Let’s start with what an accounting system isn’t: it is not your software package. Whether you use QuickBooks, Microsoft Dynamics, Sage, an industry-specific software package or any of the available cloud-based systems, it is only a component of your accounting system. It is not the system itself.
A reliable accounting system is a combination of financial data and the procedures you use to record, maintain and safeguard that data. For example, you should have procedures in place to enter data in your accounting software, reconcile the data with supporting documentation such as monthly bank statements, verify balances of loans or credit cards, and review aging schedules for receivables and payables. Your accounting system should also include a system of internal controls that can improve the safety of your data and property and decrease your chances of theft or fraud.
With a full set of these procedures and controls in place and performed on a regular basis, you can begin producing accurate financial data. Then, it’s time for the fun part. What can that golden data do for you?
Successful management of a business operation requires a thorough knowledge of the company’s existing financial position. With easy and quick access to accurate numbers for cash in the bank, outstanding debts, sales, cost of goods sold, operating costs, overhead and other key metrics, management will have a real-time picture of the company’s financial health. They can be aware of potential issues and opportunities for corrective action. Staying on top of this data can save the company time, money and headaches.
With reliable financial information available to you and your tax advisor throughout the year, your business can take advantage of tax planning opportunities. Your tax advisor can help you estimate taxable income for the year and offer some strategies to minimize the tax consequences of your business transactions.
Businesses that don’t have good data, and those that wait until tax preparation time to meet with their accountant, can sometimes be the recipients of surprising tax bills. This can happen when an accountant reviews the business records, reclassifies some transactions and makes other adjustments, resulting in a drastically different taxable income number than the business anticipated.
In most cases, after a tax year-end has passed, so has the opportunity for tax planning for that year. So, keep your tax advisor in the loop throughout the year, keep your data updated, and make sure you don’t get a nasty surprise at tax time.
Planning for the expansion of your business, a shift in strategy or succession in ownership is much more effective if financial data is reliable. When you know where your company has been and where it is now, it’s easier to ascertain where the company is heading and where it wants to go (and are those paths are the same?). Financial projections and professional consultations in these planning areas will be much more effective if the financial data is reliable. The more tools that management and its professional advisors have, the easier it will be to arrive at strategies to meet the company’s long-term goals.
Without a good accounting system and the timely data it can provide, it can be difficult to make informed management decisions. So, put some procedures and controls in place, regularly consult your tax advisor, and start discovering the golden nuggets of data in your accounting system.
For assistance in setting up or reviewing your company’s accounting system, contact John Weaver, CPA, or your WK advisor at (573) 442-6171 or (573) 635-6196.