Category Archives: financial reporting

The Balancing Act of Account Reconciliation and Online Banking

The Balancing Act of Account Reconciliation and Online Banking
Convenience Doesn’t Make Up for Inaccuracy

Mindy Barker | Barker Associates

We are continuing our financial literacy discussion with something we all know about … or do we? We’re talking about online banking and its effect on our reconciliation habits (or lack thereof). In our daily routines, with our phones and computers easily assisting us with deposits, automated payments, and Zelle transfers, do we ever think about good old bank account statements and the ever-important task of regular bank account reconciliations? My guess for many is no. 

Most of us happily “live” online. Our online lives provide convenience and speed like we’ve never known before. Simply, they provide what we all crave – instant gratification. As a society, we have become accustomed to having all of the information we need with the click of our mouse or a swipe on our smartphone. Dare I say, we tend to get a little lazy, not to mention, annoyed, when we don’t have instantaneous satisfaction. Everything from groceries to dinner delivery to setting appointments to virtual doctor’s appointments to online banking just helps make our lives easier. And we’re all for it. 

With regard to online banking, being able to find out your balance, arrange for a payment, and make a deposit all from the palm of our hand is wonderful … in certain situations. However, in many instances, people are becoming far too reliant on this online information and forgetting about some of the basics, such as bank account reconciliation.  

In the Days Before Online Banking 

Once upon a time, long before online banking became a regular part of our lives, the standard practice for both personal and business checking accounts was to reconcile a check register to a monthly bank statement. You remember those days (or you should) – when you received your bank statement in the mail (yes, the actual mailbox, not email) and then you’d open your checkbook and go through line-by-line check-marking away to make sure each transaction was accounted for? Well, there was a reason for that. You need to know which transactions have cleared and which haven’t, so you can accurately determine how much is in your account (which, in reality, is not always what the number on the statement says). 

Yet, when accounting professionals adopted online banking into their processes, organizations tended to forgo the discipline of maintaining a check register as part of their reconciliation processes. In the interest of increasing efficiencies, and feeling as if the ends no longer justified the means, reconciliation became an “obsolete” practice. But should it have? Absolutely not. 

A Common Conversation 

The following is a typical conversation I’ve had when consulting with clients on accounting process improvements: 

Accounting professional (with a bundle of unsigned checks): “This is our process for obtaining check signatures.” 

Me: “How do you know you have enough money in the account to cover these checks? What is your procedure?”  

Accounting professional: “I checked the balance online this morning.” 

Me: “Where is the reconciliation to the check register? How do you know that all of the uncashed checks will not deplete the entire balance?” 

Accounting professional: “I know there are not that many outstanding checks.” 

Me: “When is the last time you reconciled the account?” 

Accounting professional: Answers range from “a year ago” to “I do not remember” (not good) to “yesterday” or “a month ago” (which is good). 

Finding the Right Balance 

I am not saying there aren’t times when viewing online balances without going through the reconciliation process is appropriate, but it’s not the final reconciliation resource. It’s okay to use online banking as an effective tool to manage your daily cash flow, but it requires the extra effort of being connected to a cash reconciliation process that is properly maintained and reviewed periodically. Without accurate and consistent reconciliations, your organization is at risk of fraud, unauthorized withdrawals, or bank errors. If left unchecked, these issues can quickly lead to cash flow issues that will hurt business operations and stifle growth. 

Let’s avoid those situations with an experiment: If you are a CEO, President of a company, or a Finance Chair of a non-profit, ask the accounting department for the latest bank/cash reconciliation of the operating account. Ask specifically for these documents: 

  • The bank reconciliation 
  • A copy of the bank document to which it was reconciled 
  • The Balance Sheet balance to which it was reconciled 

(Note: Publicly traded companies, financial institutions, insurance companies and other regulated industries have to maintain reconciliation procedures, so if you are in charge of one of those, regulation will take care of this.) 

If you are bold enough to move forward with this call to action, my experience tells me about 50% of you will get a reconciliation completed in the last 45 days. If you get one and do not know how to review it, schedule time with me for a free, no-obligation checklist that will guide you through a high-level review.  

If you do not get a reconciliation, and, in fact, get a blank stare from your accounting person, contact me to complete a review of your cash procedures and processes. You may have plenty of cash flow today, but how do you really know without a current reconciliation? Don’t risk finding yourself in a position where you cannot meet your basic financial obligations. “Cash is king” is a cliché’ for a reason – it’s true!

