Whatever your outsourced and managed services needs may be — Eide Bailly can help.
Accounting is a critical component to any business operation. It not only tells you where your business stands, but also allows you to make informed business decisions moving forward.
When your financial information is up to date, you can make smarter, faster decisions and modifications for your business as needed. You can use the information to identify cash flow opportunities, cost containment strategies and your financial capacity to make business-building investments.
When your financial information is out of alignment and outdated, you keep yourself at a significant disadvantage. You’re constantly working off inaccurate, aged-out information, which often leads to faulty assumptions about where you stand and what your next steps should be.
As you move forward with any next steps – whether your goal is cost containment or business expansion – your financials and accounting records must be top priority and they must inform your strategy. Accounting is a guidepost for how your organization is functioning. If you’re not prioritizing it and following best practices, it could guide you off course. If you optimize accounting, you optimize your business.
To get it right, there must be an individual or individuals whose primary goal is to ensure up-to-date, accurate accounting at your organization. It’s also essential that leadership remains actively involved and supportive. This way, you can make the best decisions for the future of your organization.
However, it’s not always easy or within budget to hire an in-house accounting professional or team. For some, outsourcing is the more cost-effective option. In fact, outsourcing accounting can mean better process efficiency and greater outcomes – and ROI – when you work with an experienced, trusted advisor.
Here, we’ll offer guidance as to how to evaluate your current accounting practices and financial health and how outsourced accounting can help at any stage of the process – from evaluating your current and long-term needs, to improving the timeliness and accuracy of recording your transactions, reconciling your accounts, creating financial statements, financial analysis- including comparison to budget, cash flow analysis and forecasting financial results. Outsourcing provides management-level expertise, giving you confidence in your financials.
If you’ve never outsourced, you may feel unsure of what, how, when and why companies outsource in the first place – but you may also feel the pinch of being under-resourced.
Accounting Basics Every Company Should Practice
At a basic level, any organization should have a review process in place that documents when invoices are due, when bills are paid and when cash/checks or electronic payments are reviewed and deposited. This is a solid foundation for an accounting program that’s on the right track.
In addition, monthly reconciliations should be performed for the following common accounts:
- Bank accounts: Verifies all revenue and expenditure activity is captured in your records on a monthly basis.
- Accounts receivable: Ensures your customers are paying in a timely manner and helps with collection procedures.
- Accounts payable: Verifies the amounts shown due are true payables and allows you to pay your vendors in a timely fashion. This may also help you take advantage of discounts given by your vendors for early payment. This also reminds you of future cash needs!
- Capital asset inventory: Establishes that any capital outlays are added to your balance sheet and depreciating properly. This list is an audit necessity.
- Payroll accounts (accruals and expenses): Verifies that payroll is being accounted for properly in the correct accounts.
Another critical component of basic accounting best practice is understanding, monitoring and managing your financial performance. To do this, you’ll need to:
- Watch your liquidity- do you have enough cash for the things you need to pay for and those activities you want to expand in to (new product line, more SKUs, larger shipment size, new location, technology upgrade, etc). Do any new customer contracts have payment terms that will drain your cash?
- Conduct financial modeling to understand how various scenarios and situations will impact your results and especially your cash flow. You may want to be a little conservative here.
- Manage the assets on your balance sheet and assure all the liabilities are accounted for.
- Focus on the conversion of inventory to sales and on accounts receivable to cash.
Your financial data can reveal insights that are game changers for your organization. It’s just a matter of harnessing and analyzing that data to make it actionable. For that, it helps to have a little guidance.
Accounting Best Practices to Shape Up Your Finances
Whether you have the basics in place or not, there may be flaws in your processes and opportunities for improvement. These flaws and opportunities aren’t inconsequential. A well-run accounting department isn’t a nice-to-have, like an organized junk drawer. Finances influence a variety of factors in your organization, from supply chain to inventory to new business models. The impact of optimizing accounting, particularly through outsourcing, could be groundbreaking for your business.
Shaping up your finances doesn’t happen in a day. Build the following best practices into your accounting program to identify problems, reconcile accounts and measure the impact in key accounting areas.
Keep in mind that when you outsource such reviews and practices to an experienced third party, you will benefit more immediately from that outsider’s perspective, as well as their familiarity and industry expertise.
