Best Practices, Finishing Touches, Operations, V6I3

Monitoring and Accounting

(Photo courtesy of Headway on Unsplash)

When Blythe CPAs and Advisors began this series at the beginning of 2020, it was with the intent of providing professional commentary on several common areas of business considerations to management and owners of growing shed building businesses.  

Now, amid the COVID-19 pandemic, the filter on the series has changed, but the topics remain the same. 

In a time where most feel they have lost control, whether due to health regulations, government regulations, supply chain interruptions, customer demand, etc., let’s focus energies in 2020 on things that are within our control.  

There are internal monitoring and accounting items that can be assessed, reviewed, and addressed during this time of uncertainty that will put you in control of your business and help change your trajectory from surviving to thriving once we come out of this pandemic. 

IMPORTANCE OF INTERNAL CONTROL 

In a growing business it can be easy to become consumed with all the immediate needs of the company, such as relationships with vendors and suppliers, being responsive to customers, banking relationships, and continuing to find experienced and quality employees. The accounting and back-office functions often fall to the bottom of the list where the mindset can become “act now and account for it later.”

We caution against this mentality, as how can a business strategically make confident and effective decisions if they do not have the complete and accurate accounting data to support their decisions? Internal control over the accounting functions is a basic, but an extremely important, business item that needs to be checked off your list.  

Things to be considered include:

  • Is there adequate segregation of duties in your accounting functions? Does the person who handles cash, also reconcile the bank statement and post to the accounting ledger? How can you appropriately divide duties within the capacity of your workforce to improve controls in your company?
  • Is inventory being counted periodically, or at least annually? Are there accurate reconciliations of inventory on hand against inventory in the accounting ledger? If there are major adjustments, what is going wrong? Can you identify potential waste? Can you identify slow moving or obsolete inventory and update your procurement process to reduce future waste?
  • Have software and account restrictions been reviewed? Do only those who need access to the accounting ledger and bank accounts have access? Who are the authorized signors for checks?  

Reviewing controls is a necessary foundation of a well-run business. There are many other internal control items that can also be considered, this is only a sample. A business owner needs to know the controls in place to protect the assets of their company.

LEVELS OF FINANCIAL REPORTING

Once controls are reviewed and reliance can be placed on proper cutoff and accurate information in the accounting ledgers, the level of financial reporting should be considered. 

What is the purpose of financial reporting? At minimum, management should be performing detailed reviews of the financial reports monthly and creating budgets with associated key performance indicators.  

Reports that management should be able to review are a reconciled balance sheet, income statement, budget to actual reports, and for best business practices, an accurate cash flow statement. A growing, successful business needs to be able to manage their cash flow to effectively determine their needs for additional investments and financing in the future. 

In a small business, management may only be the owners of the business. If the owners do not have the ability to review and analyze the reports, it is recommended they seek the assistance of experienced accounting professionals to assist in maintenance, reporting, and/or analysis of the aforementioned reports.  

Keep in mind that as the business grows and seeks additional financing, the level of reporting increases. Third parties will expect accurate reporting prior to agreeing to financing or investment. 

DEALING WITH BANKERS AND INVESTORS

When a company is responsible to their bank and investors, they have the fiduciary requirement to be responsible in the management, control, and reporting of their company. 

Regardless of the source of a company’s capital, either through a bank or investors, the third-party cares most about the following: quality reporting, good communication, and transparency.  

By following the recommendations in points 1 and 2, a company can reap the benefits from a productive relationship with their source of capital. By having solid controls in place and producing meaningful financial reports, the company easily facilitates good communication and transparency about its operations.  

This allows the relationship to grow beyond a transactional nature to one that the third-party is a partner in the business. These mature and trusted relationships are what can help the company through hard times, such as the one we are experiencing right now. 

Bankers—A banking relationship will be a partnership where the bank wants to see the success of the company. However, things the company needs to consider are how the interest expense and principal payback will affect the management of the company cash flows.  

Significant financing could mean additional reporting requirements for the company by engaging a third-party CPA to perform required procedures such as a compilation, review, or audit. If one of these is being required of your company and you are unsure the cost and time requirements, you should contact a qualified CPA to discuss. 

Other considerations when obtaining additional financing are the potential covenant requirements a bank might require, such as restrictions on cash distributions, capital expenditure restrictions, and requirements of personal guarantees by members.  

Investors—An investor relationship is much like the banking relationship, except an investor may have the desire or perceived ability to try to assert themselves into the management and operational decisions of the company.

As the investor usually is compensated only through a return on investment determined through the structure of the investment, they are particularly interested in seeing the company not only continue but grow. This could cause stress on a company if not well positioned to grow.  

Growth for the sake of growth can be damaging to the profitably and cash flow of a business.  

Henry David Thoreau said, “It is not enough to be busy … the question is: what are we busy about?”  In a time in the world where many of us are forced to stop so much of what we are doing, it would seem most prudent for us to reflect on what we have been so “busy about”?  

Is the company you are managing simply “busy” or is it “busy” being efficient, profitable, and meeting targeted expectations based on strategic goals? Now is the time to manage that which you have the ability to control?

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