Have you ever tried to cook in a messy kitchen? Or find a tool in a cluttered garage? If the mess is too big, you may give up and fix it with duct tape instead. You will experience the same frustration when planning a business using messy financials – searching for answers in nonsense data, growing frustrated, and eventually giving up doing things the right way instead of making decisions based on instinct.
Best-in-class restaurants have organized kitchens. Best-in-class mechanics have organized shops. How can you be a best-in-class business if your accounting is a mess?
Read on to learn the process if you are ready to clean up your accounting mess.
What is accounting cleanup?
Accounting cleanup, like any cleanup, is an activity we hate to do but desperately need. Accounting cleanup is a series of adjustments to historical books to correct errors and improve the accuracy of financial statements. Since accounting is a chronological series of dependent entries, bookkeeping cleanup often involves researching a string of complex and inter-related transactions to identify the historical root of an error.
Accounting mistakes do not self-correct; instead, they often perpetuate into compounding errors that impact financial reporting for months or years. This chain effect means accounting cleanup cost is exponentially more expensive the longer you put it off.
How do you clean up an accounting mess?
There are two ways to fix any accounting mess: the fast way and the right way.
Accounting mess cleanup done the fast way.
When short on cash or time, some businesses are forced to clean up an accounting mess the fast way. That means truing up all the balance sheet accounts to the latest statement and booking variances to the P&L without further explanation.
This solution handicaps your business in significant ways. In the short run, you are deprived of valuable financial history, such as gross margins or customer acquisition costs, which are invaluable for planning. In the long run, brutally adjusted financial statements are a red flag when selling your business, driving down your valuation, or even making your company unsellable.
Accounting mess cleanup done the right way.
There are three steps to clean up accounting books the right way:
- Examine the books and develop a cleanup plan
- Execute the cleanup plan
- Develop month-close processes and documents to avoid future messes
Step 1: Examine the books and develop a cleanup plan.
No accountant should ever “jump in” and start adjusting records without a plan. Accounting is a system of dependencies, and every entry affects at least one other account. A cleanup plan establishes the proper order of adjustments to avoid blunders, excessive corrections, and duplication of work. Taking the time to plan will make cleanup faster and less expensive.
Step 2: Execute the cleanup plan.
Successful execution of an accounting mess cleanup plan will depend on the accountant’s expertise. Are they routinely cleaning up books, or do they only do it occasionally? Have they worked with companies in your industry before? Are they planning to bring you to full accrual accounting or just cash basis? Be sure you understand the cleanup plan before allowing execution to begin.
Step 3: Develop month-close procedures and documents.
Lack of procedures and documents is likely why you ended up with an accounting mess in the first place. Do not repeat that mistake by skipping the final step – invest in your accounting process and documentation so you can have accurate and reliable financials moving forward.
How do you fix errors in accounting?
There are 1000 causes for errors in accounting, but the month-close process should be the single tool to catch these errors and correct them. Errors that do slip past a month-close come from just two sources: bad processes and bad controllers who do not follow or enforce procedures.
To fix errors, work with your controller to build robust month-close processes. These should include no less than:
- Reconciling every balance sheet GL, especially cash, credit cards, AR, and AP.
- Having the sales team check revenue for accuracy
- Performing a ruler check on all financial statements.
Your business will have additional processes based on its unique needs.
Bookkeeping Cleanup with CFOshare
Are you ready to clean up your books the right way? Contact us to schedule your call and take the first step towards accurate financial reports.