Your people are well trained. Your customers are happy. Your company is well recognized and you have an outstanding reputation. But is your company healthy? Not necessarily. If you don't have sound accounting practices in place, you could be in trouble or heading there.
A lot of business owners appear successful, but without realizing it, they are allowing poor accounting practices to run their businesses into the ground. To keep this from happening to you, the following are the most common accounting problems that can lead to financial ruin and what to do about them:
Lumping your numbers together on financial statements
If you don't separate revenues and expenses by department, you won't be able to tell which department is losing or making money. Instead, separate financial numbers for different departments.
For example, in HVAC, maintain separate numbers for residential replacements, residential service, residential maintenance, new construction and commercial work because each has different gross and profit margins. In plumbing and electrical, separate commercial, residential and new construction services.
Review gross and net profit margins every month, and if they're off, fix the problem quickly to get those numbers in line. Also, finalize your profit and loss statement and balance sheet for the previous month by the 10th of each month so you know where you stand. Don't let small problems become big ones by waiting too long to take action.
A poor, or nonexistent, purchase order system
A good purchase order system keeps everyone honest and makes it easier to catch billing mistakes. Don't use your tech's name for a purchase order number, and don't ever let a tech pick up parts without a purchase order number.
If you have never implemented a purchase order system, you can notify your suppliers with a letter telling them that you will no longer pay for invoices that don't include a purchase order number.
A good system allows the bookkeeper to compare the order with the invoice to ensure the company wasn't charged for items it didn't get or at a higher rate than expected. If you don't use purchase order numbers, it's like giving a tech and supplier an open checkbook.
Failing to withhold payroll taxes
If you think you can spend all the cash in your accounts throughout the year, you're wrong. The cash that you withhold from your employees' checks for taxes must go to the U.S. Treasury.
Keep a separate checking account for all your payroll transactions. The only withdrawals that should be made from the payroll account are those that are to pay for the deductions that you have made for your employees.
You can also hire an outside payroll service to make this process easier. This service should not only process your payroll, but automatically withhold payroll taxes, set them aside and pay the taxes when they're due.
Not reconciling your bank statement every month
You number crunchers will find this hard to believe, but some business owners don't reconcile their bank statements every month. If you do this on schedule, you can quickly catch mistakes and verify your cash coming in and going out.
You can even do this weekly or daily by reviewing account information online. Reconciling your accounts helps you watch for lost checks and checks that haven't been cashed. Most importantly, you can catch unauthorized withdrawals, which leads us to the last, and perhaps most fatal, financial mistake business owners can make.
This one can cause you a lot of pain — and cost you your business. Many business owners give full check-writing privileges to their bookkeeper or other employees in their business. Don't! That's how embezzlement can occur.
You can let your bookkeeper write the check, but make sure you review and sign each one. And keep your checks under lock and key, only issuing them when they're needed. Unfortunately, the embezzler could turn out to be a friend or even a relative.
One contractor told me about a bookkeeper who embezzled an estimated $700,000 from his business over a period of 14 years. She even attended the contractor's church while she was doing it.
Also, make sure you have the right person keeping your books. Too often, contractors assign bookkeeping as a side duty to an employee who may not even understand bookkeeping or have the time to do the job right. Instead, hire a reputable, experienced bookkeeper who understands accounting principles.
If your company isn't large enough yet to support a full-time bookkeeper, hire an outside, qualified bookkeeping service to keep your books. Once you reach $750,000 a year in revenue, you should be able to hire and pay a full-time bookkeeper.
With the right person keeping your books and by implementing the right accounting systems, you'll always know the financial health of your company. And by knowing that, you should sleep better at night.
Rebecca Cassel is group president for consumer services at Clockwork Home Services Inc., which awards and supports franchises in the home services industry including Benjamin Franklin Plumbing, One Hour Heating & Air Conditioning and Mister Sparky Electrical. Additional information is available at www.clockworkhomeservices.com.