Finally, after a long and hard month, you are closing your books and preparing your financial statements. Once they are complete, you walk to the printer, grab your financial statement and take them to your desk. As with each previous month, you comb through each number and percentage to accomplish one thing: paint a picture of your business. Once the picture has been painted, you move to the next step, decision making.
Here’s a checklist to ensure each month end is quick, but more importantly, accurate.
1. Adjust for inventory
There are few things more important than adjusting for your change in inventory. As we all know, inventory is directly related to cost of goods sold, which is directly related to your net profit. Whether you physically count inventory once a month (always a good idea) or rely on your inventory management system, you need to adjust your cost of goods sold depending on the change in inventory. If your inventory falls by $10,000 then you must adjust this by increasing your cost of goods sold and decreasing your inventory. One makes this adjustment because the business has sold $10,000 worth of product that was originally in inventory. If the revenue does not match the cost of food and beverage sold, you would be overstating your profit.
2. Check for missing credits or payments
While these invoices or credits may eventually come to the surface, big invoices and credits can cause drastic swings in your net profit as well as your gross profit and net profit margin. The last thing a business owner or operator wants is to spend their valuable time analyzing numbers and making decisions based on faulty numbers. While you do not necessarily need to hunt down every single invoice, you should at least talk to your employees or vendors to make sure there are no large invoices that have been missed or not sent into the office.
3. Factor in accruals
Following the invoice check, you would be smart to make entries for items occurring during the period that you may not have billed for or have been billed for but the expense applies to multiple periods. Accountants call these items accruals and deferrals. A simple example is utilities, but these types of entries can become more complex as you incorporate items such as payroll. As we all know, when month end rolls around the business has used electricity for an entire month. However, you will not receive your utility bill until the middle of next month, and no one wants to wait until then to begin their financial statements. Because of this predicament, we typically advise accruing an expense. In short, you debit an expense account and credit accrued liabilities, since the cash has not been dispersed, but you owe the liability because you have used the electricity. Your main goal is to estimate expenses you have incurred so you have a true picture of your net profit for the month. If you did not accrue or defer anything, your operation’s financial statements would not accurately reflect your month’s operations.
4. Allow deferrals for the future
The opposite of an accrual is a deferral. A deferral is when you are postponing recognition of an expense or revenue. A basic example of a deferral is an insurance premium. Some businesses pay insurance premiums every six months. The cash is leaving the bank while the actual expense applies to a six-month period. To accurately reflect the insurance being related to the next six months a business would make one of two decision depending on the original entry. If the business had originally charged the amount to expense the business would defer the expense by crediting the expense and debiting a prepaid expense account for the five months during which the expense does not apply. On the other hand, if the bill total had been put into prepaid expense the business would debit the expense account and credit the prepaid expense prorated for one month of the total bill.
Accounting is often referred to as the language of business—for good reason. Accounting pulls together vast amounts of information to give a business owner/operator insights into the business. Without the proper accounting processes and procedures, the reports generated by the accounting system could be incorrect. These reports are the prime driver in business decisions. There is no question as to whether these reports can be right; they must be right.
Alex Woodie is the founder and CEO of Ledge, which provides users with online alternatives to traditional accounting departments.