While financial audits can have a negative connotation for many, they can be a great resource for information to boost profits and streamline processes.
Obtaining a financial audit may not be appropriate for every business; however, there are several general business mistakes typically uncovered during a financial audit that, when remedied, can lead to significant savings. A New Year presents new opportunities to take steps to ensure best business practices and boost profitability in 2011.
In our years doing financial audits, some trends have emerged. Here are the five most common business problems and solutions:
1. Collecting accounts receivable in a timely fashion can be a problem for many businesses. In this scenario, businesses oftentimes use a line of credit to fund accounts receivable, which can amount to a substantial interest expense over a period of time.
Solution: In this case, it could be advantageous for a business to require credit card payments, since it may be more affordable to pay the merchant fee than rack-up interest charges. To take it a step further, if cash flow is good, then the company may be able to save money by taking advantage of opportunities from vendors that offer discounts for early payment.
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2. One trusted bookkeeper who handles all financial functions is typical of small or middle-market businesses that oftentimes don’t have enough internal resources. But when too many overlapping responsibilities are handled by one bookkeeper, it does not lead to the proper segregation of duties and could put businesses at risk.
Solution: Use nonfinancial trusted people in management who can do simple things to break up the flow of information. For instance, have the unopened bank statement go directly to the business owner. As another safeguard, have the office manager open all of the mail, including the checks, and prepare the bank deposit for the bookkeeper. If the bookkeeper prepares the wire transfers, have the company CFO or president sign-off on them. These are examples of steps that can serve as a deterrent for potential fraud.
3. Poor record keeping is a big time waster for both the client and the auditor. Whether it’s a lack of organization or a lack of record retention, when it comes time to sell your business and go through the due diligence process or prepare for an IRS audit, it is important to have a complete set of accurate records. The quicker complete records can be produced to a buyer or an IRS agent, the better.
Solution: Scanning the documents into electronic files can lead to better organization, as long as your business has a secure network. Keeping documents organized using a system that works in conjunction with the flow of your business transactions will allow information to be easily stored and accessed. Businesses should be aware of record retention best practices, so records are kept for an appropriate amount of time.
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4. Employment contracts, especially for businesses with portable customers or proprietary business knowledge are essential, but oftentimes overlooked. One talented employee can leave and take a sizeable amount of clients or proprietary knowledge from the business, if the business is not protected.
Solution: Work with an attorney to make the contracts as reasonable, and therefore enforceable, as possible to provide a framework for negotiation and recouping damages.
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5. Duplicate payments can happen within even the most diligent companies.
Solution: Monitoring payments to avoid duplication is simple to do on a quarterly basis. Most accounting software allows businesses to download information into a spreadsheet which can then be sorted by dollar amount. This makes it simple to spot red flags that point to potential duplicate payments and then do the research to resolve the situation one way or another.
Most profit boosting tips are easy-to-implement, common sense guidelines that can get lost in the day-to-day operations of a busy company. Following these five tips is a great start to avoid potential pitfalls and position your business for optimal success in 2011 and beyond.
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George M. Thomson is the director of accounting and auditing services for Filomeno & Company, a CPA and business advisory firm in West Hartford (www.filomeno.com). He can be reached at GT@Filomeno.com.
