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.

Termination Retrieval Checklist

Password/Login Retrievals

• Email Account and Aliases
• Computer Password
• Voicemail Password
• QuickBooks/Accounting System Administrator Password
• Bank Account Access
• Payroll Administration Access
• Credit Card Account Login/Access
• Worker’s Comp, Health, Life, and other insurance Logins
• 401k/Retirment Plan Administrator Access
• Merchant and/or PayPal Account Access(es)
• Customer Portal Access(es) (client invoicing systems)

Physical Access/Retrievals

• Keys to office
• Keys to file cabinets
• Keys to mail box
• Laptop
• Cell phone
• Credit Card(s)

Documentation

• Location of unpaid bills
• Location of check stock and deposit slips
• Status of invoicing
• Current copy of cash flow forecast
• Location of sow’s, purchase orders
• Depreciation Schedule
• Working papers/monthly reconciliation files
• Current payroll information
  • Changes to employee records
  • Vacation requests
  • Expense reports
• Location of employee files
• Location and status of tax filings, especially local taxes
• Location of new hire paperwork (insurance, 401k forms, employee handbook, etc)
• Status of 401k/Retirment Plan Contributions

Contact information

• Bank
• Worker’s Compensation Agent
• Health Insurance Agent
• General Insurance Agent(s)
• Third party administrator for Section 125/132 benefit plans
• 401k/retirment plan
• Merchant account

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.

In terms of your business’ health, the balance sheet is the “real” you.  Think of the income statement (also called the profit and loss statement) as your diet log.  It tells you how well you did in a specific time period—last week, last month, or last quarter.  We all know that there are good weeks and bad weeks on a diet.  If you only look at one week or month, are you getting a true picture of your overall health?  Of course not.

The balance sheet, on the other hand, is based on everything you’ve ever done.  In our diet metaphor, it accounts for how much you’ve exercised and what you’ve eaten over your entire lifetime.  The sum of all that information is what you see when you stop sucking it in.

To understand this metaphor, you need to understand what the balance sheet is and how it relates to the income statement. Your income statement contains information about what has occurred in the current period.  Revenue, cost of goods sold and expenses are some of the account types found on the income statement.

To get an accurate picture of what’s happening in your business, you must adhere to the matching principle.  That means you record expenses and cost of goods sold when you have earned the revenue that they are related to (if an expense is not related to revenue, you record it during the period it is used). The balance sheet accounts hold these revenue and expense items until the period in which they are earned or used.  We use accounts such as prepaid insurance, customer deposits, and accrued payroll to classify these things on the balance sheet.

Income statement accounts only reflect transactions in the current accounting period.  At the end of the period, the net profit or loss is moved to the equity section of your balance sheet (to retained earnings).  This means that the balance sheet reflects all prior period revenue, cost of goods sold, and expenses in the form of retained earnings.  The equity section also shows how much you’ve invested in and drawn out of your business.  The equity section, therefore, shows what the company is worth to you.

So, how do you know if your business is “over weight”?  Take a look at your debt to equity ratio (total liabilities divided by total equity).  Compare that to your industry average and you’ll have a pretty good indicator of your business’ weight.  Too much debt and not enough equity means your business is, in fact, overweight—even if your current period income statement looks healthy and you have money in the bank. Because everything shows up on the balance sheet, you can rely on it to depict the financial health of your business.

~Kelly

]]> http://www.crackerjackaccounting.com/2010/05/bank-balance/feed/ 0 http://www.crackerjackaccounting.com/2010/04/barter/ http://www.crackerjackaccounting.com/2010/04/barter/#comments Thu, 29 Apr 2010 17:00:23 +0000 Kelly Totten http://www.crackerjackaccounting.com/?p=802

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.

Of course, you also have to record the receipt of the item. If the item you are receiving is a valid business expense, you will record it just as you would if you had paid cash. Instead of cash, you paid with your goods or services. If the item you are receiving is for your personal use, you need to record it as if you took cash out of your business (draw, payroll advance, etc). Let’s look at an example to see how it works in practice:

A designer is trading his website design services for two months of free rent. His rent is normally $800/month. The designer would record the transaction at $1,600, the value of two months’ rent. Since the rent is a business expense, he would debit “Rent Expense” and credit “Income” for $1,600.