Watch for signs your organization is struggling financially
Certain red flags in your finances could signal underlying issues that could wreak havoc on your organization. Here are a few to look out for:
- Cash Flow Problems: Common cash flow issues include smaller profit margins, loss of sales, theft and allowing accounts receivables to get too backed up.
- Mountains of Accounts Payable: When you “pay” your bills on credit, they go to the accounts payable ledger. Not paying them off can create a mountain of bills. To improve your accounts payable process, set up procedures for cross checking payments, always check pricing options from competitors and vendors, and be sure that billing amounts are being entered correctly.
- Inventory Issues: Inventory metrics are key to understanding your finances and improving processes. If you have too much inventory that doesn’t sell, you’re losing money on storage costs . If you sell perishable products, you lose money if they don’t move fast enough.
- Profit Problems: Issues with profit and profit margins are important, though obvious, red flags. In its simplest form, profit is when you have more revenue than expenses. You’ll need to make sure your gross profit margin (% of revenue that exceeds cost of goods sold) is enough to cover all the other expenses of your organization. That’s your net profit.
Keep your accounting records up to date
Your accounting records are key to detecting red flags and warning signs in your finances. Review and update the following records to identify issues that need remedying.
Warning sign: Cash no longer reconciles to your bank account.
Review your account activity, starting from the last time your cash was in balance, and work through your current period end. If you have significant unexplained differences in a monthly or annual bank reconciliation, it might be an issue with bookkeeping. It’s best to address these differences rather than let them go, as they can continue to grow.
Warning sign: Balance sheet no longer balances.
Your assets should be debits and your liabilities and equity should be credits. You’ll want to review your retained earnings or net assets accounts and make sure they roll forward from the prior year (as a general rule, nothing should be posted directly to these accounts.
Review your assets and liabilities for reasonableness.
- Have they changed amounts from the last period? If not, that most likely means everything is being recorded directly to cash. If so, your current numbers aren’t giving you an accurate depiction of the current situation.
- Do the amounts appear reasonable? Follow you gut on those feelings and investigate further.
- Not getting the knowledge you need by looking at the financials? Maybe you need to break out more line items. Or change up the presentation to give you what you need to make decisions.
Warning sign: Making manual adjustments to equity.
When you find yourself recording manual adjustments to an equity account, besides equity transactions like owner contributions and distributions, it’s a red flag. Only in rare instances, such as correcting an accounting error, should you make manual adjustments to equity. The correct answer is almost always to record the adjustment within your income statement, rather than to your equity account. Always make sure to proactively inform your CPA’s about these adjustments. And if you have to make many of these manual adjustments, it may be time to discuss the issue with a professional.
Warning signs: Account disagreements and negative balances.
Looking at your balance sheet account reconciliations can help you identify issues with the books. A couple items to look for include:
- Account reconciliation detail doesn’t agree to the balance sheet amount. Similar to the bank reconciliation, if your account detail – such as accounts receivable and accounts payable detail – doesn’t agree with your balance sheet, it may indicate a problem with the reconciliation process. A detailed review of your account records can help you identify which difference needs to be corrected.
- Negative balances in your account reconciliation detail. While this may happen occasionally and not be an issue, it could indicate a problem. For example, if a customer has a significant negative accounts receivable balance, do you owe that customer a refund or was something entered incorrectly? On the other hand, if you have a negative accounts payable balance from one of your vendors, are you expecting a refund or does that indicate an error with payment?
Don’t underestimate the power of the balance sheet when you are looking at your books. When you have a concern, you can often look to the balance sheet to see where problems originate. If you outsource your accounting to a third party, the balance sheet will be critical in helping them evaluate your financial status, identify red flags and optimize your processes.
Focus on key accounting areas
Of all the metrics in your organization, how do you identify the ones that are most consequential and provide the best insights to help you stay on track? Here are a few focus areas and key performance metrics organization leaders should focus on and optimize:
Keeping accurate records for sales is important because sales figures can help you determine revenue and inventory purchases. Implement detailed policies and procedures for all types of sales, whether cash, checks, credit cards or online sales. Consider using an invoicing system when shipping goods and having proof of delivery when goods are shipped. Also, check your invoices against sales and payments to ensure everything matches up correctly.