Grow Your Financial Knowledge, Grow Your Business

This week, we continue our month-long discussion on financial literacy, including best practices to increase your financial knowledge. While there are numerous reasons business owners do not have an adequate level of financial knowledge (some people are just not good with numbers, guidance from GAAP has gotten so complicated it makes it even more difficult to understand, and business owners are just “too busy” to get into it), this knowledge is crucial to having effective conversations about your business.  

Mindy Barker | Barker Associates

Can You Stand Your Financial Ground? 

If the right investor came along tomorrow, how confident are you that you are prepared with accurate historical and projected financials? Can you demonstrate thorough knowledge of your company’s financials, cash flow, burn rate, and return on investment?  Are you prepared to get drilled on each number you provide and have the ability to accurately explain where it came from? If you are not prepared, it will feel like the longest half hour of your life.  

So, how confident are you? 

If your answer is, “Not confident,” or “Somewhat confident,” it is time to make an investment in yourself. Here are a few tips to increase your financial knowledge: 

  • Prioritize your financial education. We know how busy you are, but think of it as the investment it truly is. 
  • Develop a financial advisory team. Ask these trusted individuals questions and encourage them to do the same.  
  • Make the cash flow statement your new best friend. This is the lifeblood of business and you should understand everything on it at all times. 
  • Take some basic accounting courses. It’s never been easier to take a class online. 
  • Connect with a CFO firm. Not everyone has all of the required resources at their fingertips. Allow the right CFO firm to become that resource as a trusted partner. 
  • Get a better understanding of key financial terms. We’re including some right here to help get you started. 

Terms to Help You Stand Stronger 

When an investor begins to ask about gross profit, net profit, or EBITDA, often the business owner’s face says it all – like when you’ve caught a teenager in a lie. Knowing these financial terms helps you not only have a more constructive conversation with potential bankers and investors, but also to truly have a better understanding of your business. Some of the basics (there are many more) include:  

Aged Accounts ReceivableThis is a report that categorizes a company’s accounts receivable according to how long invoices have been outstanding. This report is used as a benchmark in measuring the financial health (or lack thereof) of a company’s customers. 

Burn Rate. Burn Rate refers to how much money it takes to operate your business for a period of time (generally, a month). Knowing your burn rate helps to ensure that you have enough available cash to adequately run your business. Experts advise being able to cover your burn rate for at least six months. 

Cost of Goods Sold (COGS)This refers to the total cost of all labor and materials required to provide the products or services that your customers ultimately purchase. 

Debt-Service Coverage Ratio (DSCR)A ratio calculated by dividing your business’s net operating income by your debt payments. This compares cash flow to debt obligations. With the information, you can determine if you can cover debts due within one year.  

EBITDA. Earnings before interest, taxes, depreciation, and amortization. To calculate EBITA, take the gross margin and subtract total operating expenses, plus depreciation and amortization. Keep in mind the difference between EBITDA and EBIT. EBITDA subtracts all expenses, whereas EBIT subtracts everything except depreciation and amortization. 

Gross Profit Percentage or Gross MarginThis refers to the percentage of total revenue that remains after subtracting the direct costs of producing the product or service.  For example, if your company’s revenue is $400,000 in one year and your gross margin is 25%, then your gross profit is $100,000.  

Profit Margin. Profit margin is the percentage of your total revenue that you retain as profit. This metric is most often analyzed on a per unit basis. To calculate profit margin, subtract overhead expenses (along with direct costs) from your sales and then divide it by your total revenue. While it may take some time for a business to start generating profit, it is ultimately what makes it valuable … and a priority for investors. It is imperative that you are confident that your revenue you are charging for the product will cover the overall cost of the organization.  When you are in growth mode, this may not be the case – which is why the Cash Burn rate (referred to earlier) is so important. 

Working Capital. Working capital is cash plus other current assets, less current liabilities.  

Whether it’s understanding these terms (and the many others), using the tips to increase your financial knowledge, or tightening up financial reporting, successful leaders ensure these characteristics are not contained within the walls of their accounting departments, but instead, are a part of their entire company culture. With financial clarity, you can maintain stability to carry out the company’s mission. 

