Developing Management Skill-- The Art of Supervising Your Bookkeeper --Its Relationship To Good Bookkeeping
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To start practicing the management skills needed to do the monthly financial review, have your bookkeeper prepare a monthly reporting package for you that has the following (for now, we'll add to this package later):Listening is a form of accepting. This quote was found in The Artist's Way by Julia Cameron. Keep this in mind when you go sleuthing. |
One bad bookkeeping habit some bookkeepers have is to print out all the vendor cheques that need to get paid, whether there is money in the account to pay them or not. The bookkeeper then holds them in a drawer or file folder until it is time to release them ... I know you would never do this! ;-)
This habit might have started because the owner (that would be you) is not around to sign the cheque when it needs to be sent out. It seems a logical solution and an efficient way to keep things moving but ...
... it makes your financial statements inaccurate and takes away their usefulness to you as a business owner. How?
When the cheque is printed, an entry is made to your books that decreases your accounts payable (the amount you owe others) and decreases the money in your bank account (putting it into overdraft on your books in this case). The entry looks like this:
Debit (Decrease) Accounts Payable (current liability)
- Credit (Decrease) Bank Account (current asset)
Printing and holding cheques before you need them affects your working capital and other liquidity ratios, and ...
... when you look at your aged accounts payable report, you think bills have been paid that haven't.
Now you can no longer rely on your balance sheet or your accounts payable report to help you run and monitor the financial health of your company.
So if this is happening in your business, put a policy in place to stop it. Make it policy that the cheque date should be the date the cheque is released to the vendor.
Putting policies in place like this one is an effective use of your business management skills.
You will have to make yourself available on a regular basis to sign cheques for accounts payable to be paid. I know with your time and business management skills that you are up to the challenge. :o)
The frequency of doing a cheque run will depend on the size of your business. For most home based businesses, once or twice a month should be more than adequate.
Let's Chat About ...
Each month, take the time to develop your business management skill set by reviewing the bank reconciliation report ... especially if there is no segregation of duties (one person is doing all the bookkeeping and has control over posting entries, writing cheques, and preparing the financial statements).
What you want to look for (with your awesome business management skills) are any adjustments made to the bank account like :
- Bank errors (increases or decreases the bank statement balance) - Make sure the bank has been notified and that the bank is going to be correcting the error.
- Outstanding cheques (decreases the bank statement balance) - Keep an eye out for cheques that have been outstanding for more than six months as the bank does not have to honor them, unless certified. These are referred to as stale-dated cheques. They should remain on the bank rec unless they are cancelled or re-issued.
What if for some reason your bank rec has staledated cheques still outstanding from prior years? Transfer them through a journal entry to a suspense account for your accountant to deal with (you have one don't you?). Your accountant may decide to recognize the cheques as revenue.
- Deposits in transit (increases the bank statement balance) - Investigate if the number is growing or the deposits are slow in arriving at the bank. (Deposits in transit are deposits that have been recorded in your books but didn't get posted to your account by the bank yet.)
- Bank service charges (decreases the company's bank balance) - Includes service fees for overdraft charges, stop payments, monthly service charges, interest charges, a new cheque order ... the list goes on. These need to be journalized to your books by debiting bank service and interest charges and crediting your bank account.
- Interest earned (increases the company's bank balance) - This needs to be journalized to your books by debiting your bank account and crediting interest income.
- Chargebacks, returned, bounced or NSF cheques (decreases the company's bank balance) - Look for instructions in your software program on how to enter the non-sufficient funds cheque and reissue an invoice to the customer for the amount including service charges.
It is a good policy to cancel the stale-dated cheque by reversing it in a journal entry in the current month. (Do not void or delete.) So I think you may as well use your book keeping / business management skills and just reverse the entry yourself in the way I described above. |
In QuickBooks®, there are basically four steps to process an NSF (non-sufficient funds) cheque. Here is an overview: 1. Setup two items: (a) Setup an "Other Charge" item called NSF Cheque or Bounced Cheque. Select E for the tax code, leave the amount field blank, and select "Cash in Bank" as your income account. (b) Setup an "Other Charge" for NSF Charges selecting E for the tax code, "Other Income" as your income account, and leave the amount field blank, ... or you could enter in your pre-determined admin fee for handling NSF cheques. 2. Create an invoice to bill your customer for the charge back and associated fees, using the two items you created in step one. (a) On the first line, fill in the amount for NSF Cheque with the amount of the cheque that bounced. (b) On the next line of the invoice, select the NSF Charges and fill in the amount with either the amount the bank charged ... or use your business management skill and charge a higher amount that takes into consideration the administration charges for you to handle the NSF cheque. (c) If you want, QuickBooks® has a letter you can send with the new invoice asking for payment. 3. When you do your bank reconciliation, you will have to enter the bank charges for the NSF cheque. Some bookkeepers void the bounced cheque but my preference is to leave the "deposited" bounced cheque like your bank statement shows. 4. You should see in your cheque register, the returned cheque which you posted when you created the customer invoice. When you reconcile, the two items clear (deposited NSF cheque and the chargeback created by the invoice) each other to zero. I prefer this method as it keeps a clear history of what has transpired. If you go to QuickBooks® help and type in "bounced", two selections will come up. The second set of instructions explains how to deal with bounced cheques from customers. The instructions are more detailed than the overview I've given you here ... except they have you code the bounced cheque to "Other Income" and use Write Cheque to enter the NSF cheque to the bank. One final thought. You may want to exercise your business management skill set here, and review your credit policy for customers with whose cheques are charged back routinely. |
Sign the reconciliation as proof you have performed the review. If staff know you are reviewing the bank statement regularly, that may be enough deterrent to keep them honest.
