As business grows, product and service lines expand, and more employees gain access to credit cards and expense accounts, it can become harder to keep track of all of the moving pieces in your financials. The days of sitting down at the end of the month (or year) to record all of your revenue and expenses become more and more of a lingering headache.
Your ability to trust the numbers in your financial statements make sense and align with reality, is obviously important, and as your business expands, that importance will grow. If your business is confident in the following areas, know your financial statements paint a good, high-level picture of your company’s performance.
The foundation to trust in your numbers is reconciliation. Reconciliation verifies all of the transactions exist in your financials and that none are missing. We’ll limit the scope of reconciliation today to any bank accounts, credit card accounts, loan accounts, and sources of truth (which will be explained in more detail later).
The process of reconciling bank accounts, credit card accounts, and loan accounts essentially compares all of the transactions on your account statement with the transactions recorded in your accounting software.
All transactions on these statements should be recorded (even if they are not business related - your accountant will know how to handle these transactions). All accounting tools, like QuickBooks, have built-in reconciliation tools to help with this process.
Once you have confirmed all transactions are recorded in your accounting system, you’re well on your way to gaining trust in your numbers. In addition to account statements, there can be other places with information that can be helpful to verify have been properly recorded.
In many businesses there is relevant financial information that lives outside of bank statements. Some examples are sales forecasts stored in CRMs, customer orders stored in online storefronts - think Shopify, inventory stored in inventory management systems, among others. This information could also be stored on a spreadsheet generated by sales and/or operations. These systems and spreadsheets contain helpful guide rails for verifying accuracy of the financial statements ensuring income, cost of goods sold, and expenses have been recorded for all jobs, contracts, etc. expected by the sales and operations teams. Though this process may begin as a more manual process than desired, it will help bring to light any uncaught errors in process or integration and could lead to additional efficiencies and/or a better understanding of the systems you use.
If you are not able to identify what your sources of truth are, spending some time thinking about where this important information lives and who owns it could be beneficial. Better yet, if you have a team, lean on them to identify these sources of truth. Building and maintaining these methods of tracking leads, jobs, orders, inventory quantities/value, etc. should help you make better decisions if regularly reconciled with your accounting data.
Unless you are large enough or flush with enough resources to use a full blown enterprise resource planning system (ERP), these various systems may not be tied nicely into your accounting software. Even when systems are nicely integrated it’s important to confirm the numbers reported in the financial statements match any supporting data or reports.
It’s helpful to integrate as many supporting data sources as possible. Integrating these systems generally means some, if not all, of the underlying detail generating the results (sales, cost of goods sold, etc.) gets added into your financial statements without adding manual, redundant data entry. The alternative to manual data entry if systems are not integrated, are general accounting adjustments (journal entries) to match a report. Taking this approach can lead to confusion and additional time spent trying to understand or recreate the adjustment.
Even though you may not use much of the supporting data initially, as your business grows, your business will, hopefully, be performing analysis to support decision making. Having this data available in your accounting system will make this analysis easier not having to pull data from multiple sources.
Like all technology, it’s great until it’s not. There are times when issues arise with these integrated systems. Common cases are when customers are vendors and vice versa. Accounting systems, like QuickBooks Online, do not allow you to have both a customer and a vendor with the same name. If a vendor is already set up for Entrywork and Entrywork buys a product from your organization, an error will occur when the integrated order system tries to create an invoice and the invoice will not show up. It’s important to identify where in your integrated systems error logs exist to monitor any issues to be handled. There should be reports to monitor making sure all of your integrated data is flowing nicely into your accounting system so your financial statements are reliable.
After you’ve identified your sources of truth, integrated them with your accounting system, and reconciled your accounts, you should feel comfortable with the overall status of your financial statements. There is one final step in this process, though, which is reviewing the financial statements to make sure they make sense. As the business owner or operator, you (hopefully) have a rough idea of what your margins should be and can tell if something looks off.
There are a few things, some within our control and some out of our control, that even after all of the work above, can still require a few adjustments. Sometimes contractors or vendors do not send bills timely so expenses are missing. Other times, jobs may be mostly but not entirely completed so not all of the revenue and expenses occur in the same period. Armed with your understanding of the business and your sources of truth, these situations and others can be mitigated with accruals or deferrals. Accounting entries can be recorded to move unearned revenue out of the period with the final expenses or add expense placeholders while waiting for the final numbers. This accrual method of accounting is helpful in representing how the organization performed for the period.
If you are not already monitoring your financial statements on a monthly basis this is a good practice to establish. Depending on your growth goals, this will become increasingly important to ensure your business is keeping in line with your expectations and you do not run into any avoidable surprises.