Simply, when you understand the financial terms and their effects on your business, it not only helps your bottom line, but also helps you have a more constructive (and potentially profitable) conversation with potential bankers and investors. 

Let Mindy Barker & Associates show you how to raise your knowledge and be prepared for that next big conversation. We can help you improve your financial brilliance and empower you with the tools and financial information you need to improve your company value, cash flow, and profitability. Schedule a 30-minute free consultation here to learn how. 

Non-Profit Mergers: It’s Time to Close. Now What?

Non-Profit Mergers: It’s Time to Close. Now What? 
Beyond Planning & Due Diligence 

Mindy Barker | Barker Associates

Last month, we talked about the initial considerations of a non-profit merger, as well as the critical due diligence phase. After finding unity of purpose, reflecting on the relevant issues and deciding that a merger aligns with your goals and mission, you engaged in an extensive due diligence process, examining all legal, financial, logistical, and human resource documents and processes. At the conclusion of due diligence, the board of directors of each organization developed and approved a Plan of Merger consistent with applicable state laws. At long last, after months of preparation, meetings, discovery, approvals, and planning, the time arrives for merger implementation. Essentially, it is finally time to close the deal. However, this is only the beginning of the end

As with the previous phases, planning and organization are crucial for a successful implementation. While it would be nice if we could sign on the dotted line and all issues magically resolve, we know that is not the case (it never is!). This process, like the others, will take time, patience, and an in-depth understanding of the logistical steps that must be achieved to effectuate the merging of two different organizations. The following checklist can be used as a guide through the final steps of the merger. 

1. Appoint a Merger Transition Team. This group of three to six individuals will spearhead each logistical step of the merger. They will assign tasks, set timelines, and keep the merger moving forward at a reasonable pace for the new nonprofit. 

2. File Appropriate Documents with the State. Each state has its own requirements for filing with regard to non-profit mergers. All documents should be filed with the state of organization/incorporation, following those particular guidelines and requirements. Note that although the merger is legally completed once the state accepts the documents as filed, many more steps must be taken for actual completion.  

3. Develop Integration Plan. Due diligence should have previously identified duplicative positions, departments, and resources. This plan will identify what is being removed and what is surviving in the new organization. The plan should also identify any issues in the short-term due to the merger and provide for analysis at one month, three months, six months, and twelve months.  

4. New Board of Directors Established. The new board generally consists of previous board members from each of the non-profits prior to merger, but can be entirely new. They should establish their new meeting schedule and implement new by-laws as soon as possible. 

5. Schedule Employee and Volunteer Training. How will the new departments, responsibilities, and tasks differ from the previous ones? What do employees and volunteers need to know about the mission, vision, and day-to-day operations to effectively perform their duties? 

6. Determine Human Resource Needs. Establish a new payroll system, health benefits, vacation and sick pay, and hiring and termination protocols. 

7. Finalize any Facilities Management Issues, Vendor Contracts, and Insurance Coverage. What contracts need to be rewritten in the new organization’s name? How will insurance coverage transfer without lapsing? 

8. Develop Communication Plan. This plan should involve internal and external communications and ensure consistent messaging throughout. This may include the launching of new branding, the name and logo, and a marketing campaign. The new website and social media accounts must also be established and maintained. 

9. Finalize Financial Transactions. Transfer assets, close and open accounts, as needed, and integrate accounting systems. 

10. Implement Technology Solutions. How will technology, phone systems, and databases be integrated? What is still required? What can be eliminated? 

While the entire process can take between twelve and eighteen months, depending on the size of the organization, this Closing Checklist enables the Merger Transition Team to keep the merger on track, heading toward a successful completion.  

Need more assistance? Barker Associates has extensive experience working with non-profit organizations as they implement and finalize mergers. If you are considering this strategy, use this link to my calendar to choose the best time for a free 30-minute consultation. 

You Have Unity of Purpose, but What about Unity of Numbers?

You Have Unity of Purpose, but What about Unity of Numbers? 
The Importance of Financial Due Diligence in Non-Profit Mergers 

Mindy Barker | Barker Associates

Last week, we talked about the initial considerations of a non-profit merger. Once you’ve reflected on the relevant issues and made the decision that a merger aligns with your goals, donors, board members, and mission, it is time for the next phase of the process – engaging in due diligence.  