Income from operations keeps your organization going. Making sure you collect, and on time at that, is very important. To keep up on accounts receivable, establish collection policies in writing and make sure to implement those policies. For instance:
- Establish a defined system for billing, such as numerical or batch processing
- Have a timely review process for all accounts
- Keep accounts receivable separate from cash. Review the account receivable aging reports and make sure they appropriately reflect cash postings on a timely basis.
- Have security measures in place for communicating with clients. If you are a healthcare organization, ensure you are maintaining HIPAA compliance.
Human Resources and Payroll
Technology has made it easier for hackers, scammers and even employees to commit fraud or other harm to your organization. Such incidents could have major implications for your financial standing and business continuity, so it’s important to monitor activity, have proper separation of duties and establish defensive policies upfront.
To keep your people (and your organization) safe, consider the following:
- For payroll, review the details and checks/direct deposits to make sure pay is being disbursed properly. Do all those employee names look familiar?
- Pay attention to any differences between payroll expenses and monthly budgets – this could be a red flag that someone or something has gotten access to your books.
- Require password updates regularly – for you and your employees – and make sure to keep all passwords safe and not written down.
The physical assets your organization owns, such as machinery and laptops, are of great value to your organization. If one of these assets is compromised, it can greatly affect your finances and operations. Make sure they are safeguarded or locked up to prevent theft of the assets and the information stored on them. Record asset purchases and monitor use and depreciation on them to stay up to date on their value. To ensure assets don’t fall into the wrong hands and aren’t mishandled, set a usage policy.
Ensure leadership stays hands on
As a business leader, you must be hands on when it comes to financials. Being involved and invested in accounting best practices can save time and prevent potential risk at your organization.
From a leadership perspective, you should ensure the following capabilities are enabled for your accounting department and that you’re actively involved:
- Send the invoice right away. Or, add a process to automate invoices.
- Ensure you can receive electronic payments. This ensures easier access to funds and also means your organization can provide a touchless or minimal contact environment.
- Keep your inventory on track so you know exactly what you have on hand. Make necessary adjustments to increase turn on both inventory and accounts receivable.
- Review cash flows weekly. Your cash flow will tell you the money coming and going from your organization each week and let you know where you stand.
- Reconcile cash against your receipts daily. This will not only help you find issues, but also protect against potential fraud.
Organization leaders must play an active role in accounting and finance – but they can’t do it all on their own. Whether you need a little consulting or a lot of outsourcing, professional guidance can make a world of difference.
The Benefits of Outsourced Accounting Services
Many organizations run a tight ship, with limited budgets and resources. Yet the accounting role is critical. That’s why business leaders turn to outsourcing as a way to gain the information they need without having to bear the burden of hiring someone full-time.
Specifically, outsourcing can:
- Give you financial data you can rely on and trust to make strategic business decisions.
- Reduce fraud risk as it adds an extra layer of oversight.
- Provide a team of resources and years of experience on a variety of accounting related options.
- Add access to an experienced professional without the additional costs of a full-time employee (salary, paid time off, payroll taxes, insurance, unemployment, benefits).
- Stay up-to-date on daily operations and compliance related issues.
Outsourced accounting staff with a high level of financial knowledge can:
- Ensure the accuracy and timeliness of your financial data.
- Help you manage cash flow.
- Present your financial data in a useful and meaningful manner.
- Analyze market trends and help you define key performance metrics and benchmarking data.
- Understand business strengths and weaknesses and identify opportunities.
In addition to these daily and monthly tasks such as data entry and reconciliation, outsourced accountants and financial professionals can help you craft a plan to move forward, optimize your operations and position your organization for the future.
Further, top outsourced accounting firms utilize technology to help you move forward with key business decisions. Instead of utilizing an on-premise, possibly outdated solution, the best accounting outsourcing organizations look to the cloud or to software solutions your organization may need to thrive and grow. Cloud computing allows organizations to be “elastic” with employees gaining access to applications from anywhere in the world. Such technology also provides access to real-time analytics, giving organizations a competitive edge while aligning with overall business objectives.
Save on Cost and Gain Expertise with Outsourced Accounting
Accounting is a crucial component of business. In the current age of disruption, it’s more important than ever. Outsourcing through a trusted advisor can help you identify red flags more readily, solve for them and pave a path toward for an even more efficient and promising future.