I trust practicing this particular management skill will get easier over time. Who knows, you may even begin to enjoy the task. I know I like managing my money.
One last thing. Make a note to look at your cancelled cheques or cheque images two or three times a year.
Use your business management skills to always be on the lookout for possible fraud or embezzlement. When it occurs, it is often a trusted employee who took advantage of an opportunity.
Leaf through to make sure you recognize the supplier names. Glance at the endorsements on the back of the cancelled cheques. Watch for cheques that have second endorsements. If it occurs frequently, it could be a sign of fraud or embezzlement.
If you don't receive cancelled cheques or images, skim through your actual cheque register.
Keep an eye out for funds being diverted. This may be indicated by multiple cheques written to the same supplier around the same date. If all the cheques are on the up and up, you might want to find out why one cheque isn't being printed and sent, saving you bank processing charges and stationary costs.
You may be interested in checking out this list for ideas on how to segregate duties to reduce the possibility of fraud.
It will take management skill on your part to ensure you have adequate policies and procedures in place to protect your business from fraud.
This ends the chat on how to review your bank reconciliation report. Let's continue with how to do a monthly financial review by moving to the next item on your balance sheet.
Let's look at your accounts receivable.
Take your aged accounts receivable report and compare it to the number on your balance sheet (in the asset section). The two should match. If not, get your detective hat out, develop your business management skills, and investigate.
Watch out for frequent misapplied payments as possible fraud.
Do collections on slow paying customers. Implement collections procedures and follow them faithfully. Consider whether some accounts should be written off to bad debt expense.
Review your invoicing procedures to ensure customers are billed promptly and credit terms are clearly stated. Send out monthly statements on overdue accounts.
An affordable way for you as a small business owner to accept credit card payments from your customers, and avoid the usual hefty merchant charges, is to sign up for PayPal.
It is a good practice, if you use QuickBooks®, to enter all your customer payments through the Customer Menu using Receive Payments ... or Sales Receipts ... if you want your customer reports to work properly. |
Inventory is important because it can tie up a lot of the company's cash. Developing management skills here can help you to avoid possible cash flow problems. It is not unusual for small businesses to have poor inventory records.
Has your inventory balance changed since your year-end? No? This indicates you are using the periodic method of valuing inventory.
The reporting problem it presents is that it makes your financial statements inaccurate by understating your direct expenses on your profit and loss statement. Your gross profit is not correctly reflected playing havoc with your profit margin. Your working capital will also be affected which in turn affects your owner's equity.
What does it all mean? It's probable you are showing too much profit. In fact, you could be losing money and not know it until your next year-end is performed. :-( Don't worry, we have a way around this problem. I'll explain in a minute.
You will need to ensure a physical inventory count is performed at least once a year to bring this number up-to-date. This is normally done in conjunction with year-end. In the interim, you need a method to make your inventory numbers meaningful and your financial statements useful during the year.
Let's Chat About ...
Under a periodic inventory system, your inventory account is only adjusted at year-end. Inventory purchases throughout the year are booked to a purchase account as there is no cost of goods sold account.
When inventory is purchased, the following entry takes place:
Debit (Increase) Purchases (on your income statement)
- Credit (Decrease) Cash or (Increase) Accounts Payable (on your balance sheet)
When inventory is sold the basic transaction that gets recorded in your books is:
Debit (Increase) Cash or Accounts Receivable (on your balance sheet)
- Credit (Increase) Sales (on your income statement)
At year-end, you will have to book an adjusting entry to adjust your inventory sitting on your balance sheet.
This ends the chat on how periodic inventory is recorded. Let's get back to how to review your inventory account(s) on your balance sheet.
Here's how to fix the problem mentioned above ... It is good practice to estimate the value of your inventory at each month-end if you use the periodic method of valuing inventory. There are two methods to estimate inventory.