In the scenario of a non-profit merger, due diligence has three primary functions: 

1. Minimizing the risks associated with joining two separate organizations to further a common mission; 

2. Providing clear insights into each organization’s interests; and 

3. Improving the timeframe of the merger by reviewing the relevant documentation and processes, and identifying any challenges sooner rather than later.  

Due diligence is conducted by thoroughly inspecting all aspects of the organization with which you plan to merge your own non-profit. The entire due diligence process consists of numerous categorical reviews, including legal, contractual, employment, operational, financial, tax, real property, physical property, intellectual property, and human resources, among others. However, for our purposes, we will focus only on financial due diligence. 

Financial due diligence provides an opportunity to analyze potential savings with regard to the overhead of the combined organizations.  With this full and complete knowledge, the approving Board Members will have the ability to examine the overall benefits of the merger. 

The Financial Audit Checklist 

Before you can merge with another non-profit, you must possess a clear understanding not only of its current financial status, but also of its financial history. You must have the ability to answer questions such as: What resources will be available moving forward? And what obligations will remain? 

Financial due diligence will include a review of the following: 

  • Audited Financial Statements for at least three years 
  • Annual Budgets, Projections, and Strategic Plans for at least three years 
  • Debt and any Contingent Liabilities 
  • Grant level financial results 
  • Accounts Receivable 
  • Accounts Payable 
  • Fixed and Variable Expenses for at least three years 
  • Depreciation/Amortization Schedules and Methods for at least three years 
  • Outstanding Liens 
  • Accounting Methods and Strategies 
  • Any Investment Policies 
  • Account Standings 
  • Employee listing with position and annual salary 
  • Organization Chart 
  • Detail list of larger donors 

While non-disclosure agreements must be executed prior to any due diligence occurring, many organizations have valid confidentiality concerns as they relate to financial reviews of internal documents. As one possible solution, some organizations choose to move forward in a phased approach. In doing so, they leave the disclosure of the most sensitive data and documents to the end of the process.  

While each situation will be different, and financial due diligence may vary slightly, it is essential to build a foundation for success. Not only are you protecting the non-profit itself, but also the individual board members and donors involved. Each non-profit should conduct its own independent due diligence, as well as joint due diligence to maximize information and minimize risks. By taking both a historical approach and a forward-looking approach, you will gain an incredible amount of knowledge. And with more knowledge, comes the empowerment to make the best decision for your non-profit. 

Barker Associates has extensive experience working with non-profit organizations as they prepare for, and go through, a merger. If you are considering this strategy, use this link to my calendar to choose the best time for a free 30-minute consultation.

Could Due Diligence Impair Your Exit Strategy?

Mindy Barker | Barker Associates

I have noted that, even during these days of the COVID pandemic, there is still a lot of money in the PE and VC world that investors must spend for firms to survive. 

PE and VC firms invest in companies with a plan to exit the investment in three to five years. The exit can take the form of another investment round at a higher valuation, an IPO, or the sale of the business altogether. Another dynamic is becoming increasingly apparent: PE-backed companies are having an increasingly difficult time implementing an exit and/or raising the next round of capital. 

Why the difficulty, when there is an incredible amount of money for investors to invest? 

The primary factor leading to next round challenges is the enhanced due diligence investors are performing now compared to pre-pandemic. The long run of economic gains nourished a confident exuberance in investors where the investor had to believe in a company’s financial projects similar to how Dorothy had to believe in Oz without much evidence. The supply of capital outweighed the supply of companies to the point that investors were willing to lower the bar for the due diligence completed on sales and financial projections, data rooms, and balance sheet liabilities.  

The current atmosphere based on a stricter due diligence process represents a correction that goes back to the core fundamentals of investing. When the pandemic dust settles a bit, the correction will result in a more sustainable environment for the PE and VC firms. In the meantime, portfolio companies must place more focus on the following areas to support due diligence efforts: 

Data rooms. Companies that cannot produce supporting documentation for their financial and sales assertions are destined to fail due diligence. Deals fall apart when a company cannot produce contracts, proving professed commitments or demonstrating compliance with the contract terms. Be prepared for due diligence efforts by appointing a trusted, organized document manager to oversee your data room. Read more about data rooms here. 

