I was recently asked to compile a list of information needed prior to terminating a bookkeeper. I’ve compiled a list of things that you may need to retrieve from your bookkeeper, controller, or office manager below.
Even if you have no plans to terminate, pretend like you are firing your bookkeeper or controller and start getting access to anything you currently don’t have access to or cannot easily obtain without the help of the person you are terminating. It’s important to have control over this information. What happens if the office manager gets hit by a bus tomorrow? Your business needs to keep humming along regardless of who is sitting in the bookkeeper/office manager/controller chair.
It’s common for small business owners to measure their financial health based on their income statement or bank account balance and deem their business “fit” if the bottom line looks good. To reveal why this approach can be deceptive, let’s apply a dieting metaphor.
Only looking at the bottom line is the equivalent of “sucking it in” when you look in the mirror. Sure, it looks like you’ve lost some weight, but what happens when you exhale? You might appear skinny for a moment, but that version of the situation isn’t accurate.
Many small business owners make financial decisions based on how much cash they have in the bank. Unfortunately, there are a number of pitfalls to managing this way. Let’s explore some ways that business owners manage by bank balance, the problems associated with these practices, and some alternatives that will help you stay in great financial shape.
1. You pay bills as they arrive, based on your bank balance.
The difficult economic climate of recent years has led more businesses to utilize barter transactions, in which they trade their products and services for other products and services. Many businesses wrongly assume they don’t need to account for these transactions. Accounting for bartering transactions is required by the IRS and is essential to accurately determining the financial health of your business.
When you barter for other goods and services, you are still investing time and resources to sell the item you are trading. You are simply receiving a commodity other than cash in exchange for your product or service. Not accounting for barter transactions is equivalent to not accounting for revenue and expenses. It’s impossible to determine how well your business is doing if you can’t generate accurate financial statements.
Recording these transactions is quite simple if you break them down into individual pieces. When you barter, two transactions occur: 1) you sell something and 2) you buy something. The most confusing factor can be determining the value of the transaction. IRS guidelines dictate that you must value the transaction at the fair market value of the item you are receiving. In most cases, the fair market value is already known-it’s the normal sale price of the item. The sale of your goods or services is valued at the purchase price of the goods you are receiving.
Ask any accountant and they’ll spout off the balance sheet equation (Assets = Liabilities + Owner’s Equity). Ask most everyone else, and they’ll either look at you blankly or have a hard time remembering what goes where in that equation. It’s simple, really, if you just picture it.
Unfortunately, I’ve worked with many business owners who were victims of embezzlement prior to my engagement with them. It’s really not all that uncommon. Why? Because we want to trust our employees.
I’m not saying your employees aren’t trustworthy; I don’t know them. What I can tell you is that’s always the story I hear. “I thought I could trust her”, “we’ve been friends forever, I can’t believe he did that to me”, “she worked for a bank! I thought I could trust her”. I’ve heard all of those from owners who were cheated by that “trusted employee”.
I don’t want to scare you and I don’t want you to lose faith in your employees. I want you to set up some simple internal controls, so you don’t ever have to question your employee’s trustworthiness.
I am no stranger to businesses with cash flow problems. The lack of cash to pay the bills is pretty common among small businesses. It’s no secret why it happens… promises haven’t been kept by customers, you expected sales that didn’t materialize, you expected funding that didn’t come in, the list goes on. What I find most often is business owners don’t know what to do when it happens to them. Here’s my advice:
1) Figure out what went wrong and take steps to fix the problem or at least limit the impact. This is easier said than done and you might need some outside advice to help you figure it out. Here are some things every business should do:
Review your budget vs actual report – is anything out of line? (If you don’t have a budget, you need to get one. Budgets help you keep things under control and see when they aren’t)
Review your trends – Look at your operating cash flow ratio, debt to equity, etc. What’s the trend? Is this a one month blip or has your problem been brewing for a while? (note, your financials must be accurate or your ratios mean nothing)
Build a cash flow report. I like to use 2 cash flow reports. The first is a high level cash flow that turns the budget into a cash flow forecast so you can see potential problems with your budget and figure out how to make your plans work well in advance. The 2nd is the one you’ll need immediately. It’s a very tactical report that details out what you’re expecting in receivables over the next 4 to 8 weeks (as far out as you can accurately predict) and the bills you’ll need to pay.