You know how it is when you look at the reports that come out of your accounting system and you’re not entirely convinced they’re telling the real story…
We see it so often, where transactions have been incorrectly handled or missed, accounts have been set up incorrectly, reports have been designed with errors. These issues end up causing all sorts of grief for business owners because:
- There is no understanding of the real position of the business in terms of profit.
- There is a lack of confidence in the accuracy of the future cash position.
- There is uncertainty about taking a risk and growing the business.
- This leads to an inability to assure lenders and investors that the business is a good risk.
There are some ‘red flags’ that may mean your accounts can’t be totally relied upon:
1. The Balance Sheet doesn’t balance!
This may seem impossible with an accounting system, but we see it occasionally. Somehow things got ‘out of whack’ in the system and the total of the assets doesn’t agree with the total of liabilities and equity. Even if looks like it’s a small difference, it may be big difference one way and a big one the other way i.e. two big differences end up creating what seems like a small one !
2. The Profit or Loss figure just doesn’t seem right.
Sometimes you look at your Profit & Loss and you just know it’s not right. This can easily occur if sales, costs and overheads aren’t treated properly.
For example:
- A stock purchase gets allocated to a Profit & Loss account instead of the Balance Sheet
- Work in Progress isn’t properly processed and costs get allocated to the Profit & Loss for jobs that haven’t been invoiced yet.
- Cash sales get allocated to the bank account instead of a sales account in the Profit & Loss.
- A deposit from a customer is allocated to the Profit & Loss and no corresponding costs have been accounted for.
- The list goes on, and you can see how these mistakes create a misleading picture of profitability in the business.
What is worse, is when these issues are happening, but they are not obvious !
3. The bank account doesn’t reconcile
It’s so easy to fudge this in accounting systems. Someone who’s not really sure what they’re doing can’t make it reconcile, so they just shove the difference into a balancing account. This means you could be doubling up on sales and/or costs and vastly misrepresenting the profit situation !
4. The detailed lists for Accounts Receivables, Accounts Payables, Inventory and Work in Progress don’t match the totals in the Balance Sheet.
This can occur when erroneous transactions are made to these accounts if the system isn’t set up correctly to stop this happening. That is why proper regular reconciliations of these Balance Sheet accounts are so important !
5. The method of accounting for stock is changed.
This could happen without considering the consequences e.g. in the past ‘Average cost’ method has been used and it gets changed to ‘FIFO’. This can have a big impact on profitability and the Balance Sheet. A lender/investor may be surprised to see sudden and unexplained changes in ratios and lose confidence in the business risk.
On the surface these may seem like just small transactional issues, however if allowed to continue, they can seriously hinder a business’ opportunities to grow and secure funding. Not to mention limiting owners’ confidence in the information they are basing their decisions upon.
If you’d like an unbiased second opinion on the validity of your accounts from a CFO who’s been ‘around the traps’, get in touch and we’ll be happy to organise it for you. Our CFOs have a well-honed toolkit for how to handle accounting problems and avoid unintended consequences of mistakes.
If you would like to learn more about this subject, plus other useful business financial management tips, check out ‘Business Financial Toolkit’
BUSINESS FINANCIAL TOOLKIT