Barter exchanges are also becoming more common. When you trade via a barter exchange, you trade for “points” through a third-party organization. You can accumulate points by selling your goods and services to other members of the organization and apply those points when you find something you want to buy.

If you trade with a barter exchange service, it’s important to understand that barter income is cash basis. When someone “buys” your services with trade credits or points, you have generated reportable income. The fact that you haven’t spent your trade credit is not relevant. When you do spend your trade credit, you record the expense just as you would with a direct trade (normal business expense or personal draw).

The easiest way to account for barter exchanges is to set up a “bank” account on your books called “Barter Exchanges”. When you sell something through an exchange, make a deposit into the “Barter Exchanges” bank account, crediting “Income”. When you purchase something from the exchange, you can simply “write a check”, debiting the appropriate expense account. Using this method, you have a complete record of all transactions running through your barter account and you’ve properly recorded your income and expense. You can also make reconciling your barter account a part of your normal monthly close process.

Properly accounting for both types of barter transactions is essential to accurately representing your revenue and expenses. When recording direct barter transactions, you are essentially recording a sale and a purchase. Instead of recording two transactions-one in which you sold something for cash and one in which you purchased something with cash-you record one transaction and skip the cash. Barter exchange transactions are similar to cash transactions; you just need a barter bank account to record them. Remember to keep a paper trail in either case and note it as a barter. For more information, see the IRS document “Record Keeping for Barter Transactions.”

Balance Sheet

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.

The balance sheet is nothing more than a pie graph where half is always “assets” and the remaining half is divided between “liabilities” and “equity”.  The proportion of equity to liabilities will change, but the total of the two must be equal to the dollar value of your assets.

Now you know how to visualize the balance sheet.  If you can hang on for a few more minutes of reading, I’ll tell you what it means to your business.  First let’s define the terms:

Assets will be divided between current and long-term assets on your balance sheet.  These are either cash or items you own that have cash value.  Examples include: accounts receivable, investment accounts, inventory, equipment, etc.  You’ll also find things like “prepaids” in your assets.  Prepaids are simply expenses you have paid in advance, so they don’t belong on your income statement yet (theoretically you could get them refunded if you don’t actually use them…hence cash value).

Liabilities are things you owe.  Like assets, liabilities are divided into current and long term liabilities.  The most common liability accounts are: accounts payable, credit card debt, loans, lines of credit, etc.  Similar to prepaids, you’ll also find deferred taxes, deferred wages, accrued payroll, etc.  Customer deposits are also liabilities.  Revenue is recognized when it is earned, not when the customer pays you.  So, if the customer pays in advance, you record it as a liability until you have actually earned the revenue.

Equity is essentially what your business is worth.  Equity is reduced by dividends and distributions and increased by your net profit, capital investments, etc. 

Now that I’ve defined what’s on the balance sheet, let’s review what that means to your business.  Essentially, the balance sheet holds the keys to how well your business has functioned throughout its lifespan.  The income statement covers a period of time, while the balance sheet is an accrual of your business history.  Bankers are more concerned with how your balance sheet looks because it shows how well you’re running your business.

Don’t get me wrong, the income statement is important too.  The balance sheet and income statement together tell the story of your business.  Too often, I see owners concerned only about the profit and loss and there are many problems with that approach.

If you ignore that balance sheet and work under the assumption it is correct, you are setting your business up for failure.  The accuracy of the balance sheet is directly tied to the accuracy of your income statement.  The asset and liability accounts on the balance sheet hold income statement account items until the period they impact the income statement.  If you don’t move things to/from your balance sheet from/to your income statement in a timely manner, then you’re managing an incorrect income statement too.

Once you have an accurate balance sheet and income statement, the next step is to set up a dashboard and monitor your financial ratios (things like debt to equity, current ratio, receivables turnover, etc).  Ideally, you’ll determine the right ratios for your business in your industry and start utilizing all of this data to make decisions. 

Personally, I like to set up visual dashboards for the income statement, ratios, and other trend data.  The whole idea here is to become proactive with your financial data and keep (or make) your business healthy.  I find the easiest way to understand what is happening in a business is to make it visual.

