This month we have a special treat. It’s a guest article written by a colleague of mine, James Wheeler. James is fractional CFO serving a variety of businesses, including software and other technology companies. I have worked with James personally and recommend him highly for his expertise in corporate financial matters. Find out more on his website at narrativefinancialmanagement.com. Now on to his article:
Business owners should feel confident in their financial data. But without access to a team of competent bookkeepers, confidence can quickly become uncertainty. These situations are more than frustrating—in fact, most business owners never suspect they could actually be losing money.
Finding a high-quality bookkeeper isn’t easy—and forming talent in-house is a heavy lift. These owners rightly want to focus on leading their business to growth instead of developing all of the technical expertise that is required to effectively vet, onboard, manage, and oversee a competent bookkeeper.
As a fractional CFO, I serve as a guide to small business owners that are becoming leaders of growth-driven companies. In this unique role, I provide implementation and ongoing oversight of key finance functions like Accounting, Tax, Treasury Management, and Financial Planning & Analysis. Over many companies, this has allowed me to see a repeated pattern of challenges in basic accounting activities that actually costs business owners money.
Below, I’ve categorized 10 real-world example into three distinct buckets, with detailed examples of exactly how each example can impact profitability.
Insufficient expertise and experience
Accounting is an organic ecosystem, as are the systems used to conduct it. In other words, the rules of accounting are constantly changing, which many people recognize. At the same time, the accounting systems are also constantly changing—a fact which many people choose to ignore.
As a result, whether an individual bookkeeper had sufficient knowledge to do the job competently at a point in time may eventually be irrelevant without an appreciation for and commitment to learning. Simply put, ongoing education is what prevents expertise from expiring. Some common mistakes related to insufficient expertise or experience include:
- Mis-recording or omitting expenses – This error can overstate taxable income, causing businesses to lose money to taxes.
- Failing to surface unused subscriptions – I’ve seen many clients paying hundreds or even thousands of dollars per month for subscriptions the company hadn’t used in months (or even years).
- Erroneous payments – Everything from double payments to payments to the wrong entity falls into this category, and any type of erroneous payment can be costly.
- Incomplete payroll reconciliation – Not reconciling payroll liabilities each period can result in misstated income, resulting, in some circumstances, in over-payment of taxes or underpayment of taxes (subjecting the company to penalties).
- Fraud – Many types of fraud are up to 4x more likely to happen in small companies than large companies.1 This is due in part to the lack of expertise and experience available in small companies to address these issues.
Insufficient processes and controls
Even the best bookkeeper may not be able to create and implement the processes and controls required to prevent a needless loss of capital. This is because the skills and knowledge required for these respective tasks are completely—and in many cases, drastically—different. A few of the most common errors related to processes and controls include:
- Applying payment to the wrong invoice – Without a documented process and corresponding training, some accounting systems make it easy to recognize income without receiving actual revenue (even on a cash basis), resulting in higher taxes on lower actual income.
- Lost payments (misplaced checks) – A cousin to the issue above, companies still dealing in checks should have an established, transparent, and consistent process to avoid this case.
- Fraud – The lack of internal controls contributed to 1/3 of all recent fraud cases.2
Most business owners are simply not equipped to provide appropriate oversight to their internal bookkeeping staff or outsourced provider. Without that oversight, many business owners end up paying more from the following mistakes:
- Failing to file 1099s – This common issue can subject a company to penalties and an EDD audit, in turn exposing the company to potentially more liability.
- Fraud – Fraud detected by account reconciliation has some of the shortest duration of all fraud detection methods.3
Some of the issues above can be mitigated by using a business process outsourcing firm (i.e., outsourced accounting, or outsourced bookkeeping firm). This solution can come with challenges of its own and will still benefit from the oversight and strategic perspective of a fractional CFO.
If you have questions about the efficacy of your internal or outsourced accounting team, don’t let a potentially costly situation linger unresolved. Contact me at firstname.lastname@example.org to discuss your unique situation.
1,2,3 The Association of Certified Fraud Examiners 2020 Report to the Nations. Access on July 7, 2020 at https://www.acfe.com/report-to-the-nations/2020/