadmap for your business through having the right infrastructure in place, including an Enterprise Resource Plan, CRM, General Ledger, Cash, HR System, and Payments.
Stay Safe: Leaders must set priorities that have measurable results with employees, even if the employee is working from home or transitioning back to the office.
If you have any questions about these topics or how to start your new year on the right financial foot, we can help. Let’s set up a time to talk! Use this link to my calendar to choose the best time for your free 30-minute consultation.
Often, when people think of budgets, images of CPAs and CFOs come to mind. They’d assume leave the numbers to those with the titles and letters following their names. However, in reality, budgets are for many more than just those with accounting backgrounds. In fact, all individuals with any spending authority in an organization should be comfortable bonding with the organization’s budget.
A budget is an invaluable tool to help individuals make well-informed decisions based on actual numbers, rather than hypotheticals. With those decisions, individuals can guide the organization strategically through each quarter and fiscal year, with a clear picture as to where the organization stands and in which direction it is heading. The budget creates a detailed road map to help navigate through expenditures and forecasts.
Ultimately, there are three primary budget considerations for any organization:
1) More People Involved from Inception. Each person who authorizes an expenditure in any way, whether it is signing checks, approving invoices, paying bills, or some other task affecting financials, should participate in the budget preparation process and the monthly budget review. It is critical that they are involved in the budget process from inception, or are brought up to speed as quickly as possible. Often, when I ask someone who is in charge of expenses why the budget to actual is off, they respond that they have no idea how the budget was put together in the first place. How can anyone expect these individuals to properly manage expenses when they are unaware of the principles behind them? This is easily solved when the individual is involved from the beginning.
2) Alignment of Budget and General Ledger. The budget line items and categories should be identical to those in the general ledger. Accounting and finance teams need to focus on analyzing differences at month-end, not inputting, exporting, and manipulating data merely to get it to the point where they can analyze it. It should all be organized in the same way from the start. For example, a property and casualty insurance company may have their general ledger categorized by type of customer, while their budget is categorized by their annual statement (the document each insurance company is required to file with the state of domicile). Varying methods of organization requires increased allocation comparing the actual results with the budget, resulting in misspent time and resources. To make matters worse, through this time-consuming process, an organization lacks the critical information needed to pivot at a time of crisis. For example, when a country’s entire economy shuts down due to a global pandemic.
3) Accounting Alignment. The accounting in the budget analysis and the general ledger should be the same by department. One common issue occurs with payroll. Oftentimes, payroll is run every two weeks and recorded on a cash basis in the general ledger, but on an accrual basis in the budget. For example, if an employee gets paid $120,000 per year, the budget would allocate $10,000 per month for payroll, while the general ledger would show $9,230 for two payroll months and $13,846 for three payroll months. It would never match. When budget to acutal analysis is presented to the management of the organization, there should not be time for an explanation of the accounting differences in the budget and actual. Rather, the conversation should be 100% focused on maintaining alignment with the strategic goals that were established when initially creating the budget.
Other benefits of proper budget management include, empowering more employees to make better decisions for the organization, saving money over time, curbing spending, and increasing preparedness. Additionally, when the budget process is carried out properly, it can reduce fraud. Once the person authorizing the expenditure understands that someone will be carefully analyzing the details for which they are responsible, they will be less likely to steal from the organization.
While many people would rather push off the numbers, columns, and formulas of the budget process to someone else, it’s really the last thing they should do. In fact, when they are involved in the process, they will understand all of the components and essential information on a more comprehensive level. In doing so, they not only create a stronger bond with the budget, but also create a stronger bond to the organization itself.
If you would like to discuss your budget and how to ensure it is working efficiently for you, or if you have other specific areas of concern, please click here to schedule a 30-minute free consultation.
Companies are going through year-end financial reporting.
Just for fun, at cocktail parties and networking lunches, I ask executives and
investors if they get the year-end results as quickly as they would like to get
them. My unofficial survey says that most stakeholders are not receiving
Proactive organizations have “Day Zero” at the top
of mind at the beginning of the month. If you don’t know what this means in
terms of proactively managing your financial strategy, read on…
The truth is that almost every single employee in an
organization can impact the ability of the accounting department to close
timely, yet the company accountant may not be the best source to drive home
that truth. The message from the top should convey respect for each
professional’s time and support for more efficient month-end and year-end
processes – where everyone focuses on funneling information in a manner to
close the records effectively. The ultimate goal is to provide to the
management team a Flash Report as soon as possible following month-end,
followed by the official month end financials.