~Kelly Totten, Top CrackerJack

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’m put in positions all the time where the business owner will put me on the checking account or try to leave me a blank signed check.  Each time, I take the opportunity to explain that I would never, ever steal from them, but it’s not a good idea to put anyone in the position of being able to steal.   Then, I advise them in ways we can solve the problem (usually their unavailability to sign a check) and maintain a system of controls that protects their hard earned cash.

Here’s a list of simple controls you can put in place to protect your business and your bookkeeper:

• Open the bank statement yourself (or view them online), review the cleared checks (invest in getting copies of cleared checks if you don’t automatically get them).
• Review the bank account reconciliation with the bank statement. Ensure the bank account is reconciled in a timely manner.
• Require checks to be written sequentially. Review the check register and ask to see any missing check numbers. Voided checks should be kept on file and marked VOID.
• Have someone who doesn’t issue checks or handle cash reconcile the bank account
• Check Signing
  • Do not give signature authority to anyone who reconciles the bank account or issues checks. Require duplicate signatures if you must have one of these persons on the account.
  • NEVER sign blank checks.
  • Do not use signature stamps.
• Request to see invoice copies for checks submitted for your signature, ensure there is a paper trail and know what you are signing.
• Have someone other than the bookkeeper check the mail, open customer payments, and list the receipts.
• Make sure you have a fidelity bond included with your business insurance package that will pay in the event of employee theft.
• Petty cash
  • Set a limit on the petty cash fund and treat it like a bank account (someone who doesn’t have access reconciles it).
  • Use an imprest petty cash system: require signature on a petty cash receipt for taking cash from the till and receipts/change returned to match the petty cash receipt.
• Require vacations and cross train. Have someone else perform the bookkeeping functions while the bookkeeper is on vacation.

While these controls don’t guarantee that you’ll never be the victim of embezzlement, they certainly will reduce your risk. 

~Kelly Totten, Top CrackerJack

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:

1. 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)
2. 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)
3. 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.

2) Take a look at your tactical cash flow report.  Make sure you’ve got payroll covered.  If not, immediately figure out how you’re going to make payroll.  Once you’re 100% satisfied you’ve made payroll, prioritize your vendor payments.  Try to get an idea of when you’ll be able to pay vendors.

3) Collections.  Call your clients – be persistent.  ALWAYS ask for a date of when they’ll be able to pay.  Offer to take payments on their account if they too are suffering cash flow issues.  If you take credit cards, ask if they would like to use that option.  If the client hasn’t given you a date of when they can pay, ask them when you should follow up with them.  I like to suggest a date – “should I follow up with you next Tuesday?”  Document the day, time, who you spoke with and mark them for follow up.  Remember the squeaky wheel?  It is true, persistence will pay off.

4) Vendors.  Call your vendors (at least take their calls!).  I know first hand that you don’t want to take those collection calls.  No one does.  I also know that what every vendor wants to know is that they’re important and you do want to pay them.  You’re a lot less likely to be thrown into collections if you talk to your vendors, explain that you are having cash flow problems and see what they can do to work with you.  Make sure to prioritize your vendors and don’t make promises you can’t keep.  Being a liar will never work in your favor.  If you simply can’t make any guarantees, tell them when your next decision point is.  “I’ll be reviewing payables again next Tuesday, you can follow up with me on Tuesday.”  Almost every business has had a time when they experienced cash flow problems.  Most vendors will understand as long as you’re communicating and making an attempt to get them paid.

5) Paying the bills.  When you finally have money to pay the bills, of course, pay the most important first. If you don’t have enough to pay everyone, try to share the love.  You’ll be better off getting several people closer to current, than making one person completely current and avoiding the rest. 

Of course, every situation is unique and I can’t possibly comment on all the possibilities for getting through a cash flow crunch.   If you take nothing else from this article, take my advice on talking to your vendors.  I see people make the mistake of not keeping an open and honest dialog with their vendors far too often.  It’s the professional thing to do, so take those calls!  You need to manage the situation; avoiding it won’t solve anything.

~Kelly,  www.acclaroaccounting.com