Financial Management 201, Part I
When I was a college student, I got an “A” in my Accounting 101 and 201 classes. Then I entered the “real world” and almost sunk the family business because I had no idea what I was doing with “real” accounting.
You see, the examples in the college textbook used financials that were correct. That means, the dollar amounts in the accounts could be trusted, and were assumed current and accurate.
Well, when I took a swing at entering my accounting data, I made a big “Slinky knot” mess out of my Peachtree accounting file. Oops. I didn’t learn how to fix my accounting in college. That would have been useful! I learned what I know now from falling in holes and climbing out of them.
As a business consultant, I see lots of financial reports. Most of them have a few “Slinky knots” in them - accounts that are just wrong. The data in those accounts are the result of mistakes in data entry. In my consulting work, I start by helping my clients get to KFP - a known financial position. Let’s get the accounting correct. That’s the first step.
From there, we can see the impact of operational, marketing and sales behaviors. The good news is that you can always improve your financial situation once you know what it is. I am kind of like Super Nanny; I show up, we work together to clean up the accounting, and we put simple systems and routines in place to help you stay at a KFP.
Sometimes, we clean stuff up and then it gets messy again. Just like Super Nanny, I go away after my consulting visit. It is up to my clients to maintain the systems we put in place. I can always come back, and I often help over the phone. However, the key to staying at KFP is your willingness to learn enough about the accounting systems to enter data properly and to fix things when they get balled up.
Welcome To The Real WorldIf you are the owner of a very small shop, you might be the financial manager of your company (as well as the service manager and marketing manager and salesperson, etc.). That’s the way it goes. If you dream of being a bigger shop, take heart that every big company was once just your size.
The way out is through. Take responsibility and do a good job as the financial manager. Quit looking for a magical solution (accounting fairy?) that will handle the accounting for you. Learn how to do it yourself and document your basic procedures. This will help you hand off the accounting duties successfully.
In larger shops, sometimes the accounting duties get handed to:
Whatever your title, if you are the one who is responsible for the financial information at your company, I am here to help you. The following are a few tips and tricks for finding and fixing the “Slinky knot” messes in your accounting program. The rest will be presented in next month’s column.
1. It's probably you.I often hear something along these lines, “That number wasn’t there yesterday. It must be a QuickBooks problem.” That weird dollar amount in your financial reports probably has a very simple explanation. Somebody, maybe you, entered that information.
In every accounting software program, there are debits and credits. Sometimes the debits and credits are not visible from the data entry screen. You will have to do some digging.
Follow the flow of information from the entry point to the income statement (a.k.a. profit and loss or P&L) and/or balance sheet. (In my lengthy career, there have been only two cases where the accounting program was corrupt. Chances are you are the problem. Start troubleshooting from that assumption.)
2. Stay current with your financial reporting.I recommend a weekly review of the balance sheet and income statement. Some contractors I know get daily reports. That’s great! Once a year at tax time is just not going to cut it. Get to KFP and run the financial reports at least once a week. It is so much easier to find and fix a mistake that happened in the last few days than trying to track down something goofy from six months ago.
Also, you can fix the mistake in the current month. That is better than having to re-open a previous month and adjust it. Once I “close” a month, I don’t like to open it again.
3. Go line by line down the balance sheet and income statement.Look for “weird” things. If you are just getting started with this process, I can help. Or your accountant may help you learn what’s “weird” and what’s right. What a great opportunity for him or her to add value to your relationship.
KFP means that every account is right. It reflects what you have in assets, what you owe in liabilities and what you own in equity. The sales account should equal what you have sold for that period of time. The expenses should reflect what you have expensed for that period of time. The financial reports should be current and true.
Here’s a list of “weird” things that may need some fixing:
The journal entry to enter payroll is much easier if you don’t have to keep track of the appropriate liabilities and payments. Follow the flow of debits and credits. You could create a sample transaction for your payroll procedure and reference it every time you enter payroll.
Have your accountant help you make the weird things right with an appropriate journal entry or reversing entry.
Find out how it got weird, if you can, and update the data entry procedure. Written procedures are key to staying at KFP.
If you don’t know how it got weird, at least get it to right. If it is a small dollar amount, create an adjusting entry and watch to make sure it doesn’t get weird again. If it does, look through the previous week’s transactions for that account to find the entry. This is forensic accounting!
If you do this once a week, you will get intimately familiar with the accounts and the dollar amounts. You will become an expert in what looks right and what looks “weird” and how to fix the weird stuff.
4. Run a transaction register report and look for the debits and credits.Different accounting programs call this report by different names. Look for the detail trial balance or the general ledger journal to find the “guts” of every transaction.
Double-entry accounting is based on the universal law of “what goes around comes around.” If something goes up, something else goes up or goes down by that amount. Debits and credits are the mechanics in the accounting system that cause the dollar amounts to go up and down - and the balance sheet to stay in balance.
There are debits and credits behind every data entry screen. You can also affect accounts directly by creating a journal entry. I’ve attached a “cheat sheet” of debit and credit rules below; I reference this several times a week.
That’s plenty for now. Tune in next month for street-smart ways to uncover “weird” numbers, and a mother’s perspective.