One is the gross profit method which estimates your cost of goods sold based on your expected profit margin. The other method is the retail method which uses the cost-to-sales ratio to estimate the value of the ending inventory.
How can you tell if your inventory is estimated? (Hint: if the value of your inventory has no cents or a rounded dollar value, chances are an estimate has been booked.)
If you have any inventory items that have a large dollar value, consider doing a physical count on these more frequently than once a year. This one habit could reduce the chance of having a nasty surprise at year-end when you find out your monthly estimates were off target.
If your business has a large volume of inventory transactions or you carry a large inventory, you will want to invest in software for perpetual inventory management to improve the accuracy of your financial statements. A just-in-time system can offer improved cash flow.
Let's Chat About ...
With perpetual inventory, your inventory account is updated on an ongoing basis. Purchases are booked through the cost of goods sold account at the time of the sale. There is no purchase account under this method.
When inventory is purchased, the following entry takes place:
Debit (Increase) Inventory (on your balance sheet)
- Credit (Decrease) Cash or (Increase) Accounts Payable (on your balance sheet)
When inventory is sold under a perpetual system, the basic transactions that get recorded in your books changes slightly to:
Debit (Increase) Cash or Accounts Receivable (on your balance sheet)
- Credit (Increase) Sales (on your income statement)
Debit (Increase) Cost of goods sold (on your income statement)
- Credit (Decrease) Inventory (on your balance sheet)
You can see two transactions are booked here at the time of the sale. In periodic inventory only one transaction is booked at the time of the sale.
This ends the chat on how perpetual inventory is recorded. Let's keeping going with how to do the monthly financial review of your financial statements.
GAAP Update Inventory ... and ASPE Have you been wondering if the new Accounting Standards for Private Enterprise (ASPE) coming into effect on January 1, 2011 will affect how you report inventory on your financial statements? Grant Thornton (www.grantthornton.ca), in their Catalyst Winter 2010 newsletter, says no ... but there are fewer mandated disclosures. I'll leave it to you to use your management skills and determine what disclousres are applicable for your business. |
I just want to take a moment and check in here. Are you having fun practicing your business management skills? Looking at this task as interesting and enjoyable will make it easier. :o)
Okay, moving on to the next section of your balance sheet ... let's look at your liabilities.
Are there any negative balances? It's a sign that your financial statements are inaccurate. It means that an entry or entries has most likely been entered incorrectly or missed. Use your business management skills to investigate each account with a negative balance (in the liabilities section, this means it is a debit balance in your general ledger).
One way to quickly look for obvious errors, if the account balance is not what you expected, is to take a look at all the transactions in your general ledger for the month. Look for the transaction that doesn't seem to fit or looks odd. It could be as simple as an entry booked in the wrong direction (should be a credit but was posted as a debit.)
(As an aside comment - Hopefully your problem transaction isn't caused by someone posting an item to a prior month. To avoid this, make sure after each month-end is complete to set the closing date so that entries can't be posted to it anymore. This forces all transactions that occur in the month to be posted to the current month. Correcting entries should be done by posting a journal entry.)
Pay particular attention to your tax accounts. A negative number for GST or income taxes means you are expecting a refund. Is this reasonable?
However, when you look at your payroll taxes, it would be highly unlikely you are receiving a refund, so this balance should not be negative.
Look at the "Change" column on your balance sheet. Have any accounts changed substantially when compared to your prior period? Do you know why? If you don't know the answer, you guessed it ... practice honing your management skills and determine what is causing the change.
Verify any loan balances to your statement from the bank to ensure the interest portion of your payments has been expensed.
Is there any balance owing to you, the owner? Is the balance what you expect?
If possible, be the one to hand out pay checks. Make it a habit to scan the payroll register especially if your employees go directly to the work site.
Remember, keep notes to follow up on and to look back at next month ... and file it instead of throwing it away when done. Make sure you take time to write follow-up notes beside each item as well. Why? Two words ... audit trail. Okay make it four words ... and accountability.
Still in the liabilities section of the balance sheet ... let's look at your accounts payable.
Take your aged accounts payable report and compare it to the number on your balance sheet (in the liability section). The two should match. If not, you have some sleuthing to do. Your business management skills are getting a good work out today, aren't they?
Also refer to the discussion above about the bad habit of printing and holding vendor cheques. Keep this in mind when reviewing your payables.
It is a good policy to always enter all your accounts payable through the Vendor Menu using Enter Bills ... even if you are paying the invoice right away. |
Three or four times a year, develop your business management skills by taking some extra time to look at your vendor statements. One way to do this is to choose a day to open the mail yourself.
Always investigate long overdue invoices. A good practice is to ensure vendor statements are reconciled to the individual accounts payable on a regular basis to ensure no invoices have been missed or payments redirected.
Let's move to your income statement and very briefly review it.
