By: Rayanna Anderson
There is money in the bank, so why should you be concerned about those time-consuming financial practices that everyone tells you are important? With over 50 percent of businesses failing in the first five years of business, according to the U.S. Small Business Administration, good financial practices are one of the best ways to ward off any bad consequences.
Here are four of my favorite best practices regarding a company’s financial procedures.
- Keep your books up to date. That means processing all transactions in a timely manner. In today’s computerized world, this process is as simple as making sure software is connected and you are collecting revenue and expenses as they occur. If you haven’t embraced a good accounting software package, this should be your first step. The software will allow you to keep your books current, enabling you to analyze your situation and spot any problems so they never become a crisis.
- You need an accountant. Accounting is a complicated process. Students of accountancy put in four to five years to get an undergraduate degree in accounting. Therefore, it seems reasonable that if you don’t have a degree in accounting, you will need some help setting up your books, managing your accounts, understanding and keeping current on all tax laws, and grasping what your financial statements are telling you.
- Understand where your cash is coming into the business and where it is going out. This information can be easily reviewed by learning to read and analyze your company’s statement of cash flow. Knowing how cash comes into your business (sources) and how cash goes out of your business (uses) is how successful businesses flourish and why countless businesses fail.
Ultimately, you want profit to be your No. 1 source of cash. That will probably require growing your sales beyond your starting revenue streams. Problematically, as a company’s sales increase, operating accounts such as accounts receivable and inventory increase too. This detail is often missed, because this use of cash doesn’t appear as an expense on your company’s profit and loss statement, but rather as an increase in the balance of those accounts documented on a balance sheet. When missed, this use of cash can have devastating results.
4. Don’t delegate financial management controls. According to the Association of Certified Fraud Examiners, an average company loses 5 percent of its sales to fraud each year. With most small businesses averaging less than 4 percent profit per year, this can be the difference between success and failure.
Some important controls to have in place are segregation of duties whereas the employee paying the bills is not the same person signing the checks, and the check signer is inspecting the supporting documentation for validation. In addition, having passwords in place for access to accounting software, along with periodic overseeing of inventory counts and documentation, and a systematic review of bank statements along with reconciliations are highly recommended.
While financial mistakes and bad practices can lead to failure and financial ruin, good financial controls can be your ticket to success.
Rayanna Anderson, MBA, is the Entrepreneurship Coordinator and Community Liaison for the Missouri State University’s College of Business. Anderson writes about issues from her 25 years of consulting with small businesses in Springfield and the state of Missouri. Email: RayannaAnderson@MissouriState.edu.
This article appeared in the July 30, 2016 edition of the News-Leader and can be accessed online here.