4 Key Accounting Tasks Small Business Owners Overlook

For real-time insights into your business performance, periodic financial statements from your CPA aren't enough.
It's crucial for small business owners to take responsibility for learning and managing their company’s financial affairs. Photo: (garagestock/Shutterstock)
Tage Tracey

Using flash reports to remain updated on short-term financial performance is crucial for small businesses, says financial consultant Tage Tracey. (Photo: Tage Tracey)

Most small businesses owners put the periodic accounting function on the back burner when business conditions are hectic. What’s more, they often lean or rely on external accountants or CPAs to prepare periodic financial statements, reports and analyses to provide vital operating performance results. The thinking often goes, “As long as I have cash in the bank and my CPA is providing quarterly updates, I should be good to go.”

While this worked 20 years ago, today’s real time economy demands speed and accuracy in receiving and deciphering financial results. The old saying “time is money” has never been more true.

To ensure accurate and timely financial reports that will help you better manage your business, include the following often-overlooked accounting tasks.

Using flash reports

Flash reports capture and present critical financial performance data on a short-term basis. Developing and understanding these reports should be priority #1.

Examples include weekly or even daily sales reports, a 13-week rolling cash flow forecast (to always have visibility of cash sources and uses over a 90-day period) and inventory status reports (what’s in, what’s out of stock, what’s about to run out, etc.). The idea is to report key performance indicators (KPIs) in time to make smart business decisions around them.

Implementing the matching principle

To ensure a real measurement of operating performance, revenue should be realized when the earning process is complete and expenses should be recorded as they are incurred, not when a cash payment is made. But almost every small business I’ve worked with fails to properly match sales with expenses on a periodic basis.

A perfect example of this issue is paying sales commissions. In one month, sales may be realized as products were shipped or services delivered. At the end of the month, sales commissions are calculated and then paid 20 days later. So the payment of the sales commissions occurs in the following month but the expense for sales commission was incurred and is an obligation of the prior month.

If the expense is not properly matched with the sales realized in the correct month, the operating results will be distorted.

Using reserves

Another very common problem I see is owners who trick themselves into thinking every piece of inventory they own has value and can be sold and every customer receivable that is owed to them will be collected. Wrong.

It is important to conduct frequent reviews of slow moving inventory or potential uncollectible customer receivables so if losses are present they are realized in an accurate and timely manner.

Another error most small businesses make is failing to build a reserve for the obsolete inventory, bad debts, customer returns, etc. that are bound to occur. So what inevitably happens is that during the year, the company appears to be generating a profit, only to have it wiped out by writing off worthless inventory or uncollectible receivables. Not a very pleasant holiday gift.

Taking possession of your results

Small business owners should not rely solely on external accountants or CPAs to produce and understand financial results. They must take responsibility for learning and managing their company’s financial affairs.

I can’t tell you how many times I’ve heard owners say, “I meet once a year with my accountants to review the financial results and tax returns.” Sorry, this isn’t sufficient. At a minimum, quarterly — and preferably monthly — financial statement reviews should be completed with variance analyses included (comparing budget to actual operating results) to cover not only the P&L but just as important, the balance sheet and cash flow statement.

By paying attention to these tasks you can proactively manage critical economic data rather than taking a passive approach and relying too much on external parties. While external accountants and CPAs offer valuable support services, those services are often delivered in a passive, delayed, and/or reactive manner, from a party that is not living and breathing your business every day.

Tage Tracy is a financial consultant and co-author of several books including “Cash Flow for Dummies,” “How to Read a Financial Report” and “Small Business Financial Management Kit for Dummies.”

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