Small Business: Bookkeeping and Accounting Audit

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Management Audit:
Bookkeeping and Accounting Audit

Yes / No

A. The company has a bookkeeping system. ----- -----

single entry ----- double entry -----

The owner

1. Prepares the books. ----- -----

a. Understands the how and why. ----- -----

b. Prepares own financial statements. ----- -----

2. Pays for bookkeeping service. ----- -----

a. Understands financial statements. ----- -----

b. Has taxes done by bookkeeper. ----- -----

c. Has compared cost for bookkeeper with that of a CPA. ----- -----

B. The company reconciles bank statements monthly. ----- -----

C. The company keeps income and expense statements accurate and prepares statements monthly. ----- -----

The owner

1. Understands purpose of financial statements. ----- -----

2. Compares several monthly statements for trends. ----- ----

3. Compares statements against industry averages. ----- -----

4. Knows current financial status of business. ----- -----

D. The company makes monthly deposits for taxes. ----- -----

The owner

1. Makes deposits on time to avoid penalties. ----- -----

E. The company has a credit policy. ----- -----

The company

1. Ages billing system monthly. ----- -----

2. Accesses late payment fee from customers. ----- -----

3. Writes off bad debts. ----- -----

4. Has good collection policies. ----- -----

5. Has a series of increasingly pointed letters to collect from late customers. ----- -----

6. Has VISA, MasterCard, or other credit card system. ----- -----

7. Emphasizes cash discounts. ----- -----

F. The owner considers tax implications. ----- ----

1. Considers buy versus lease possibilities. ----- -----

2. Considers possible advantages/disadvantages of incorporation. ----- -----

4. Does not pay tax penalties. ----- -----

Bookkeeping and Accounting Analysis

A. The company has a single- or double-entry bookkeeping system.

A. The company has a single- or double-entry bookkeeping system.

Record keeping is vital to the survival and success of any business. According to analysis of the cases studied, problems with record keeping constituted the second-largest problem area. Whether the business used a single- or double-entry system did not appear to be as important as how the system was executed. Timely and accurate record keeping is essential.

1. The owner prepares the books.

The small business owner who understands bookkeeping, records the transactions and prepares the financial statements has an intimate knowledge of the business. Knowledge of these accounting and financial aspects makes the owner credible with lending institutions. It also keeps the owner out of financial trouble and helps him or her stay focused on ways to make a profit.

2. The owner pays for bookkeeping service.

The owner who does not understand the essentials of bookkeeping needs to hire a trusted professional. Even then, the owner needs to understand financial statements. Failure to understand essential financial statements is an indication that the owner has surrendered managerial responsibility. It is generally wise to have the professional bookkeeping service prepare taxes when the service is already keeping the books. The owner who does not do the record keeping is rarely in close enough touch with the records to adequately prepare tax forms. The business owner who delegates so much financial responsibility to others should think seriously about using a CPA.

B. The owner reconciles bank statements monthly.

A quick way to get into financial trouble is not to reconcile bank statements monthly. With a single-entry bookkeeping system, this is the only way to maintain accuracy. Even when a doubleentry system is used, reconciling statements monthly is the only sure way to catch mistakes. Too many small business owners put this off because of other, more pressing, concerns. This destroys the validity of their own financial statements, causing them to make important decisions based on erroneous data.

C. The owner keeps income and expense statements accurate and prepares statements monthly.

The ability to track the flow of funds into and out of the business is necessary for continued viability. Cash flow problems have closed many small businesses. The monthly preparation of accurate income and expense statements is the best single way to avert critical cash shortages.

1. The owner understands purpose of financial statements.

An owner who understands that financial statements are essential for directing and controlling a business will more likely take them seriously. Well-prepared business statements put the owner in control of the business, facilitate relationships with lending institutions and simplify tax preparation, often saving the owner tax dollars.

2. The owner compares several monthly statements for trends.

Comparing monthly and annual statements for trends provides financial data for planning purposes. Trend analysis is essential for efficient inventory control, capital budgeting, vacation scheduling, timely advertising, promotional campaigns and profit maximization.

3. The owner compares statements against industrial averages.

Knowing how a business compares financially to others helps the owner who is seeking loans or expansion opportunities. Such knowledge also provides the owner with both a psychological and planning advantage, adds to the owner's awareness of how well the industry is doing as a whole and provides an early warning system for market fluctuations and trends.

4. The owner knows current financial status of business.

Not knowing how the business is doing financially is a major reason for small business failures. Managing the business with relatively simple financial tools and staying constantly in touch with the business's financial status is critical if an adequate profit is to be made. Although good record keeping is time consuming and takes away from doing the actual work of the business, it is essential nevertheless if the business is to be a success.

D. The owner makes deposits on time to avoid penalties.

Penalties are costly and take away from profits. In several of the cases studied, late deposits had become so chronic, and the penalties so high, that the businesses were financially threatened. Chronic penalties for late deposits are a sure sign of poor business practices and can be a warning sign to lending institutions that the business is heading for financial trouble, making it highly unlikely the owner will be able to get a loan when needed.

E. The company has a credit policy.

Providing credit to customers can often increase sales volume. But if the business does not have a written credit policy or does not follow it exactly, the business may lose more money on bad debts than the additional sales brought in. Written credit policies often speed debt collections, especially when discounts can be made for early payments. Several of the cases studied showed a marked improvement in cash flow after credit policies were implemented.

