Protecting your money is one of a business owners top priorities. Unfortunately many owners fall victim to financial loss which could have been prevented. Below are four primary things every business should understand and create processes and oversight to protect your money.
Know Your Financials
Accounting is the basis of good business decisions. For that reason, you must familiarize yourself with your financial statements. These include Balance Sheet, Profit & Loss, and Statement of Cash Flow (or Cash Flow Statement).
A Balance Sheet shows the company’s total assets, liabilities, and equity at a particular point in time. Your Profit & Loss (or Income Statement) shows the revenues generated and expenses incurred during a particular date range. The Statement Cash Flows shows details of the flow of cash (in and out) as a result of the company’s operating, investment, and financing activities.
Don’t Be a Victim of Employee Theft
Not a month goes by without our office hearing from a contractor that discovered they were being robbed by an employee. The last call I took was from an owner who discovered that a trusted employee had been stealing from him. He discovered that at least $55,000 had been stolen over the course of three years.
Most victims have a few things in common. They are usually companies owned by a single person who has little to no interest in office work, especially accounting. There is a single primary person in charge of bookkeeping and accounting functions. The company does not have an outsider perform basic audits or even perform bank reconciliations.
Don’t Manage Your Company on a Cash Basis
Cash Basis is the simplest form of accounting. You recognize and record revenue when cash is received, not when the work is done. Expenses are recorded when bills are paid, not when the item(s) was used.
In the Accrual Method, revenues are recognized and recorded when earned. Expenses are recognized and recorded when consumed or when an invoice is received. Remember, when using this method, revenues and expenses don’t have to be paid before they are recognized.
Some accounting software allows you to print your reports using the cash basis of accounting. While cash basis reporting can be necessary when paying sales tax or preparing your tax returns, it is a very dangerous way to manage your company. Do not use cash basis reports to analyze your financial performance or to help you make day-to-day management decisions.
Hire a Good Accounting Firm
When is the last time your accountant called you to ask you questions about your financial statements? Most contractors only hear from their accountant when it’s time to work on their tax returns. In this case, they don’t have an accountant, they simply have a tax preparer. Your accountant should review your financials quarterly and discuss the numbers with you. They should ask you probing questions designed to test your accounting practices and controls. Their job should be to give your company a “financial physical” by checking all your vital signs.