Every Business Needs Accounting Done Right

Whether you’re a sole proprietor or a multi-employee small company, every business needs accounting done right. In the article Does a Part-time CFO Makes Sense? I touched on this issue, but let’s look a little deeper.

Oh Really

I was still in college when I first heard someone essentially try to tell me that accounting was not that big of a deal. Essentially they were saying it was simple. Since then I’ve heard statements like, “I don’t need an accountant. I’ve got QuickBooks or some other accounting program.” Like many thinks in life there was just enough of an element of truth to make these people sound like they knew what they were saying. Yes, the basic concepts of accounting are straight-forward. Yes, the fundamental math is not that complex. Yes, a good software program is a great help. Yet, that is just getting started. When done right accounting is much more. Here’s why.

Classifications

When it comes to recording financial activity there are a number of classification issues to be considered, such as:

  1. Timing – Are expenses being properly matched to revenue?
  2. Coding – Are expenditures being classified to the correct accounts?
  3. Current or Long-term – Are assets and liabilities properly recorded?

I could list more, but the point is that these are things that require a level of understanding that many small business owners do not have. For example, it is not uncommon to see an expense classified in one month when in reality it belongs in another month to appropriately match revenue. At one client a number of years ago I discovered just after contracting with them that they were not recording payroll expenses in the correct months. Consequently they had to prepare amended financial statements and file amended tax returns for several years.

Likewise, if expenditures are coded to the incorrect accounts then you will get incorrect information. At the same company I mentioned above they were recording capital lease payments as operating lease expenses. Again, this required restatement of financials and amended tax returns.

In both of these instances their CPA firm which was performing annual reviews failed to detect these errors. As a result they had to prepare amended tax returns. These are two examples of why so many small businesses would benefit from having a Part-time CFO or Controller to make sure things are being done correctly. Again, every business needs accounting done right.

Clarification

There is also the issue of using the accounting information appropriately. This mean that things like the following must be considered:

  1. Interpretation – Are you getting meaningful financial information?
  2. Management – Is the information you’re getting in a form you can use?

I’ve prepared financial information for business owners and managers where it was clear when I showed it to them that they really had very little understanding of what they were reading. Oh, they may have had a basic understanding of what an income statement and balance sheet were, but they had little to no comprehension of how things really fit together or how to interpret the financial statements for decision-making purposes. I had to point out things like excessive growth in payroll expenses, cash tied-up in accounts receivable and inventory, and other such items. In these cases the statement that every business needs accounting done right was never more obvious. Not only did they have limited understanding of what they were reading, they had almost no idea how to make meaningful decisions based on the information.

Think about it. Is your company getting its accounting adequately needs met? Could a Part-time CFO or Controller make your business life a lot easier?

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

Share

Leave a Reply

Enter your email address:

Delivered by FeedBurner