Working with small business owners can be more interesting than watching the latest mystery thriller on Netflix. Owners are far more complex than movie characters. The stories of how they got started and how they stay in business can beat any movie plot. And sadly, the downfall (in cases where there are downfalls), can be caused by the most unlikely circumstances. It really makes for great storytelling!
On a recent occasion I met a business owner whose company had gone through an agonizing death by a thousand cuts over a two-year process until he finally called it quits. The culprit: Poor accounting policies and practices. The company had implemented rather aggressive accounting practices that helped it in the short-run, but ultimately killed it over time. Most surprising was the conservative nature of the owner and his utter surprise at what had happened. An accounting reality check may have prevented this from happening.
Getting an accounting reality check
An accounting reality check is not an audit, but rather an opportunity to review your company’s key accounting policies, how they impact your business, and how they compare to your peers’. The reality check should be held with the person responsible for your organization’s accounting, whether it’s an outside bookkeeper or your in-house CFO.
You don’t need to be a CPA to understand how accounting policies impact your business. Spending a few hours per month is sufficient. Ask your accountant or accounting adviser the following questions as part of the reality check:
Revenue recognition
1. What are our main revenue recognition policies in plain English?
2. Are they considered more aggressive or less aggressive than our peers’ policies?
3. How much of an impact would it have on our performance if we changed these policies to be more in line with other companies?
Want more financial management tips? Check these out:
Expense recognition
1. How and when do we recognize our main expenses?
2. Does our expense recognition policy play a major role or a minor role in determining our profitability?
3. How much of an impact would it have on our performance if we changed these policies to be more in line with other companies?
Go to the article: Reality Check for Your Small Business Accounting