Projections. Think like the investorplay a great game of Sesame Street and make sure that one of these things (your financial projections) looks like the other (your historical trends). Practice the dialogue spoken regarding your company’s future to ensure it rings true to what you can support based on data and research. 

Historical financials. Your financial data must be accurate and easy to follow by potential investors.When you produce complicated financials that require confusing explanations or take too long to organize, you put the deal at risk. Just like a burglar will move on from a house with a security system, investors are glad to move on to the next deal that requires less effort to close. 

If you are a founder or a C-suite executive of a fast-paced, growing entrepreneurial company, are you prepared for the next round of funding or other exit strategy? Let’s talk about how to begin organizing your data room, simplify your financials, and produce realistic, evidence-based projections that investors will find credible. I would love to speak with you about the challenges you face in preparing your exit strategy. I invite you to set up a 30-minute free consultation with me by clicking on this link to my calendar – let’s talk! 

Dogs Will Lie, but the Numbers Will Not

Mindy Barker | Barker Associates

Are you wrapped around your pet’s little paw? We are, despite the fact that we recently learned they will lie to us.

Last night, I fed our Maltese and Bichon Frise their dinners and went about my evening activities. Later, my husband, Glenn, came into the kitchen and the little guys acted as if they had missed their dinner. Given the circumstances, he, of course, fed them again.

While our dogs may lie about whether they’ve eaten yet, some things never lie, such as the real data you need to run your business each day. And whether or not you intend to, it’s the same data you need to pitch to investors when seeking funding.

With the right infrastructure in place, you have answers at your fingertips, such as:

What is the seasonal fluctuation of my business so that I can prepare for the ups and downs?

What is the demographic profile of my customers so that I know where, when, and how to reach them?

What is the average cost, price, and profit of a sale? Am I losing money on my best sellers?

These questions and many more can be answered by having the right infrastructure in place and capturing the data as you conduct daily business.

What does the “right infrastructure” look like? The answer is different for each organization based on its size and complexity. At a minimum, an organization should have a list of existing and potential customers and a system to maintain communications with them. The optimal tool is an integrated Customer Relationship Management (CRM) system. An organization also needs to manage money and financial information to project cash flow for the next 12 weeks, have the correct information for tax compliance, and make the appropriate strategic decisions. This may mean you need a separate billing system and/or General Ledger. You also need to properly set up your General Ledger with the right coding segments to be able to report on profit and loss by product, location, customer, and department, among others.

If you feel that you are blindly making decisions about hiring, marketing, warehouse space, or any other issue, remember the numbers don’t lie. Let’s talk one-on-one in a free consultation to get you in the right direction. Check out these times on my calendar and choose the one that is best for you.

Don’t Just Hope For the Best – What Does the Data Tell You?

Mindy Barker | Barker Associates

Don’t Just Hope For the Best – What Does the Data Tell You?

For months, the headlines have screamed that millions of small businesses will file bankruptcy due to impacts of the COVID 19 pandemic. Perhaps you have had the thought in the back of your mind, calculating how many weeks you can remain in business before considering closing your business and possibly even filing for bankruptcy. 

Don’t just wonder – take steps to gain a confident understanding of your business’s financial position. 

Communicating with your banker and investors effectively is essential during these times of economic upheaval and doubt. To do so, you must have the right financial data to inform yourself, and then to inform your financial support team if you will struggle to make payroll in a month or two. What you need is a 12 week cash flow projection.  

Instead, you are hunkered down, uncertain of your cash position, keeping silent and hoping for the best. 

This is not a great strategy. The most important thing you have as a professional is the trust you gain over time as other professionals recognize you do the right thing. I recently had a Senior Executive of Marketing where I was serving as an Interim CFO say that they appreciated my intention to always do the right thing and recognized how much it helped the team feel more comfortable. Prior to that comment, I would have never dreamed someone in marketing would notice. 

Bankruptcy is not the only option if financial projections indicate your business is in serious trouble; in fact, your business has to qualify to file Chapter 11. The Small Business Reorganization Act of 2019 has created other options for small businesses (set to expire in March 2021) to seek protection from debtors.  The key to moving to the next step is for you to communicate pro-actively with all parties and let them help you understand your position as well as the options available to you rather than using hope as a strategy. 

Empower yourself with knowledge and get the cash flow projection you need! Listen to a podcast where I was recently interviewed about cash flow here.

