Even as you spend your time charting the course of your early stage development, it’s important that you establish a solid operational accounting foundation. Without one, you can make decisions on incomplete information, miss tax deadlines, impact your year-end financial reporting, and ultimately undermine the confidence of your investors. A well-planned and implemented accounting and reporting function can greatly assist in monitoring growth and providing valuable information. Read on for accounting guidelines that can help your company sidestep the most common early-stage pitfalls.
The Importance of Your Accounting Process
In an early stage business, the accounting, human resources, and office management roles are often assigned to one individual. Sometimes this individual is not a trained accountant, but may only have enough knowledge of an accounting software system (such as QuickBooks) to enable them to enter transactions. In this situation, a monthly financial close process is usually not being performed and general ledger accounts are not reconciled. Without reconciliation, you can’t get the reports that enable you to measure financial performance and assist in decision making. Take these following accounting process steps:
- Designate an experienced individual dedicated to the accounting function. This person will have the responsibility to accurately record transactions and provide up-to-date accounting and financial information to assist with decision making.
- Institute a formal monthly close process. Closing the books each month entails preparing reconciliations for all balance sheet accounts, including entries such as depreciation, accrued, and prepaid expenses. This ensures that any errors or omissions that occurred during the month are identified and resolved in a timely manner.
- Document your procedures to ensure continuity in the event of turnover and coordination with outside accountants for audit and tax requirements. This should include the preparation of tax return schedules and filing deadlines.
Internal Controls Provide Needed Checks and Balances
In an environment with a limited headcount, everyone wears a lot of hats and there is often a small number of individuals who will have responsibility for all accounting and financial reporting functions.
In order to protect yourself from fraud it is imperative that you institute checks and balances in certain key areas:
If you have one person who sets up new employees in the payroll system, adjusts pay rates, and can authorize bonus payouts, make sure that you have someone else who reviews any changes. Most payroll service providers will include a change report to identify any changes made to payroll so designate someone in management, independent of the payroll function, to get this report and review it for any changes each payday.
Check Signing Authority
If you have one employee with the authority to sign checks and wire funds to vendors, this same person should not have the sole responsibility for monitoring and reconciling monthly cash balances. A member of management, independent of the cash disbursement function, should obtain and review detailed bank statements each month to make sure there is no fraud occurring.
Vendor Review and Approval
Once your vendor due diligence has been completed, the final authority to engage the vendor should be reviewed and approved by someone in senior management. This will make it harder for fictional vendors to be set up and receive payments.
Monthly Close Report
Monthly account reconciliations should be reviewed by a member of management who is independent of the accounting function. Any variances between what was expected and what actually occurred should be provided in this reporting as well as any journal entries that are unexpected or out of the ordinary. Additionally, you should maintain documentation of all these closing activities, including all reconciliations and supporting schedules
Software and Network Access
Get Access to your accounting software package and information stored on your network should be limited to those individuals who require access to complete their specific job duties. Limiting the access privileges to those on a need-to-know basis will reduce the chance that individuals without authority can access protected information.
While some of these steps can seem daunting in an early-stage business where everyone wears several hats, establishing accounting and financial reporting procedures will benefit your business in the long run. You will have greater visibility into the financial health of your company, and be positioned to make decisions based on complete, accurate information. Your Investors can also be assured that adequate internal controls are in place and that you have taken steps to minimize the likelihood of fraud. Most importantly, you will have set a sound foundation so that you can continue to focus on the continued growth of your company.