You're looking at your trade accounts receivable listing and you note amounts that are a couple of years old, amounts with strange names, large credit balances or balances that aren't consistent with the your type of business. These could be signs that you have a problem.
Bookkeeping impacts every business. Good bookkeeping can give your business an edge over your competition and poor bookkeeping can cost you money and hold your business back. What kind of bookkeeping are you getting?
Why should you care?
A good bookkeeper provides support to keep your business healthy. Poor bookkeeping can hide signs of a business in distress. Paying for bad bookkeeping services has two costs, the price of the bad bookkeeping and the cost of the CPA firm to fix the errors. In addition, there is the hidden cost of bad decisions made from poor financial information.
What is bad bookkeeping?
As accountant we have seen the good, the bad and the ugly of bookkeeping. At an extreme, ugly bookkeeping provides information that is worse than no information at all. You should question the quality of your bookkeeping if it isn't consistent with your own knowledge of the business's operational results.
In working with one client, the information provided by the bookkeeping was so inconsistent with the operations of the business it was clearly unreliable. Instead of using the bookkeeping, we had to redo most of the work. During the year, the company used unreliable information this lead to excessive use of its line of credit and unnecessary interest expense. In the end, we filed the tax return, and made a recommendation to replace the bookkeeper.
Four signs of bad bookkeeping
1. CRA interest & penalties.The bookkeeper is unsure how to perform the bookkeeping or is trying to clean up incorrect bookkeeping which results in the filing of late reports and incurring interest and penalties from Canada Revenue Agency. CRA assessments should be monitored for significant interest and penalties.
2. Old or unusual items on common reports. These are more technical errors that occur when a bookkeeper records a transaction to a sub ledger and then does not correctly close out the transaction resulting in numbers that should have removed from reports remaining forever. This makes the reports less reliable for business decisions.
3. Inability to answer questions about their work. The bookkeeper cannot answer questions about their bookkeeping, or the answers given are inconsistent with the operations of the business. A business should be able to rely on their bookkeeper for financial information.
4. Inconsistent treatment of similar transactions & lack of understanding of trend analysis. Inconsistent treatment of similar transactions indicates a lack of understanding of basic accounting principles and makes accounting data less useful for trend analysis and monitoring for mistakes. An example of this is when the bookkeeper records waste removal to a utilities account one month then to repairs and maintenance the next. Utility type expenses should have twelve items expensed in a year (one per month). Trend analysis can be used to watch for errors, both in accounting or operations. A missed month could indicate a missed payment.
Unexpected costs of bad bookkeeping (or the fraud discussion)
Sometimes bad bookkeeping is not a sign of incompetence in the bookkeeper, instead bad bookkeeping hides signs of fraud. Most examples of fraud go hand in hand with bad bookkeeping. When someone chooses to commit fraud they must figure out a way to hide it and it is much easier to hide in a mess then in clean bookkeeping.
Good bookkeeping can improve your bottom line!
Good bookkeeping should provide information to manage your business. Strong management of accounts receivable can show your customers you are well organized. A work in progress listing can enable faster billing. An accurate accounts receivable listing will identify a need to phone customers with amounts older than thirty days. An accounts receivable listing will also pin point customer trends. If a certain customer normally orders $10,000 in product every week and this week they haven't, someone can phone the customer to find out what happened.
An aged inventory listing can be used to manage stock. For example, a wine shop can track old and slower moving inventory and put any inventory older than a year on sale, then replace it with more popular vintages. Or, the listing can be used to monitor popular vintages, and larger orders can be placed for any new product that sells out within a week.
Strong cash flow management can cut down on borrowing costs. As an example, accounts receivable is generally a business's largest current asset and management of it can cut down on your business' use of a line of credit which charges interest. For example, if the average collection period for an invoice can be moved from 45 days to 25 days the faster payment can be used to reduce the use of a line of credit.
If you borrow $1,000 from your bank for 20 days at a borrowing rate of 6% per year, the interest would be $3.29 ($1,000 X 6% X 20/365). If this occurs 12 times in a year, the annual cost is $39.45 ($3.29 X 12 times) on every $1,000. For $100,000 of accounts receivable the savings is $3,945. In addition, the faster accounts receivable is collected the less likely the amount will become doubtful.
A competent bookkeeper is essential to a healthy business. If you don't have one – either get your bookkeeper some training or replace your bookkeeper.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.