Your business isn't a spectator sport yet, many business owners don't really know what "good books" look like. Many assume their accountant will identify and solve the problem, however, if the accountant is handling numerous files during tax season, there is a limited bandwidth of time available. So how do you know if your bookkeeper is making that fatal error?
Look for what doesn't belong...balances that are in the negative.
Common issues one might overlook include
- Liabilities that are not properly cleared
- Unreconciled Cash Accounts
- Negative liabilities or Assets
There are 3 parts to the Balance Sheet and it flows back to the most fundamental of equations Assets=Liabilities + Equity.
In the assets section, there should never be a negative cash on hand balance. While it is possible to have a bank account in a overdraft balance, that will say bank account. But really take a look at the account for Cash on Hand. If the Cash on hand is in a negative balance, that means something has been paid for, but who paid it and from which account is unknown. A large negative balance on the Cash on Hand is could also be indicative of Unreported Cash Sales or Unreconciled Sales. Cash has to come from somewhere and while we might like to imagine it comes from thin air, a reality check is in order.
The one I find the most is negative receivables. This is an indication that you either got paid in advance for a job (which is possible) or you got paid for something for which an invoice has not been issued. This means an underreporting of your sales and under reporting of your sales collected.
In the Liabilities side, a negative payable is indicative of an expense not being recorded; and who wants to be paying more tax when they shouldn't be. Again, a sanity check has to apply. Would one knowingly overpay a supplier. A negative payable would mean either the supplier owes you money (which you would like back and that leads to a whole other set of questions about why you would do that) or that the invoice was marked a paid and debited to a liability without the expense ever being picked up.
One should then turn to the income statement. Check your monthly and annual profit and loss summary. Most accounts should reflect a positive balance...and one of the I run across is negative insurance. Does it make sense that you didn't pay any insurance? Not to likely. If you have negative income after your expenses, that is a different discussion. Again, the sanity check needs to apply. Negative expense accounts rarely exist, and should create a pause for discussion.
So if you find errors in your reporting, what course of action should you take?
- 1. Talk to the bookkeeper first; asking them to explain the variance and show you the reconciliation. Pay attention to their confidence and explanation and body language.
- 2. Talk to the accountant with the same documents and ask them for their opinion.
- 3. Take additional action - and that could be additional training for the bookkeeper (if it's an internal hire) or even change bookkeepers if the problem is recurring. Hire a different outsourced service provider.
Bad Bookkeepers are bad enough. Bad Bookkeepers without oversight is disastrous. We have all heard the horror stories of bad bookkeepers destroying good business in their wake. One does not have to be an accountant and know everything, but finance isn't a spectator sport. Your financials should be reviewed on a regular basis to catch issues early.
Excelsior
