Attempting to run a company without good financial statements is like attempting to call football plays without being aware of the score. Irrespective of your coaching skills and experience, it will be impossible to call a successful play. However, despite knowing how detrimental playing without information is there are many business owners who attempt to run their companies using this approach. They use financial statements that are, at best, not useful for any effective decision-making.
In this situation, the financial statements will typically be inaccurate and small business owners find that the statements received are no longer relevant. An entrepreneur who counts on their company to provide consistent income needs continuous and regular statements; however, if they are inconsistent the chances are the company will fail. This article will provide information on how to upgrade the reporting system and make financial statements useful.
• Using The Correct System When working with financial statements, it is recommended that the company use an accrual accounting system rather than a cash system. Contrary to belief, the accrual system is more beneficial when matching expenses because it reports revenue and associated expenditure in the company over the financial year. A cash system will not account for the variations in monthly reports, and there may be a lack of performance understanding.
• Ensure Accurate Accounting Measures It is highly recommended that you separate the costs directly according to the product, service or additional expense. By separating the costs, it is possible to determine a gross margin percentage. This is significant because a dramatic fluctuation in the gross margin percentage will indicate problems in transactions. A successful company maintains a stable margin percentage, and this needs to be considered when looking at financial statements.
• Review The Statements Line By Line In the service industry, understanding profitability of the consumer is an essential factor to take into account. Similarly, in product-based companies, it is important to understand the profitability of the production line and sales. Evidence has been found among smaller companies that unprofitable production lines or clients are being experienced without the knowledge of the manager. This type of discrepancy is apparent in financial statements, and if this happens, it is recommended prices are raised to reduce the profitability scale.
• Accountability The company manager is typically responsible for a company’s revenues and costs. For example, if the items being produced are ‘people costs’ there is a lump sum where all costs are being placed together. In this situation, there is more than one manager responsible for the portion of costs and the revenue may be obscuring performance. The financial statements can be useful for multiple accountabilities because it will help identify who is accountable and at what point accountability is reached.
• Deadlines For Financial Statements It is highly recommended that all financial statements are received within the last two weeks of each month. By doing so, the statement will remain relevant, and the value for decision-making will be reduced. Typically, people will be able to send in statements during this period or before, but it is best to estimate for statements to be received and dealt with early to avoid problems. The best solutions for business is to hired a professional bookkeeping service meaning that you will have more time to run your business.
It is very easy for a business to believe that a few dollars here and there in expenses will not be a problem. However, this can add up over time and it will become harder to detect the expense fraud. There are a number of steps that you can take to overcome this form of fraud in your business.
Have An Expense Report Policy The first step to preventing expense fraud is to have a clear policy for expense reporting. Many small companies will have a simple policy while larger companies will need more complicated policies. Some of the recommendations for your policy will include all expenses being submitted within a set time frame after incurring the expense. Some businesses feel that this should be within 30 days while others allow for 60 days.
You should also look at implementing a policy where all purchases over a certain amount require receipts. This will stop any fraud where extra is added to a larger expense. Itemization of multi-category purchases such as stays in a hotel is also recommended.
Inform Employees Of Violations Before Reports Are Submitted Most companies will have their expense report policy in their employee handbook. The problem is that most employees will not refer to the handbook when filing out their expenses report. To overcome this, you should consider an expenses system which automatically highlights policy violations. The system should also look at automatically identifying duplicate transactions.
An immediate feedback loop is more efficient than having to go back to the employee after the report has been filed. This will also lower the burden on accounting staff and supervisors who have to identify and reject any reports that violate the policy.
Have A Thorough Review And Approval Process The approval chain that you have should start with the appropriate managers. They should be given the primary role of ensuring that all claimed expenses are accurate and are a true business expense. If you have large departments, you should have multiple managers involved in this stage.
You can also look at having multiple approving managers for the different aspects of the business. Project-specific expenses should be approved by the manager that is most knowledgeable of the project. You should also consider the bookkeeping expense reporting tools that are used and how they can help with the approval and review process.
Utilize Data Analytics There is a lot of data available to you about the expenses that your employees claim. You need to make use of the data to determine trends in the expenses. You can see what certain employees are claiming, what the primary category of claims is and the merchant that the claim relates to. This information can be leveraged and used to identify any unusual trends or items.
There are a number of steps that you can take to prevent expense fraud in your company. It is best to start with a clear and easy to understand expense reporting policy. Having a review and approval process that includes multiple managers should also be considered.
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