When I have guests over for dinner, I empty trash cans, pull out the cloth napkins, and replace the everyday hand towel with a nice guest towel. The morning after the dinner party, I almost always say to myself that we should keep the house this tidy and organized all the time. A decluttered house feels really nice. Working at home during the pandemic has allowed me to have the time to keep the house up better and I have enjoyed it.
Think about getting your house in order and keeping it that way, similar to keeping your books and records audit ready. When business owners and their CFOs go through an audit that requires a lot of up-front preparation to get the information auditable, they generally discover facts about their business of which they were previously unaware. The ability to use financial data to think strategically and make sound decisions about the operations of the business is not a luxury to undervalue.
Auditors estimate their costs for performing your audit based on the books and records being clean and auditable. I have asked some auditors how much more first year audits cost than their original estimate due to the books and records being out of order. They report that the range is 20% to over 10 times the original estimate. This is not a pleasant outcome for anyone.
Here are seven tips on how to keep your books auditable and help reduce your audit costs.
Maintain a checking account balance in checkbook style that one person reconciles to the bank statement and then a second person reviews for accuracy.
Reconcile balance sheet account balances no less than once a quarter, if not every month. The two accounts that are generally audit gremlins are prepaid expense and accrued expenses. If you have not reconciled these accounts in the last year, I can almost guarantee you there will be unexplained numbers in them.
Keep a data room with all of your contracts and loans. With the digital age and the end of the metal filing cabinet, this seems to be something that is rarely maintained appropriately. Read more about the data room in my previous blog Who is Your Betty.
As soon as you decide to engage an auditor, your immediate next step should be to get the list of information they will want. Assign a person and a due date to each item on the list and distribute it to the responsible parties. Set deadlines for delivery of the documents and monitor progress until the tasks are completed (Excel schedule, Asana, or other project management software).
Complete the confirmation information and attorney letters immediately after you receive the list of the items the auditors want to confirm. Make sure the auditors give it to you as soon as you have a year-end trial balance for them to review.
Provide the auditors with a complete trial balance. Every adjustment to the trial balance you provide auditors increases the price of the audit.
Work on the format and disclosures of the audited financial statements for the current year as soon as the previous audit is complete. There is no excuse for digging through loan documents to prepare the financial statement footnotes after the year-end, or to read a new GAAP disclosure to figure out how to do it after year-end.
Barker Associates works with companies to access audit readiness, which is a far better investment than starting an audit with false confidence you are able to get through the audit. Let’s work together to make sure your audit fees are not multiples of the original quoted rate from the auditors. Click here to set up a free consultation.
Many entrepreneurs who launch a business are focused on selling and bringing in revenue so much they are not thinking about the type of infrastructure needed to efficiently operate their business. I have to admit that some of this even happened to me when I first began my consulting practice. All of the support I received in my role as a corporate CFO was nonexistent. That saying about building the airplane while flying it applies here.
You bet I am – because it’s that important to the success of your business.
In an ideal world, your infrastructure can be represented by this graphic:
(* ERP – Enterprise Resource Planning – is the conductor that manages all of your business’s processes to integrate them into a cohesive database for reporting purposes).
Small businesses starting out often prioritize going after the work to generate revenue while building a “just-in-time” infrastructure. No thought is behind how all of the pieces should work together with the end result in mind. With a computer and a phone, you can run many types of businesses by the seat of your pants in the beginning.
For a business to grow to the next level, a business owner needs a vision and a roadmap that includes the evolution of their company infrastructure.
Understanding the basics of what your infrastructure should be able to do for you is critical when selecting the right tools to operate. Here are two of the most fundamental components: Cash and your General Ledger.
Knowing your cash burn rate – the rate at which you spend cash over time – is the most basic component for a business owner to know. Without cash you cannot operate. Maintaining a cash ledger, even if it’s in Excel or a tool such as QuickBooks, is critical. Select a tool that provides download capabilities for future integration needs. Forecasting cash needs over the next few weeks or months will help you decide the timing of critical versus discretionary spending. I advise my clients to know at least a 12-week forecast of cash needs.
You may be saying at this point that you already have a tool – your online banking site. Anyone who has heard me speak on this topic knows my position on this – you MUST have a checkbook that is reconciled each month to maintain history. The information gained from this piece of your infrastructure can be used to diagnose issues and strategically to plan for future growth. The online account is only a moment in time and does not serve your future.
Setting up your general ledger with the end goal of financial reporting in mind provides you with the insights you will need to answer questions such as, “How much did I spend in Marketing last year?” and “Am I making or losing money in my Hoboken location?”
Whether or not your future includes seeking investment funding, you must have the infrastructure in place to answer these types of questions when planning for the future. Potential investors will require you have data to back up projections for future sales. If you cannot rely on your general ledger and reporting tools to produce answers, perhaps it’s time to revisit your current infrastructure to support future needs.
Wondering where to start to build the right infrastructure? Let’s start with your General Ledger. Structuring your GL in order to generate reports from various perspectives is critical to daily decisions, budgeting, and financial reporting.
Note this example:
When a GL is structured with these various categories you can examine your business from multiple angles to determine if a location, product, or department are serving the business as needed. If you cannot produce financial reports to support tactical and strategic decision-making, perhaps the GL structure is the problem.
Mindy’s Money Tips contains in-depth, free advice for new entrepreneurs and mature business owners, alike. Find out when new articles are published by following me on your favorite social media platform – the links are shown at the end of this article.
If you would like to discuss how to structure your general ledger to work for you or other 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.
Cars built in the early 2000s that had a built-n GPS required periodic updates using a CD with new roads and street addresses. If you are still driving around with a GPS of that era, you already know that when you get to a new construction area, the GPS will confuse you more than help you get to your destination. This analogy is similar to preparing an annual income statement for a budget without updated information. The annual income statement will show the projected revenue and expenses – but will leave out critical pieces of information vital to the day-to-day planning of a business. Here’s an example of what I mean: revenue is highly seasonal but expenses are spread throughout the year, causing issues with covering expenses month to month. Actual cash flow and the ability to cover debt service payments are not analyzed solely with an income statement. Another example: internally developed software can cost a lot of money; the cash required for the development is maintained on the Balance Sheet and not the Income Statement.
Lack of proper planning and analysis, and failure to prepare a projected-by-month Income Statement, Balance Sheet and Cash Flow can lead to an unplanned cash crisis. Please contact Mindy Barker & Associates if you would like to have your budget process reviewed to determine how you can avoid such crises each month.