If you need help starting the conversation with your financial partners and stakeholders, I invite you to set up a 30-minute free consultation with me right now by clicking on this link to my calendar – let’s talk! 

To eat eggs or not – that is the question.

Mindy Barker | Barker Associates

Those of us who work to manage our cholesterol have received conflicting information about eating eggs. I grew up loving eggs, but then, as an adult, I was told not to eat them due to high cholesterol.

Then the nutrition experts decided you can eat egg whites. Now it is back to eat your eggs – yolk and all – the last time I spoke with a nutritionist. Confusing.

Deciding if you are going to outsource a function within an organization is about as confusing. The trends go back and forth on that issue too. Advances in technology and lower costs of offshore professionals have made the idea of outsourcing more attractive in some cases. 

I have some advice, gained over my years as CFO in various organizations, for you to consider while you evaluate the idea of outsourcing financial functions:

Don’t try to fix a broken process by outsourcing it. Do not outsource a recurring, detail-oriented process that is currently broken. Get the best consultant you can afford working to fix the process. Make certain the expert who fixes the process creates a training manual on how the process should run and trains an internal staff person on it. You may discover during this process it is easier for you to keep that process going with your own employees or you may decide you want to outsource the detail part of it to an outside, less costly resource. The bottom line is that if you do not understand your own process, you cannot know if a third party is accurately performing it on your behalf.

Get organized. Organize your data in a way that you can provide it to the outside party prior to engaging them. If you cannot make sense of your data, you can end up paying a third party a lot of money to do it for you.

One of the areas I’ve seen this as an issue is with State Sales Tax. Compliance in this area is about as difficult as hanging upside down from a tall tree branch while flossing your teeth. Companies get frustrated with the complicated process of filing state sales taxes, especially when multiple states, or states with complicated calculations and forms are involved. For example, are you capturing sales revenue based on the billing address or the shipping address? You must have accurate data before outsourcing it for someone else to handle.

My recommendation is to invest in upgrading your IT infrastructure. Regardless of whether you are outsourcing compliance with state sales tax or another process, you must be in a position to produce data in an organized manner that a third party can accept and act on.

When you do decide to outsource a portion of your business, make sure you keep the data and regularly backup the data the outsourced agency is using. Make sure you still know where your information is and how to get to it if the outsourced entity suddenly goes out of business. Perform routine oversight of the work being done by the third party. This is even more important today in this every changing business world.

Just-in Time Experts. Expertise that you need infrequently is a great area to consider outsourcing. Many third parties provide outsourced IT, legal, human resource, or financial expertise to augment internal resources and are less costly than hiring the expertise full time. You may only require specialized expertise for specific projects rather than an on-going need.

Outsourcing these functions is not without its drawbacks. For example, let’s say your obsolete, no-one-has-ever-heard-of information system gets hacked and you have no in-house expert who is familiar with your system. Hiring an expert to support obscure software can be costly and time intensive to get your problem solved.

Or perhaps legal expertise is something you only require occasionally. You decide to download a customer contract from the internet instead of hiring legal expertise to prepare your standard contract. If you get in a nonpayment dispute with one of your major customers and then bring in legal to help you, you may discover that the customer contract you downloaded for free from the internet will not allow you to properly recover the revenue you are due. Now the outside lawyer has to clean up the mess you made by not hiring them on the front end to prepare a sound contract.

My point is that it is essential the right expertise performs the company’s core functions in every business. The laws and regulation in these areas change rapidly and you need someone to help you stay compliant and out of trouble.

Barker Associates provides outsourced Chief Financial Officer services on a fractional or full-time basis in the event of a transition. Fractional services work best during times of fast paced growth, a new system implementation, a merger, or an acquisition. Even with a full time CFO on board, they have a day job and these types of changes require a unique focus and background. Our extensive and diverse background helps guide the organization through the change.

During a transition time, Barker Associates uses their expertise to assist the organization with designing a job description and interviewing candidates for the new position. Once your new CFO, Accountant or other financial professional is onboard, Barker Associates exits until you bring us back for the next big project.

If you are considering outsourcing a financial process within your organization and would like to discuss specific areas of concern, I would love to speak with you. Click here to schedule a 30-minute free consultation to discuss your unique situation.