1. The company ages the billing system monthly.

Monthly aging of the bills due keeps the owner in touch with who the best customers are. Last year's excellent customer can be today's problem customer.

2. The company assesses a late payment fee from customers.

Late payments can jeopardize the business-customer relationship, because the customer is not aware of how poor payment habits affect the business. Providing discounts for early payments is an effective way to encourage customers to pay on time. This will improve cash flow and even build customer loyalty.

3. The company writes off bad debts.

Not writing off bad debts gives a false sense of net worth and can threaten the financial performance of the business. This also lets the owner know which customers are poor credit risks.

4. The company has good collection policies.

Many small business owners detest debt collections. A good collection policy simplifies collections and is an effective deterrent to late payments and bad debts. Timely and effective debt collection is essential for positive cash flow and increases profits because it diminishes the need for short-term operating loans.

5. The company has a series of increasingly pointed letters to collect from late customers.

The customer who is truly a collection problem will not be influenced by discounts or good collection policies alone. These customers probably have cash flow problems or other financial problems of their own. Late notices and overdue statements with increasingly demanding language will be required. Often letters from a lawyer can be helpful. As a last resort, it may be wise to turn them over to a collection agency.

6. The company has VISA, MasterCard or other credit card systems.

Credit card systems provide timely cash turnaround and put the financing burden directly on the customer. The worry and headaches alleviated by using a credit card system more than justify the small fee credit card companies charge. Such a system also simplifies bookkeeping and billing and lowers operating costs in these areas.

7. The company emphasizes cash discounts.

Cash discounts encourage customers to pay now rather than use credit. Informing customers that paying by cash saves them money improves cash flow and decreases collection costs.

F. The owner considers tax implications.

Waiting until the last minute to consider the tax implications for the purchase of equipment and other capital outlays can be costly. Thinking ahead and discussing tax implications of various alternatives with an accountant early in the year can save in taxes. Tax considerations are essential for all businesses, but for the small business, such considerations can make the difference between a profit and a loss.

1. The owner considers buy versus lease possibilities.

Deciding whether to buy or lease equipment is an important business consideration. Leasing rather than borrowing money to buy can help cash flow, save taxes and increase total operating capital. One reason to consider leasing equipment is that it may save downtime when equipment needs repairs.

2. The owner considers possible advantages and disadvantages of incorporation.

Each kind of business structure has its own advantages. Most of the businesses in the cases studied were either sole proprietorships or corporations..

3. The owner does not pay tax penalties.

It should be obvious that any business paying tax penalties is losing profits. Worse than this, not paying taxes on time creates many time-consuming headaches. It also sends a message to lenders that the business is a poor risk.

Food For Thought
Here are five attitude adjustments for successful living. Keep them in mind as you go through your day.

Act, don't react. When you react to something, you are not really in control of your own destiny. Reactions can be time-wasting distractions that keep you from what you really want to do. Taking action, taking the initiative, will prevent you from having to react.

Remember that "those who know HOW will always work for those who know WHY. Look for the why, and see the big picture. There are always those who know HOW. The world rewards visionaries who can see the WHY.

Stay focused. Jumping from thing to thing dilutes your skills, your enthusiasm and your time. You can have anything you want, but not everything. Decide what you really want and go for it. Learn to let go of the rest.

Look for opportunity in all situations -- especially "problems". Every problem is positively ripe with opportunity. Opportunity is everywhere. Learn to open your eyes to it. Ask "How can I do this better? Why did this happen? What would prevent this problem from occuring in the future?"

Look for ways to create value. Those who can deliver the most value to the most people are the winners in life.
It's interesting that many people who would never think of taking any risk in the pursuit of their dreams, risk their lives on a daily basis by driving too fast, not wearing seatbelts, drinking too much, eating fattening food, or smoking cigarettes. If you're going to take risks, you might as well make them count. And if you're alive, you're taking some kind of risk.

Risks are absolutely necessary. Unless you're willing to take risks, and to fail miserably, and pick yourself back up to try again, success won't come to you. We must learn to take the necessary, calculated risks and avoid the foolish risks.

Driving drunk to the lake, without a seatbelt on, and speeding -- that's a foolish risk. Occasionally speeding to the airport to make a plane, or to an apppointment because you've been delayed by other urgent business -- those are calculated risks. There are times when you must take calculated risks.

If you have not yet reached your dream, then it's because there is some risky activity in the way. Something that you fear sits between you and your dream. The best way around your fear of anything is to confront it head on. It's simple, but very difficult. And absolutely necessary. When you do the thing you fear, your fear begins to fade, and soon it has no place in your life.

If you're not making mistakes, you're not doing anything. Action is the only way to accomplish anything, and taking action will bring mistakes.
So often we try to hide our mistakes, and deny them even to ourselves. Instead, we should take pride in the fact that we're out there trying. There is no better learning experience than making a mistake -- that is, if you're willing to admit that you've done so. When you acknowledge your mistakes, you have a better understanding of how to proceed. After all, you have firsthand experience with what DOESN'T work. That's valuable and useful knowledge.

All successful people constantly review their past actions and look for ways to improve on them. Imagine that -- they're anxious to find mistakes even in situations that are generally considered to be successful. Does that tell you something about the value of mistakes as a learning experience?

As you continue to take action, and to learn from the results of those actions, you develop a working knowledge of how to be effective. With this knowledge you can become whatever you want to be.