Day Zero refers to tasks your accounting and finance
departments can complete prior to the
end of the month to speed up the month end close. Decisions about the company
require timely, accurate data – a smooth and timely month-end is vital.
eyeshade” accountants may balk at the idea that they can shorten the
month-end process; however, the strategic finance professional digs into their
process to find and tackle these tasks, as well as improving their process
Here are some examples of what I mean:
standard monthly entries for amortization of intangibles, and
accruals of expense.
Once you have identified the pre-close tasks, create a Day
Zero checklist with deadlines for each item. The finance manager should
oversee that deadlines are being consistently met and if not, get to the root
of the problem to correct the process. One solution may involve asking other
departments to turn in their information based on a schedule you provide in
Refining your month-end close process is an iterative
process if you continually raise the bar to identify better ways to execute.
Automating reconciliation and other process improvements contribute to
shortening the cycle.
Document your processes with Standard Operating Procedures
so that all team members have steps to follow should any one team member need
backup. Keep your SOPs up-to-date through periodic review.
Spend time in the middle of the month following the month-end
process to complete your review of the entire process. Engage your finance team
and uncover those Day Zero tasks you can incorporate into your process.
Everyone in the organization will benefit when leaders have more timely and
accurate information with which to make decisions.
If you are disciplined and implement Day Zero and other
month-end processes, you can provide a Flash Report of results to management as
soon as Day 1 after month-end.
can facilitate a review of month-end processes with your team to ensure you
have uncovered all the possible streamlining opportunities. Provide the best
customer service to your management team possible – provide financial
information and think strategically and become part of positive initiatives to
move the entity forward and not the green-eyeshade accounting department about
which everyone complains.
Yesterday, as I was walking back to my car after a great networking lunch, I almost tripped over a pair of shoes left behind in the parking lot. They were probably part of a strategy to look fashionable and fabulous. Most of us can take a closer look and determine why they may not have been working from a practical sense and just had to be left behind.
From a practical perspective in business, some tools, processes, and even people have to be left behind. Leaders tend to get attached to all three at different stages of their careers and different stages as leaders. Financial systems are not typically customer-facing, being pushed to the bottom of the list of systems to upgrade. In addition, most Chief Financial Officers and Controllers do not have the level of Emotional Intelligence and skills required to stress the importance of the new system.
It makes sense, both financially and practically, that software vendors can only support a limited number of versions of their products. Eventually, you receive notice that support for your outdated version of their system will cease.
When you finally decide to upgrade your system, consider my recent experience. I learned that it is impossible to migrate data from certain older systems to the newest version without upgrading it through each version of the system – some of which are no longer for sale. I was able to locate a CPA who had all the previous systems, and the client had to pay them to move the data through the updating process.
Do you want your valuable accountants struggling to operate your business with an outdated system? Good accountants are in high demand, receiving multiple calls from recruiters who are offering them opportunities to work for more money in up-to-date software environments. They can walk out of your office today and have a job tomorrow. Do you want them dealing with the 10th system crash that week, or trying to get a mega Excel sheet to balance because they can’t use the old software to get the correct financial data for decision-making? When the recruiter calls them it is highly likely your accountant will be in the mindset to listen to what the recruiter has to offer. Turnover in the accounting department will cost you a minimum of $15,000.
You must have the right financial system to report the right financial data to make informed and effective decisions about strategy. If you are selling multiple products or services without clear financial information, you might as well be driving blindfolded down the highway at 100 mph.
The moral of my story is that old systems are not serving your company or your employees well. You must invest in upgrades appropriate to the stage and size of your company, or you are putting your business at risk.
Do the right thing, leave what is not working behind. Leave behind the old system, just like the owner of these shoes left them behind – because they were not working.