The 1st Year Audit – Master the Mystery

Does 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.

Rather 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.

The 1st Year Audit – Master the Mystery
Mindy Barker | Barker Associates

An 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.

1. Communicate with your CPA.

Your 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 along seamlessly.

2. Map out a project plan

Take 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.

3. Communicate with your team and launch the project

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.

-Marcus Buckingham

4. Get Organized

One of 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.

5. Review your progress

Schedule 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.

Invest 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.

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On My Soapbox About Regulations

Unintended Consequences of Regulation

On My Soapbox About Regulations

Recent posts discussed new regulations and the unintended consequences that companies are, or will experience as a result. ASC 606, already in effect for public organizations, affects nonpublic companies for annual reporting periods beginning after December 2018. The South Dakota vs Wayfair ruling last year has impactful implications for businesses who qualify to pay sales tax. Together these regulations are like tsunamis that are overtaking public and private organizations.

These tsunamis can significantly impact your business large or small.  Organizations tend to frequently hold off on systems upgrades and acquisition integration noting they cannot afford it.  The combination of these regulatory tsunamis transitions the conversation and makes it imperative systems work seamlessly together.  The organization cannot afford for that not to happen.

Learn the unintended consequences of recent finance regulations.

These tsunamis share common implications to you – in order to complete the analysis of how each will impact your organization and to implement the proper accounting, you must have good clean customer data in a system with strong month-end controls; and you must have the actual executed customer contracts – all of them. In my experience with organizations of all sizes, these requirements are problematic because they just don’t happen. What I find is that customer data is scattered throughout multiple databases and spreadsheets, month end processes end up being shoot-from-the-hip events and customer contracts are in various states of execution due to lack of strong contract administration.

 

These issues are even worse for organizations that have decided we are going to work “smarter,” – a buzz word I hear associated with the elimination of the administrative assistant position. The Ivory Tower people who have just deposited a one million dollar sign-on bonus in their bank account for a C-level position at a public company are going to have a press release and investor call where they talk about how we are going to work smarter, etc.; then the staffing cuts happen. I see the administrative positions go fast.

 

The administrative assistant is often the traffic controller of the organization. Read my post, Who is your Betty about this critical role. Critical because, once that position is eliminated, contracts and corporate documents are all over the building, saved on laptops that may or may not be backed up somewhere and are reimaged when the person leaves. In the past year, every single time I have been involved with collecting customer contracts for due diligence or some type of project, the C-level person I am working with has had to call the professional on the other side of at least one contract and ask if they have a fully executed copy. This is a HUGE and embarrassing issue occurring in companies, regardless of industry and profit-status.

Accurate contracts and clean customer data are required for any hope of achieving compliance with ASC 606 Revenue Recognition and the interstate sales tax impacts from South Dakota vs Wayfair.

What you need to know about sales tax

Sales Tax – the Wayfair case is highly technical when you dig into the guts of it, and I wrote about some of those technicalities previously. Here are a few points to keep in mind as the impacts of this ruling become more concrete:

  1. The threshold for reporting Sales Tax is $100,000 OR 100 transactions. What about your college student making and selling hairbows cheerleaders around the country on Etsy to? They better not send 100 hairbows collectively to certain states unless they are prepared to collect and submit sales tax.
  2. State and governmental entities that are in charge of regulating this probably do not have a plan on how they are going to accomplish this. Are they going to stop every long haul truck coming into the state? Look in every mailbox? I am not sure how they are going to find you!
  3. Since the law is retroactive you may have a big liability out there that you do not know about. Why – because you cannot locate the contracts or analyze data because you have none that is clean. Instead, you may have to guess what states, how many transactions, how much it adds up to.

If your organization undergoes an audit or wants to pursue a capital raise or total sale – this can be a huge problem.

Respect your accountants and know they have a difficult job to maintain all of these controls. CPAs, in general, are not the best at standing up for themselves and making sure they have the right infrastructure. CEOs and Boards tend to hire in the Marketing and Sales areas and cut in the Accounting side. IT systems are not upgraded and maintained properly, which further complicates the job of maintaining clean data. Speak up – challenge the impact of short-sighted decisions.

 

Barker Associates helps small-to-large businesses, especially entrepreneurs, improve performance and increase financial stability. Contact Barker Associates at cfo@mindybarkerassociates.com.

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