When I talk to company founders and executives about their books, they often tell me that they don’t trust their numbers, either because the monthly reports are incomplete, or because they’re subject to constant revision, or because they arrive too late to be actionable.
The reasons for these issues may range from not having an accountant on staff, to a lack of professional skills in your accounting team, to simply an overworked accounting department. Whatever the reasons are, it’s imperative for you to be able to get accurate financial statements to know where you stand as a company. Otherwise, to put it bluntly, you won’t be able to make the right business decisions.
As we said in our previous blog post, Clean-up Time: Is Your Accounting a Mess?, sloppy accounting can be truly damaging to a company’s long-term success. When a firm lacks solid, reliable financials, that only adds to the overall uncertainty inherent in running the business. That can be even more critical when a business is in its growth stage and has especially important reasons to be on top of its numbers. And finally, it’s vital to have reliable statements so your tax returns can be filed accurately.
What’s involved in a clean-up project
At Laurentian, before we begin a clean-up project, we perform an initial, detailed assessment so that we have a clear understanding of the scope of the problems and the amount of cleanup work that’s required.
Unfortunately, it’s not unusual for problems to go back several years, often because bookkeepers may not be fully aware of how to properly treat certain financial transactions. Our detailed assessment includes a review of the following:
- The income statement for uncategorized income, misclassified transactions, and unusual or large expenses
- The balance sheet for unexpected or odd balances
- The bank and credit card accounts for uncleared transactions, uncategorized expenses, or duplicate entries
- The accounts receivable and accounts payable aging reports for old or odd balances
- The tax returns to see how they reconcile with the books
- Other schedules, such as product and services lists, payroll entries, and sales tax treatment
Once we’ve completed this initial assessment and we understand the scope of the problems, we begin the clean-up process. Our process includes two main phases, fixing the workflow and fixing the transactions:
1. Fixing the workflow
This first phase is to correct any bad practices. Unfortunately, too many bookkeepers tend to make the same mistakes again and again, such as posting adjusting journal entries to accounts receivable, or not properly categorizing product and service revenue. Therefore, our focus is on finding the causes of the various problems so that we can stop the perpetuation of the bad practices.
2. Fixing the transactions
This second phase entails going back as far as necessary to make sure that the bank accounts and credit card accounts are fully reconciled. We then adjust any transactions that need to be corrected so that the accounts are properly stated. Once this is complete, the client will have proper historical statements, and they’ll be on solid footing with reports that they can confidently rely upon going forward.
It may be useful to mention here that many of our clients need a fair amount of clean-up work performed when we first get started with them. In fact, it’s entirely normal that your books may not be in the best shape. What frequently happens is that a young business quickly grows beyond the capacity of its bookkeeper or accountant.
In fact, one reason we started Laurentian is that we saw many tech firms needing professional accounting help in order to have a solid financial foundation under them so they could continue to grow. You can read more about our clean-up accounting services here.
As we’ve said before, your business needs timely data to be able to make the right business decisions. Additionally, accurate financials are essential for you to quickly take advantage of financing options and market opportunities.
Moreover, it’s just smart business practice to set effective internal controls before you grow your company. You don’t want to show faulty statements, or possibly even worse, be a victim of financial fraud. As you may know, the risk of fraud increases when proper controls are not in place, and simple but effective controls can help reduce that risk. These types of controls include ensuring that all sales have been properly invoiced and recorded, as well as ensuring that major purchases are properly authorized and approved.
Just as you always want to dig your well before you’re thirsty, it’s always better to have your books up to date before you go out and try to raise funds (whether from a lender or an investor) so that you’re not in disarray or a panicked rush.
When your books are in order, you will be in a much better position to tell your carefully crafted financial story for investors and lenders. As you can imagine, it would be more than a little embarrassing if your true financial picture, once revealed, turned out to be very different from the rosy scenario you had presented.
In the big picture, this is more important than simply having competent accountants on your team who are producing accurate reports for you. This is about putting systems in place that will help you win going forward. As Roger Martin, the esteemed strategy advisor and former business school dean at the University of Toronto, has said about management systems:
“A company needs management systems that build and maintain the distinctive capabilities that underpin a unique ‘how to win’ in the chosen ‘where to play’ that meets its winning aspiration.”
At Laurentian, all our professionals are career accounting people who take great satisfaction and pride in setting up and managing these types of strategic management systems. With an eye to your company’s future, let us help you put some of these systems in place for you.