Barker Associates helps our clients evaluate their current
financial systems to determine if it’s time to upgrade or replace, and we are
happy to help you, too.
the word audit make your pulse race and put your antiperspirant to the test? Is
your monthly financial review fraught with the same level of fear that a trip
through the Halloween Hall of Terror brings? If you are a growing company and
are required to go through your first audit, it can be scary. The fear of the
unknown, worried what may jump out at you as you dig deep to tie out a balance
can create real panic.
than sweating bullets and launching into panic mode, think of an audit as your
annual wellness check-up and not an attempt to incite fright. If you eat right,
exercise and take care of yourself your check-up typically is not cause for
concern; but if you’ve consumed one too many lattes or value meals and ignored
what you should be doing, the scale and your doc will remind you to pull it
together and get back on track for a clean bill of health.
audit is very similar, but instead of your doctor, it’s your CPA telling you to
get your business organized and your financial health on track for a clean
opinion on your audit. An audit is beneficial in many ways, but essentially an
audit provides peace of mind that your financial statements paint an accurate
picture according to Generally Accepted Accounting Principles. This assurance
is vital if you are growing and need funding or if the funding you currently
receive has compliance requirements.
An audit is important, but it doesn’t have to be as scary as looking into a funhouse mirror. Follow this 5-step process, before your audit begins, it’s like having the answers to the test and will provide you with the clarity needed to minimize anxiety and help you master the mystery behind the first-year audit.
with your CPA.
CPA is hired to help you and is not out to get you. Have them set the stage for
what you should expect during the audit. Ask them what documents you will need
to provide and what tasks you should complete before the audit begins. Talk
about the timeline, when will it start, how long will it take? Who will be the
primary contact to ask questions and submit documentation? A little fact
gathering on the front end will go a long way to help the audit process move
out a project plan
the information provided during your initial meeting with the audit firm and
identify the tasks that need to you will need to complete. Assign the
appropriate person to the task and determine a deliverable date. Work with your
team to ensure that tasks are appropriately assigned and document any
dependencies and concerns that may interfere with the deliverable date.
Communicate with your team and launch the project
kick-off is essential. A proper kick-off demonstrates leadership supports and
identifies the objectives to accomplish as well as risks, assumptions,
dependencies, and timeline. Many of the teammates that are responsible for
supporting the audit are completely busy doing their “day job” and
don’t have a ton of extra time. Communication upfront with clear requirements,
expectations, and deadlines will help them to plan appropriately to coordinate
the additional work into their schedule so they can work much more effectively.
Clarity is the antidote to anxiety. Effective leaders are clear.
the most frustrating aspects of an audit is related to cost increases. Additional
costs arise because the audit team has to do extra work to clean up your mess. Many
times, clients can avoid costly increases to their audit bill by ensuring they
have all their documents in order. For instance, are your accounts reconciled?
Do you have supporting documentation for revenue and payments? What about lease
schedules, do the payments tie out and do you have addendums and invoices to
support lease and CAM payments? Does your trial balance tie out, and is your
general ledger mapped appropriately to your financial statements, including the
statement of cash flow? Get organized, make sure your accounts tick and tie and
have the appropriate documentation on hand.
Review your progress
regular touchpoints to communicate progress. Think agile. In the IT world
during implementation, the team meets for 15 mins each day to give a quick
overview of the task they need to complete, progress, and concerns. Short,
frequent meetings allow the team to stay in synch, mitigate risks, and provide
support along the way. If you know how everyone is progressing, there are fewer
surprises, and likely you can head off any significant delays or concerns.
the time to follow the steps. As a former auditor, I’ve come to learn that
prepared clients are collaborative, not combative. Their team is happier, well
informed, productive, and the result is peace of mind and financial clarity. A
little communication, structure, and organization go a long way to help you and
your team manage the process and stay on task, bringing you one step closer to
a clean bill of health for your business.
Do you need help solving audit mysteries or getting organized? Barker and Associates can help you overcome audit anxiety and set you and your business up for success. We’ve created a Year-End Checklist for Audit Preparation that will help you streamline the process. Click the button below to enter your email and we will send the checklist to you right away via email.
There’s nothing that brings on a bit of panic that the end of the year is coming like seeing Christmas decorations prominently displayed at retailers before you’ve even heard the knock of trick or treaters at your door.
For me, as the year-end
approaches, I tend to count down shopping days and furiously plan out how I’m
going to get it all done. It’s an approach that many of us take as we navigate
holiday parties, shopping, travel, and the million other things that are
synonymous with the end of the year. Whether you’re a holiday enthusiast or
just a busy parent who is driven to make this the best holiday ever, It’s easy
to get super focused on the end of the year hoopla for your family to ensure
you get it all done, but what about your professional life?
