- How much should you have in cash reserves? In standard
Your accounting department can be chugging along, cranking out financials that, on the surface, look great. The numbers look reasonable and you can explain away things that look a little out of whack.
However, below those top-line numbers, trouble can be brewing. Most of the time, you won’t even know it.
Many businesses rely on their bookkeeper to run daily the accounting operation. Most owners think that their accountant will catch the errors when they get their taxes done.
However, nine times out of ten, we find that’s not the case. The CPA is looking at your books for reasonableness, just like you are. And, unless you engage them to audit your financials, they will do a few reconciliations and move on to file your taxes if everything on the surface looks OK.
Meanwhile, the errors grow and no one knows it until there comes a time when something blows up, and then you start digging… and digging.. and digging and discover that, below the surface, your numbers are a mess.
Here are five common areas where bookkeepers make mistakes and owners don’t even know they are happening:
Reconciliations that aren’t really reconciled: Getting to “$0” in a bank reconciliation doesn’t necessarily mean a bank account is reconciled properly. We’ve seen bookkeepers get lazy by clicking items off until they get to a reconciled balance and then moving on. So, why should you care? It’s reconciled, right? Not necessarily. Transactions need to be matched from your accounting system and the bank both in dollars and in reference numbers. It’s easy to reconcile the wrong check number if the dollars match another transaction from your bank. Eventually you will wind up with a bunch of unreconciled transactions that will need to be researched and ultimately lead to rework reconciling prior periods. Your bookkeeper won’t tell you this needs to be done
Not following up on uncleared transactions: Good bookkeepers keep a tight watch on uncleared transactions and their bank balance. Ask your bookkeeper to print you the latest reconciliation. If you see transactions older than one month you should question them. Loads of uncleared transactions are a sign of sloppy bookkeeping. Whether the check was misprinted and never voided, or the vendor never received the check, you need to know and account for every check as well as its cleared status. If there are a lot of uncashed checks that never will be cashed you need to determine what to do: re-issue, stop payment or void them. If you have deposits that haven’t been cleared you need to question why. Otherwise, you’ll never know your true bank balance in your accounting system.
Vendor or customer balances that are a mess: Even if you look at your AR or AP aging report, you can miss the fact that those balances aren’t accurate. Whether your bookkeeper hasn’t entered all the bills, or has misapplied payments to the wrong customer, many times the only way you will know is when your vendor or customer calls you, the owner. Unfortunately, it could go the other way as well– you can have a bookkeeper who is making duplicate payments, and because they are the ones managing the books, they could bury it or not even know they did it. Many bookkeepers are the ones fielding customer and vendor calls so if there are issues, they may not let you know. Unwinding misapplied payments, duplicate payments or reconciling balances with a vendor can be extremely time consuming. Make sure you look at vendor statements and compare them to your balance in your system, and run statements for your customers to address any issues early on.
Burying unknown expenses: It’s easy to bury small expenses in different categories, whether it is intentional or not. Sometimes bookkeepers book the same expense in different accounts each month, and if they are small enough, they fall under the radar and don’t get noticed. It might not be a big deal initially but it if you want to understand your total spend on a line item on your P&L, it becomes important. This is also where fraud occurs. Bookkeepers slip in personal expenses and bury them in big expense categories so they go unnoticed, or change the vendors in the system to look legitimate. Ask your bookkeeper to run you a transaction report for each line on your P&L so you can see where the same expenses may be hitting different accounts, and make sure you understand and authorize every new vendor being added, as well as check the images of cleared checks to ensure the payees are those that you recognize.
Not reconciling systems with the accounting system: If you have a front-end ticketing, billing, purchasing or sales system, even if it “integrates” with QuickBooks, you must reconcile them monthly. Don’t bank on the fact that a system feeds data into QuickBooks. We have seen many, many times where something doesn’t transfer and there is no exception report. Month after month the systems become more and more out of sync until it starts to become material enough for you, your customers or your vendors to notice. By then, the damage is done and there is a lot of work to do to reconcile the two. An ounce of prevention is worth a pound of cure.
We know that the last thing you as the business owner want to do is get into the muck of accounting transactions and check on your bookkeepers work. In our experience, many of these bookkeepers run the accounting for the business autonomously, without supervision and without a lot of training. Many aren’t accountants, or don’t have an accounting background. They know the software but they don’t understand the underlying impact of what they are doing or why the areas we discussed above are important.
Sometimes bookkeepers don’t want to admit they don’t know what they’re doing so they cover up their mistakes. Other times they make errors and don’t even know it because they weren’t trained.
One solution may be to insert some oversight into your accounting department if you don’t want to do it. Get a part time controller or use a service like ours.
In either case, you need dig a little deeper.. don’t take your financials at face value. You may be surprised at what you find.