A good accounting system is foundational to the effective management, stability and growth of all organizations. The lack of an adequate accounting system and sound financial practices is frequently associated with struggling organizations and organizational failure.
Investing in an effective accounting system
Best Practice: Invest with equal importance in an accounting system that meets all the needs of the organization. Too many times investing in an accounting system is seen as a much lower priority than other functions and sectors of the organization.
Accounting system capabilities
An effective accounting system will be capable of meeting many important needs of the organization and has many associated best practices:
- Publish financial reports that meet the needs of the managers and or lead employess in the organization that are responsible for making the organization successful.
- Explanation: Many times reports are produced in financial or accounting terms, or formats that are not readily useable by managers, directors and others in the organization that make important decisions every day. A sign that this problem exists is if people in the organization only read the bottom line of the financial statements and other financial reports and rely on other financial information and reports to do their jobs."
- Publish timely financial information to manage the organization:
- Publish monthly financial reports by the 10th of each following month.
- Consistently publish monthly financial reports by the same date each month.
- Publish accurate up to date weekly aged accounts receivable report to:
- effectively manage collections
- have needed cash flow
- prevent buildup of bad debts.
- Produce cash flow projections and status
- Provides ability to calculate margins on products, services, divisions, departments and locations as most appropriate to the organization.
- Create annual budgets and the ability to track actual costs versus budgets.
- Share these reports with: responsible managers, directors and employees.
- Produce Profit and Loss reports that match the business operations, not just P&L’s that meet accounting standards
- Accurately organize and track “fixed costs” and “variable costs” to align with the products and services of the organization.
- Explanation: Accounting formats and categorizing of costs may not accurately parallel how the goods or services are produced by the business. If the fixed costs and variable costs are not categorized parallel to the actual functioning in the business this accounting information will be erroneous, ignored or republished in a time consuming process.
- Provide the ability to publish on a timely basis reports required by bankers, investors, grant makers and others outside the organization.
- Explanation: Many times the accounting system meets basic needs of publishing financial statements for in house needs, but does not meet the requirements of others the organization is obligated to provide financial reports to such as lenders. One result is a mad scramble to produce these special reports. Another problem is these reports may have to be “hand done” and therefore may be prone to errors or inconsistent with other financial reports.
Other Issues
- “Audits are a good thing” - financial audits are your friend, not your enemy. Audits can be an important and positive tool in helping a new and growing business identify each year what improvements are needed to its accounting system to meet its business needs and avoid financial problems. It is a best practice to embrace auditors and the auditing process to get the maximum value to the organization. It is a mistake to see an audit as a report that that is required by the bank for lending requirements.
- Develop systems to have managers and employees at all levels in the organization calculate their key daily measures. It is a best practices for management with accounting experience assist and train other employees on how to measure and account for performance. This process develops a culture where managers and employees own the measurement and evaluation of their roles and segment of the business.
Other Related Best Practices
- Cash flow problem delves into the various problems and best practices associated with cash flow of businesses
- Cost Controls lists best practices to control costs for a business
- Why Businesses Fail discusses common reasons so many businesses fail including financial reasons
Resources
- The Accounting Tools website Steven Bragg, accounting book author and CPA, provides 167 free podcasts on accounting best practices. The website also contains accounting CPE and books and articles on hundreds of topics.
- Small Business Administration - SBA, "Managing Business Finances & Accounting", provides best practices topics such as setting up a payroll system, extending credit to customers and online payment services.
Author
The author of this article is Terry Gardiner. Significant input and review was provided by Linda Gardiner and informed by here career and experience in business accounting in several businesses and as a business owner.
Terry Gardiner is the founder and President of Silver Lining Seafoods and NorQuest Seafoods - a medium-size Alaska seafood processing company; and currently a Board member of the Anvil Corporation, an employee-owned company specializing in oil and gas engineering.
His co-operative experiences include member director of the Commercial Fishermen Co-operative association; creation of legislation for the Alaska Commercial Fishing and Agriculture Bank; and advisor to the US Dept of Health and Social Services for the state Health CO-OPs.
Terry served ten years as a member of the Alaska House of Representatives -several legislative committee chairmanships, Speaker of the House, Chairman of the Alaska Criminal Code Commission and board member on various state and federal boards and commissions.
His non-profit experiences include National Policy Director for the Small Business Majority in Washington DC; working with the Herndon Alliance and ForTerra.
Terry authored the leadership book, "Six-Word Lessons to Build Effective Leaders: 100 Lessons to Equip Your People to Create Winning Organizations".
For more check: Terry Gardiner Long bio