I like to have my income statement print out with my largest expenses reported first followed by smaller expenses. QuickBooks® makes this easy to do with a sorting feature option on every report. I can clearly see where my largest cash outlays are.
I also like to have the report print a column calculating the percent of income so I can easily compare my company to other companies regardless of size. I can also see if any expenses are increasing or decreasing with the volume of sales. Keep a sharp eye out to make sure your expenses do not start increasing faster than your sales revenue. Now ...
Are your sales better or worse than last year? Are they in line with what you were expecting? (Check your budget.) Or is something happening there that needs to be investigated? ... Okay, I can't help myself. You know you have to roll up your sleeves and exercise those business management skills of yours! :o)
Do your expenses jump around all over the place from month to month. It probably means your bookkeeper (is it you?) is not matching expenses with revenue. Check for missing or absent entries in one month and a doubling up in the prior month. You are aiming to have your income statement fairly represent your business operations for a specific period, in this instance the period is one month.
For example, many of your overhead (selling and administration) expenses are fixed. The expense can be anticipated and should be booked each month - by accrual if the invoice has not been received. This gives a more accurate picture of whether you made or lost money in a month.
When investigating unusual or unexpected account balances, look in the general ledger at the type of entry found in the account. Does anything stick out? How about the dollar amount? Does any one amount stand out as too large or too small for the account?
Make a note and follow-up. The ability to follow-up is a great business management skill to learn if you want to be effective.
Let's Chat About ...
Revenue Recognition and Matching Principles
A basic principle in accounting is to recognize revenue when the transaction is complete ... whether or not you have received payment. A sales transaction could be the sale of a product or a service.
If a construction or other long term project is involved, it is preferable to do progress billings (percentage of completion method) to recognize the work completed to a particular date.
The revenue recognition principle requires using the accrual basis of accounting instead of the cash basis of accounting. To understand this principle, it is important not to confuse sales revenues with cash receipts.
How do you now if you are using accrual based accounting? A good indication would be if you have recorded accounts receivable.
Another basic principle in accounting closely related to the revenue recognition principle is to match costs with revenues in the period the revenue was earned to fairly represent the operating results.
Costs are generally reported to match with revenues in two ways.
The first is by a direct association to the sale; for example the cost of goods sold (COGS) ... inventory sold ... is recorded when a sale is made.
The second method is by an indirect association to the sale ... the accounting period that costs were used in; for example operating expenses relating to selling expenses like advertising ... or general and administration expenses likes utilities and rent.
The matching principle is one of the reasons accountants do adjusting entries. Accountants have developed management skills and are trained to use professional judgement when booking adjusting entries. Novices should not book adjusting entries.
This ends this chat on the revenue recognition and matching principles and is the end of your monthly financial review. It's time to give your business management skills a rest ... you've earned a tea break!!! Whoop! Whoop! Whoop! :0)
Wrap Up
This has been a brief overview of how to go about reviewing your financial statements and look for red flags that may indicate your financial statements are not accurate.
I just want to finish up this chat on a very important business management skill ... How to Supervise Your Bookkeeper ... by saying that you may be told that as a small business owner you don't need to bother with a lot of these accounting procedures and principles. However if you are serious about your business and expect it to grow, learning how to do these things now is a whole lot easier than having to learn them later ... possibly after you run into cash flow problems or an employee has been fraudulent.
For business management skills to be useful, they need to be developed, used and practiced regularly. If you start practicing this particular management skill set while your business is in its infancy, you will be comfortable expanding and refining these skills as your company grows. So always look for opportunities to develop your management skills while your business is still young.
If you have no intention of using your financial statements as a tool to help you run your business, then some of this stuff is irrelevant to you. I'll leave it to you to figure out what.
If all you want is to have records to back up your tax return, see this simple method for ensuring your records are adequate.
In Summary
To review your financial statements, scan the reports for unusual balances. The more often you do this review, the more familiar you will become with the numbers for your business. The easier it will be to detect problems in their infancy or clerical errors that need correcting. Always ask yourself if the numbers are reasonable and do they make sense in relation to your business.
As part of your strategic plan, implement the monthly financial statement review. It will help you stay in touch with your numbers and reduce the potential for fraud in your business.
Business management skills like the monthly financial review ... every small business owner should learn. You can develop this necessary management skill by practicing it every month faithfully. Soon you will be a wizard at it.
Remember ... when you think of the monthly financial review, think ...
... Yeah I get to practice my business management skills! ... ;-)
Say it with me ... I like developing and practicing my management skills. ... Oh geez! I got so caught up with this topic that I forgot to drink my cup of tea. Sheesh!
Say it with me ... I like practicing my management skills.
P.S. You might like to check out these quick methods of calculating your profit and cash flow. It's two great ways to use your management skills to keep your finger on the pulse of your business.
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