CREATE VALUE BY GETTING BACK TO BASICS
The NFL Draft got me thinking about winning. Winning in football comes down to blocking and tackling. Nothing is more frustrating than watching a game and seeing your team miss play after play. When the final play was run, it was clear they lost because they blew the fundamentals.
Running a business requires fundamentals that must also be mastered for success. If the business does not have the skills on staff, many specialized service providers, coaches, and consultants stand ready to fill any knowledge gap. But here is your conundrum: How do you make sure the person you are hiring is doing a great job when you do not know what they should be doing?
What can go wrong? When hiring someone to do your accounting, whether a bookkeeper, CPA firm or an employer, here are some unfortunate examples:
A family-owned company ran two separate businesses with only one Income Statement.
A company’s CFO (and CPA) had not reconciled bank statements for over 30 months.
A CPA firm immediately refunded $6,000 because work was simply not done.
A company’s former controller just stopped making key entries, and nobody noticed.
Each situation created bad information and took thousands of dollars to fix—all because its basics were broken. So, let’s look at the work to be done and outline the fundamentals so you can set better expectations for whoever does your accounting.
"Success is not about doing extraordinary things, it's about doing ordinary things extraordinarily well. Get back to basics and excel in the fundamentals." - Jim Rohn
INTRODUCING THE HOUSE OF FINANCE
In several earlier blogs, we noted that business finance has two very different but related parts:
Accounting – Begins with A, it is actuals and ago. Accountants and bookkeepers focus on what has taken place. They provide the “what” by recording what happened and preparing summaries.
Finance – Begins with F, it is your future, failure, fortune, and fears. Finance people dig into the “what” to assess the “so what?” and recommend “what to do next.”
These different activities make up the “House of Finance,” a concept I learned at Procter & Gamble. We can continue thinking about football as we walk through the house. Accounting makes up the first three floors, while finance owns the two top floors, which, of course, are built on accounting’s foundation:
Internal Controls: Work processes are your playbook. They outline what must be done and how to do it. Controls ensure the efficiency and effectiveness of accounting work and protect the interests of the company and employees alike.
Accurately Recorded Transactions: This is accounting’s blocking and tackling. If too many transactions are wrong, the information created from them is wrong, causing costly errors.
Properly Prepared Financial Statements: Three financial reports provide a business performance scorecard. Each tells a different story about the company’s performance and financial health.
Budgets and Forecasts—We have our game plan and expectations. As the game begins, a good coach monitors everything, considers options, and makes decisions. Analyzing actuals versus expectations is a basic skill of future-focused finance.
Strategic Initiative Analysis – Now, we’re preparing for the draft. Looking farther down the road we try to figure out what we need, what our rivals are thinking, and how much we can invest. Finance’s greatest value is creating information to support strategic decisions.
Diagram 1: House of Finance
Diagram 2: House of Finance
With a better understanding of what it means to have a good team in place, let’s turn to the fundamentals of accounting and finance.
FUNDAMENTALS ARE LEADERSHIP’S EXPECTATIONS
So, you are planning to hire a new accounting firm or your own team. What should you expect them to do for you? Here are our ideas to get you back to basics:
Confirm All Accounts are Reconciled Monthly – Reconciling ensures every transaction is recorded and accounted for. This is especially important for bank accounts, accounts receivable and payable, credit cards, and other debts. If you only want to focus on one thing, do this! Reconciliations are that important!
Understand Your Chart of Accounts (COA) – Your COA is your accounting game plan. It tells you where every dollar will be assigned and what it is for.
Inconsistencies can happen when new people come on the team. An owner was proud that his gross margins were going up but later learned it was only because a new bookkeeper improperly recorded Freight, which is in Cost of Sales, to Delivery Expense. Profit was not affected, but a key measure was very wrong!
Your COA should not be in alphabetical order, which is the default for QuickBooks. Group-related accounts with a sub-total. For example, marketing expenses can include Advertising, Printing, Google Ads, and Website.
Ensure Consistent Account Usage – Have a member of your team spot-check account usage.
Have a Timely, Regular Financial Review – Your accountant should explain all key results and answer your questions. As the business leader, it is ultimately your responsibility to understand your results!
Educate Yourself, Be Curious – You don’t need to be an expert in every number, but be involved enough to understand trends, “weird things”, and what to look for.
FINDING A GREAT ACCOUNTANT IS IMPERATIVE
Business owners and leaders must be confident their accounting is correct. If you are in doubt, your CFO must make sure it is. If you are not financially confident and you do not have a CFO, you are at risk.
Contact us for a complimentary consultation if this prompted any doubts or questions.