For the business world the last
quarter of the year is full of opportunities though I’ve heard countless
excuses for the end of the year slack ranging from PTO, lack of focus or just
plain ole procrastination but this is the best time of year to outpace your
competition and get a jump start on the next year.
“If you fail to plan you plan to fail” – Benjamin Franklin
While everyone else is planning their
vacation, surfing online stores for that coveted gift, and running around to
countless holiday parties, what are you going to be doing?
Now is the time of year for a full-on
sprint to the finish, but to cross the finish line a winner, you need to take
some time to evaluate.
What did you set out to accomplish
Did you accomplish all your tasks,
achieve your goals?
The last 60 days is an excellent
opportunity for a big push to check off those last few boxes on the company
to-do list. If you haven’t set specific goals, think in terms of categories and
get your team together for a review. The more involvement in the evaluation
process, the more likely you will get the support and momentum you need to push
Financially – Did you
meet your profitability goals, move inventory, or land the big customer you had
your sights on? If not, design some strategies and draft an action plan for the
next 60 days. Is there a campaign you could run, a promo, or maybe a customer
Projects – Review
your project list. How many did you complete? Did your accomplishments align
with your goals? Assess current status on open projects and determine what you
can accomplish now.
Teammates – Look around,
is your team tired, haggard, and barely hanging on? What have you done this
year to take care of your team and show your appreciation? People can only push
so hard for so long, so if your team has been knocking it out of the park, look
for ways to acknowledge and reward. If you don’t know what to do or want to
find creative low or no-cost strategies, enlist teammates across all levels. I
think you will be surprised at how a little goes a long way towards building a
loyal following in the workplace.
Customers – What’s
your retention rate? How about an acquisition? Have you on-boarded the
customers you desired, and are they generating profitability as you
anticipated? Customers are essential in our business, and like teammates, they
need to be appreciated. A simple thank you note, a holiday gift, a discount…all
simple ideas that make a difference.
Conversely, you may have customers who
cost more to serve than they add to revenue. Now is a great time to review
those customers and ask why. It may sound crazy to think about firing a
customer, but if they are hurting profitability, morale, and taking too many
resources, now is the perfect time to devise a phase-out approach.
Environment – Take a look
at your surroundings. Have you spent the year head down so focused you no
longer see the stack of files or the supply closet in desperate need of a
KonMarie makeover? What about empty desks? Did you have layoffs this year, and
now a sea of cubes with an errant stapler is your only reminder of what once
was. Clean it up. No one needs to see that; it’s depressing. Reorganize your
space, check lighting, bring in some plants and ask yourself, is this a place
people want to spend most of their waking hours? If not, make a change. Enlist
your team. Nothing drives enthusiasm like a DIY project. Set some guidelines
and go for it, then plan a celebration to cap off the year.
Once you’ve evaluated your year and
have an accurate assessment of the current state, envision your future…dream
big with your team. Throw out a few SWAG ideas, brainstorm, put all options on
the table to discuss, and leverage to take massive action to reach your goals.
Collectively ask “if we were to look back in 60 days, describe the perfect
close to the year?” If you know what ideal looks like, then you have
something to work towards.
Lastly, map it out. Studies show that
we are more likely to be successful if we know what our goals are and then
create SMART strategies to turn those goals into reality. Write them out,
prominently display them and continually work with your team to get to the
finish line and celebrate you’re winning year.
“If you don’t know where you are going, any road will get you there.” – Lewis Carroll
Do you need help creating your winning
strategy, finding focus, or creating an action plan for success? Barker Associates is here
to help you kick it into gear for the end of the year sprint and plan out your
roadmap for future success.
In recent emails, I’ve updated you on regulations going into effect this year as well as consequences we realize from previous legislation (namely, SOX). The legislation was enacted because of the erosion of accountability in this country. How do you hold your company accountable while also raising the bar for maturity of processes? Here are my recommendations, based on my experiences in private equity firms, for-profits and nonprofit organizations. It means going back to the basics that technology may have allowed inexperienced staff to circumvent.
