In Pursuit of Profit
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And while A/R problems are often errantly believed to exist most commonly at large companies processing a high volume of invoices every month, the research proves that to be false. The companies that tend to be the most behind are those processing between 300 and 2,500 invoices every month.
Clearly, small businesses are the ones most likely to have A/R issues, which is a real problem because the fewer invoices a business has, the more important collecting on each one becomes. For instance, if a company is processing 10,000 invoices every month, and 50 of them are outstanding, that is only 0.5% of its revenue that has not been collected; whereas, if a company is processing 1,000 invoices, and 50 of them are outstanding, that is 5% of its revenue that is outstanding every month.
Failing to collect on outstanding accounts receivables is a serious problem because, as the CFO Selections team explains, “The longer an invoice goes without being paid, the less likely it is to get paid at all. On average, 26% of invoices are uncollectable at the three-month mark, but that number rises to 70% at six months and 90% at 12 months.”
We’ll break down what a COA is and why you need one, give you some pointers on how to create a COA, provide an example of a chart of accounts for you, and give you some helpful reminders to be aware of as you create your own COA. Let’s get started talking about accounting chart of accounts fundamentals:
Having clean books lays a foundation for smart decision-making and sound strategic planning. It is also crucial when applying for financing, pitching to investors, and keeping partners informed. A company that does not represent themselves truthfully with their financial data, even if it is an accidental misrepresentation, can miss out on growth opportunities or be faced with fines or penalties as a result.
But what happens when the books fall into disarray despite your best efforts to keep them accurate and close them in a timely manner?
As our team explains when discussing the importance of bank reconciliations,
The general ledger contains a record of a company’s cash transactions, and a bank statement tracks all money moving in and out of a company’s account. So, theoretically, these two statements should convey the same information and result in the same cash balances. However, in practice, this is rarely the case. Businesses of all sizes need to perform regular reviews, called bank reconciliations, to ensure that these two documents balance.
This summer, the IRS began urging tax professionals to increase their security measures amid a storm of increased cyber-attacks. Through the first half of 2021, cyber-attacks against tax professionals had already outpaced the annual numbers for 2020 and 2019. And tax pros are not alone.
Cyber security has become a hot topic among all financial professionals over the last year as security attacks against businesses and individuals soared during the pandemic. Michael Cohn explains the recent rise in security threats when he says,
Identity thieves and fraudsters were particularly busy last year and this year taking advantage of the COVID-19 pandemic as many tax pros worked remotely from home and their firms were forced to lower their cyber defenses. The economic downturn also served as fuel for a variety of scams and schemes to steal money and identities.
So, how do you keep your financial data secure?
Don't wait around for "the right time" to improve your accounting functions! Now is the time to stop putting off the planning and cleanup work that always seems to get pushed to the backburner. Commit yourself to embracing a culture of continuous improvement – looking for places where you can overhaul whatever is broken and streamline areas that are not working optimally.
So, how do you identify where your accounting department needs to improve?
Ask your accounting team and any staff that deals directly with them where their pain points are and what they would prioritize fixing. By including both the team’s feedback and the rest of the organization’s perspective, you will get more balanced input on what kinds of changes should be prioritized.
Focus on operations, processes, and policies with the potential to have a big impact on either efficiency or accuracy. Possible areas to focus on include:
The 2020 pandemic caused significant change across the business landscape. CEOs and business owners were put to the test as they decided how to strategically navigate the effects of the pandemic. As a result, many business owners have realized certain aspects of their company’s financial operations may shift indefinitely.
As the practice manager for an accounting firm, I’ve been in a unique position throughout the pandemic because I’ve witnessed our client pool expand to include companies that would never have considered using a third-party accounting company to handle their accounting needs before. However, these business owners were put in a difficult position when in-person work was shut down and some key employees had to take time off for sickness or family obligations. Some lost their accountants to virtual school responsibilities, while others were forced to upgrade their desktop accounting systems to cloud-based versions so employees could collaborate remotely.
As a result, business owners have now experienced first-hand that their bookkeeping and accounting work can be performed remotely without having to sacrifice quality and efficiency. In other words, the same value can be realized whether day to day accounting is being performed remotely or onsite.
Let’s look at what business owners are telling our accountants, and what this means for the future of accounting and finance.
The Association of Certified Fraud Examiners’ Report to the Nations reveals that on average companies lose 5% of their annual revenue to fraud with a median loss per case of $125,000 and an average loss per case of just over $1.5M.
The report further elaborates that more than half of businesses never recover any of the lost funds.
While only 20% of fraud is reportedly committed by business owners (compared to 41% by individual contributors and 35% by managers), the cost of owner-run fraud schemes cost their businesses 10 times more on average than fraud cases committed by lower-level employees.
The average perpetrator of fraudulent crimes has been with the company for 1-5 years and engages in their fraudulent activity for 14 months before being detected. And small businesses typically carry a higher fraud risk than their larger counterparts with twice the rate of billing fraud and payroll fraud and four times the rate of check and payment tampering.
No one wants to believe that fraud could be happening at their company, but these statistics tell the true story – fraud is far more widespread than many people think.
So, how does this kind of fraud occur and why is the risk of fraud higher this year than previous years? And most importantly, how do you identify fraud and what can you do to prevent it?
Do you know how much time your company is spending on bookkeeping activities like accounts receivable (AR), accounts payable (AP), bank reconciliations, financial reporting, and reimbursements?
Or are you of the opinion that it doesn’t matter as long as it is getting done?
In many small companies these responsibilities fall to the business owners, adding another hat to the stack that they are already wearing. In these instances, it can be difficult to determine how much time is truly being spent on bookkeeping because it is being squeezed in throughout the day and week where there is room.
However, until you know how much time you and your employees are spending on bookkeeping and accounting functions, you will not be able to do an effective cost-benefit analysis to determine if it makes more sense to outsource these activities.
Additionally, knowing where you are spending your time means you will better be able to define the role you are looking to hire or outsource to get the right fit for your company, which works to improve employee retention – not just among financial staff, but among all employees. This kind of information can help determine whether you need a bookkeeper or an accountant and whether the role should be part-time or full-time.
The solution is to use time tracking software to keep a log of which activities are being done when and how much time it takes to do them.
There are plenty of resources about the benefits of outsourcing, yet many business owners are still resistant to outsource their bookkeeping.
Even businesses that outsource other activities tend to keep a tight grasp on their financial functions. Because cash flow is so important to small businesses, bookkeeping and accounting tend to be some of the last functions that business owners are willing to relinquish control of when they formulate strategic growth plans.
But why? Why are some business owners still against outsourcing their bookkeeping?