The Importance of a Sound Financial Reporting System
Receiving an accurate and timely financial statement each month is based on the reliability of your financial reporting system. A sound financial reporting system ensures proper checks and balances, an audit trail, and the financial statements needed to make better business and tax decisions.
The following questions can support you as you begin customizing a financial reporting system for your business. These steps will help you start thinking about the different components of your reporting system. We’ll assist you as you reflect on what you have — like the financial information you are receiving, your audit trail, and software utilization — as well as how you use these resources to make business decisions and prepare for taxes.
Here are some questions to think about:
Does everything get run out of one checking account?
If not, how many accounts do you have, and what is the purpose of each of them? In general, fewer accounts keep things simple. Sometimes businesses require multiple checking accounts, but more checking accounts simply means more money to track, which can add complexity. The main question is, how many accounts do you have, how many do you need, and for what? Is there any way to make it simple?
How do you pay expenses: QuickBooks, online, debit card, manual checks?
How does cash go out of the business to pay bills? This shows up on your bank statement and determines the activity level each month. The more activity, the more to account for.
How do you keep track of your checkbook balance?
Online, check register, or bank reconciliation? Is the person who writes the bills different from the person doing the bank reconciliation? This helps us understand how your business manages and tracks daily cash needs and balances, as well as who takes on these responsibilities.
Do you generate a sales report each month?
Do you match this report to your deposits, and are all deposits recorded as sales? Is any money deposited not sales, like a loan or investment from the owner? This information allows us to make sure we know what is coming into the bank and confirms that all cash is sales. Understanding your sales report means nothing gets counted as income that should not be; such as a loan from the owner, which could increase the sales tax or income taxes that you and your business pays.
Do you have a credit card to pay expenses? Line of credit, notes payable, or loans?
What about a line of credit, notes payable, or loans? These other items need to be accounted for, especially when adding additional checking accounts. The more items, the more to account for, as this adds degrees of complexity and additional transactions to consider. A business with 1 checking account, 1 credit card, and 45 transactions a month is much different from a business with 3 checking accounts, 4 credit cards, 1 line of credit, and 5 loans.
Do you have sales tax?
If so, how often? If not, do you still file annually? Do you file Use Tax at the end of the year? This helps us understand sales tax compliance and reporting for your business, what you’re currently doing, and where to start. Additionally, filing these reports ensures the statute of limitations begins — even if a zero tax is due — so you can’t be audited beyond a certain point.
Do you have a way of keeping track of receipts?
Bank statements and credit card statements are not enough for an audit. A statement won’t show if you bought something for your home or your business. A paper receipt from the store will verify your purchase against the bank statement’s financial detail, showing an audit trail from purchase to bank or credit card statement to financial statement.
How do you track your mileage?
Keeping track of your mileage is just as important. Are you tracking it to expense and reimburse yourself at the end of each month? Are you running your gas and car expenses through the business? Make sure to talk to your accountant about the right way to handle this — running all auto expenses through the business is not necessarily the best option.
How are you handling payroll?
Who runs it? Who prepares and finalizes the hours? How often is payroll, when do you report it, and when is the pay date? Direct deposit with electronic check stubs or manual checks with paper check stubs? What is the best way to incorporate payroll into accounting, as well as getting the wage information onto the financial statement? Diving deeper into these questions can help you navigate common payroll considerations.
Do you review your financial information before submitting it to your accountant?
Do you double-check the expenses and account codes to make sure everything gets coded to the right bucket? When you review the financials, do you find anything incorrect that might need to be re-coded to a different bucket? These reviews can be critical to filing your expenses correctly.
Are you using software for your accounts payable, bookkeeping, and accounting needs?
If so, what are you using it for? Does your software assist with invoicing, writing checks, or keeping track of your checkbook balance? Are you recording all deposits, expenses, and payments? Are electronic payments and debit card transactions making it into the checkbook as well? By looking at how and what you’re using the software for, we can determine how to best support your day-to-day, week-to-week, and managerial accounting needs. Whether it’s making deposits, paying bills, creating invoices, entering sales, or managing your cash flow needs, the right software can support your business where you need the most help.
How do you report and streamline the monthly accounting?
Do you have a system in place to have all reporting items together by the 5th of each month for whoever processes the bank reconciliation and end-of-month process? Do you receive a financial by the second or third week of the month? Having someone to support the owner can ensure a good flow of information. In most cases, when a business starts, the owner wears all the hats. As the business grows, hiring a support person for administrative tasks will help with invoicing, deposits, payments, and additional bookkeeping needs.
Do you review your financial statement every month?
Do you read your financial statement and review what you can improve on next month? Do you review it quarterly for tax-planning conversations, and make updates on your quarterly estimated taxes? If you have a budget, do you update it monthly, quarterly, as needed, and re-forecast it? How are you compared to your goals? For this month, this year? Next month, next year? These insights will help guide you to understanding the first steps to putting a sound financial reporting system in place.
At EWH, our initial strategy sessions take all of these questions into consideration. The answers help us create the roadmap to implement sound financial systems for your business. Starting here gives us the insights we need to determine the best system for monitoring and tracking your businesses’ financial performance. We make sure you know how cash comes in and out of your business, that this cash is correctly accounted for, and that you have an accurate financial statement to make decisions from. Get started with a system that is streamlined, efficient, and simple to navigate.
If you want to learn more, call EWH at 262-796-1040 or contact us for a complimentary consultation. Together, we’ll strategize and develop a sound financial reporting system for your business!
