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Minding the money

  • SIMA
- Posted: August 1, 2014
By Brian Jacobson

Since business owners are involved in so many aspects of the business, it may not always be easy to keep a close eye on everything. But one area that owners and CEOs should always have in focus is the financial health and well-being of their company.

There are two types of internal controls - preventive and detective - that should be in place. Preventive controls will hopefully stop improper transactions from happening and from getting recorded in the financials. Detective controls should find breakdowns in your preventive controls and notify you of a potential problem for transactions that have already been recorded in your financials. Following are some suggestions to help keep the administrative side of your business under control so you can sleep a little easier at night.

Monthly reconciliations. At a minimum, the key general ledger accounts should be reconciled to their subledger or detail on a monthly basis. For most companies this would include cash, accounts receivable, inventory, accounts payable and loan balances. On a quarterly basis, all accounts should be reviewed in detail to ensure that costs are not being deferred and there are no surprises come year-end.

Bank statements. Personally open the company’s bank statement or, alternatively, have it sent to your home address. Review the activity, including electronic transfers and bank bill payments. Banks show different descriptions, so review the details, since a payment with a description that states it was to a credit card doesn’t mean it was to your credit card.

Check signing. At times, signature stamps are a necessary part of the payment process, but whenever possible you should physically sign checks. The detail for each payment should be with the check so you can review it at the time of signature. If someone in your office uses the signature stamp, they should put their initials next to the stamp. When you review the bank statement each month, look at all of the check images, especially those that the signature stamp was used on. The signature of the person who cashed the check will be on the image. This is important since some accounting systems are flexible and allow the payee to be changed after the check has been issued.

Check runs. Have a set schedule for check runs and avoid manual checks whenever you can. This will help control cash flow and avoid the possibility of a check being cut that you aren’t aware of. If you’re reviewing the bank statements, you should be aware of all checks that have been cut and clear the bank.

Payroll. Review the weekly payroll registers for all of the hours as well as overtime. Review any additions or changes to payroll to make sure you approve all the changes and new employees that are added. If you’re doing job costing, post the hours to the jobs so you can do a budget-to-actual comparison on an hourly basis.

Credit card payments. If you accept credit cards as a form of payment from your customers, carefully review credits each month and reconcile that credits match billing and that card numbers agree.

Credit card expenses. Review statements each month for all cards. If purchase orders are not used, make sure each charge is supported by a receipt and that unapproved items are not included in the charges (e.g., personal items on a charge related to a hardware store purchase).

Customer sales reports. Many customers are billed monthly. Run a report in your accounting system that puts the monthly billings side by side so you can visually see the “missed” billings as well as when additional work was done. Managers and foremen should review this as well, since they should recall when additional work was performed.

Job profitability. Collecting and posting costs to jobs is a hard task for small businesses, but it really is the financial evaluation necessary to ensure you’re making a profit. Material costs and subcontractors are generally easier to post to jobs when they’re received, while payroll can be a challenge if you’re not accumulating time and information in a manner that allows for posting. While your gut instinct is a good barometer for how a job is progressing, unless you know all of the costs being incurred you may not realize you’ve missed the mark until it’s too late. Gross margin or profit pays the overhead bills, so while top-line sales are great, the profit is what you’re looking for.

Expense review. On a monthly or quarterly basis, it’s a good idea to review the company’s expenses in side-by-side format, as well as the details by vendor in different accounts. This should give you a good sense of what you’re spending while also confirming that expenses are lining up to work performed.

Purchase orders. Mandate that purchases over a certain dollar amount require a purchase order that is signed by a supervisor as well as the owner (if the dollar amount is large enough). While you don’t want to slow down production, making employees think twice about incurring an expense is a good exercise.

Overhead. Costs can generally be labeled as either direct job costs or overhead. People spend lots of time discussing the different types of overhead (fixed, semi-fixed, variable), but the bottom line is as long as you generally post costs to the same account and are consistent in the calculation, you can get a decent estimate of your overhead costs as a percentage of sales. Based upon your historical income statement, your overhead costs should be predictable and you can make a general calculation that historically for each $1 of sales you incur X amount goes to overhead costs. Historical results are blended for the year, so if possible identify snow vs. landscaping overhead. You should also realize that if overhead is 30% of sales and sales are trending up for the year, then that 30% may go down. The opposite would also be true; if sales are trending down, overhead would rise. The level of overhead is a key component in your model.

Cast a favorable impression
Implementing the controls noted above can help ensure your company’s financial situation is rock solid. But the benefits extend beyond your own peace of mind. If you have a current relationship with a bank for loans, knowing that you perform some of the reviews noted above will give the bank comfort that you’re serious about your control environment, which is important to them. If you’re looking to obtain a loan or a line of credit from a bank, letting them know that you have good controls in place gives the loan officer a better impression of your company. If things appear either under control or out of control, then they probably are.

  • If you use a signature stamp, make sure the person using it initializes next to the stamp so you know who wrote the check.
  • Collecting and posting job costs is essential to knowing whether or not you are making a profit.
  • Review credit card and bank statements to make sure there are no unauthorized charges.
  • Keep spending in line by requiring purchase orders for expenses over a set amount.
Brian P. Jacobson is managing director for ClearView Financial Services in Pembroke, MA.
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