Assess Your Procedures for Payments and Bank Reconciliations
Paper checks – Get rid of them; but if you must have them, make sure to use Positive Pay through the bank. Positive Pay uses information from a file that you provide to the bank each time you process checks. As checks are cashed or deposited, your bank compares the checks they receive against the checks you wrote to ensure they match and are not duplicated.
ePayments. If you can eliminate paper checks, consider using an ePayment service. Such services provide a comprehensive payment process with built-in controls. The due diligence process to determine which service will work for you can be overwhelming, but you can request a free ePayment vendor selection checklist I put together with the information you will need about your company and the questions to ask potential vendors during the evaluation phase.
I applaud companies who had the foresight to move to the ePayment process. Make certain the IT department has proper documentation on how the process works. With low unemployment and the resulting turnover, you do not want to find yourself with no one who knows how to push the buttons and fix this if something goes wrong with the process.
The checkbook is a thing of the past, and many young accounting professionals would not know what one looks like. I have asked many accountants, as they are processing a stack of checks, how do you know you have enough money in the bank account to cover those checks? Most of the time they put a very proud smile on their face and report, “I checked the online bank account balance this morning and there is plenty of money to cover the checks.”
After I hear this, I work to control my facial expression. I should become a poker player so I can practice the poker face I need when I hear this response.
So, I ask, “What about the outstanding checks that have not cleared the bank account? What about the auto draw of ongoing expenses like rent and other items? How do you account for that? Do you maintain a checkbook?”
The responses or reactions run the gamut from blank stares, to statements such as, “I keep a running total in my head,” “The checks we issue get cashed quickly.” These answers only serve to challenge my poker face so that I can keep good customer relations. Rarely does the person I am asking show me the checkbook kept in the general ledger system and a proper cash reconciliation they prepared for the previous month. I find this lack of process in organizations of all sizes.
Bank reconciliations. In general, if the organization has escaped the Sarbanes Oxley controls, which, as I stated before, more and more are doing to escape the enormous and overreaching regulation, there is no timely bank reconciliation.
Make sure that, at a minimum, these controls are in place:
Blank checks are locked in a secure place and only check processors and checks signers have access to them.
Ensure there is a review of the bank reconciliation and the bank statement two times a year by a C-Level executive, Finance Committee or Board member or investor. Request a free step-by-step bank reconciliation checklist on how to do this here.
This is a true story. I received a check for payment from a large, publicly-traded company. I was shocked when I received the same check number for the same amount twice in the mail. I called the insurance company to report it, but they never called me back. I received a letter about the duplicate check weeks after I had received the second check and made the phone call. The letter I received was very factual and did not offer an apology or do anything to try to mitigate the branding impact. This was a shocking revelation to me that the lack of controls over payments was everywhere.
Get Corporate Credit Card Usage Under Control
Credit Cards – If the US government ever creates a Corporate Credit Card office, I am going to run for the position and work myself out of a job. Corporate credit cards are a nightmare to manage in all companies, from small to large.
Large, publicly traded companies hide behind the fact that they are audited to ignore credit card controls. Yes, you are audited, but the corporate credit card balance is small and immaterial, which means it does not meet the audit criteria for detail testing. Remember, the outside auditors are focused on what the SEC is going to ask them about – the corporate credit card is not on the list. Many small, fraudulent credit card transactions can add up and instill a culture of weak financial responsibility in an organization.
In small organizations, the office manager, bookkeeper, (remember the one who figured out how to print a check out of QuickBooks?), or even the receptionist has a company credit card. This usually happens when a C-level person realizes they may have to pick up the toilet paper at Sam’s Club with their credit card and they do not want to. It’s OK to delegate that responsibility as long as controls are in place to prevent fraud and misuse.
In my work with all sizes of organizations, I have found that often they do not have a credit card policy. Get a policy, even if it is short and sweet, and have each employee sign it who is holding a company card. Email me for a free credit card policy template to get you started.
Fraud on corporate credit cards is running rampant. Often the employee is incurring small, unauthorized charges that add up to a significant number. The Accountant, Purchasing Manager or whoever oversees the corporate credit card may be faced with ethical dilemmas every day when executives in higher positions are the guilty parties. Such situations make it difficult to manage and monitor effectively without a signed policy as backup.
Small organizations and nonprofits tend to have no automation of the credit card process, relying instead on cardholders to provide receipts for accounting purposes. When cardholders are late in providing the receipts, accountants set up a holding account in the General Ledger, (which is often QuickBooks), where they charge the payment of the credit card to avoid paying late. With no accountability for the balance sheet reconciliation, the account just grows. If the accountant responsible for collecting the receipts takes their job seriously, they will walk around the building asking for the receipts and, as an added bonus, hit the goal of 10,000 steps on their Fitbit – the search for the receipts will take care of that!
Tighten up controls on the use of corporate credit cards with these process improvements:
If you work for a public company and have authority over credit cards, set up a process where the Audit Committee of the Board has someone designated to review a monthly or quarterly report of corporate credit card usage. Internal Audit should be reviewing executive expense reports and corporate credit card statements annually. I suggest they pick randomly from the group for about 10% coverage each year and always review the CEO and CFO.
Nonprofit Board – make sure there is a policy that each cardholder signs. Review how the process works and suggest implementing automation of credit card receipts. Expensify, or a similar technology tool, can serve that purpose.
Private company – Set up automation of collecting credit card receipts and a review process like the one described for nonprofits.
Readers of this email who work for well-organized companies with mature practices in place may be thinking, “Surely there are not companies operating without these fundamental business practices in place.” My response is that if that was the case, I would not be writing on this topic or asked repeatedly to present these concepts to audiences!
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As new entrepreneurs become caught up in day-to-day survival it’s easy to overlook these four practices that support the long-term strategic growth of the new business:
Business plan with 5-year forecast
Planning for leadership evolution
Impact of decisions on cash flow
Let’s start with budgeting. The key to survival is measuring and monitoring the results. It is essential to complete an annual budget, break it down in monthly components and monitor each month. The budget should include an income statement, balance sheet and cash flow. Most companies have an income statement; however, I have seen fewer balance sheets and cash flow projections. This can really get you in trouble as you will not have any line of sight to your working capital needs. Working capital is the cash you need to run the business.
Grow in leaps and bounds when you incorporate these 4 strategies.
For example, if you sell goods, chances are you will need to spend money on inventory prior to selling the item and recognizing revenue. If you have projected your sales to increase by 25%, you may have painted a lovely picture of growth with your projected income statement that is not reality if you do not have the cash to purchase the inventory to sell because you have not projected the use of cash to purchase the inventory, which is what the balance sheet and cash flow projection are for. This can really get you into trouble, especially if you have inventory on your balance sheet, but not enough cash coming in from sales to pay for it.
In addition to a budget, your company should have a business plan and a five-year forecast. The business plan should articulate the plan for your company’s growth and address anticipated changes in the economy and future trends. It is difficult to predict all of these things, but if you develop a robust business plan, you are thinking through the different scenarios and how these scenarios will impact your business.
Think through leadership, including yourself, as your company grows. Clayton Christiansen* of Harvard Business School, says managers who are talented and skilled in the area of productivity and squeezing out the last bit of value from a company’s assets, are usually not the same people who are great at innovation and major change. Often a successful manager replaces the person who is responsible for helping the company become successful when the company becomes mature enough to establish systems and balance checks.
It is imperative to think through how decisions you make can impact cash flow – and here is why. I worked with an organization a few years ago that historically had double-digit growth each year and was very profitable. The initial product the business launched was a great success because it was much better than anything on the market. The company was getting ready to launch a second product. At my first management meeting they discussed how the product was on its way to the warehouse, noting they had offered extended payment terms to customers on their entire order if they added the new product to their order. No one had projected the impact this decision would have to their balance sheet and cash flow, so they were unaware that the plan they had in place was going to essentially stop incoming cash – and they had just signed up for a huge payable to the vendor. We had to react quickly and manage cash to meet payroll and other obligations. Such a decision caused a 5-6 month stressful time, requiring we run cash flow projections daily during that time to ensure obligations would be covered.
* Clayton Christiansen is regarded as one of the world’s top experts on innovation and growth. He is the Kim B. Clark Professor of Business Administration at the Harvard Business School, where he teaches one of the most popular elective classes for second year students, Building and Sustaining a Successful Enterprise. – See more at: http://www.claytonchristensen.com/biography/#sthash.jS5zzfLx.dpuf