There’s never a good time to encounter fraud or reckless spending within your business. In the age of the coronavirus, especially, many small business owners are more concerned than ever with the state of their accounts.
Yet fraud occurs more often than you think. Penny Breslin, the owner of MoneyPenny Back Office Accounting Services, has been in the accounting industry for over 20 years. During that time, she and her team have uncovered millions of dollars in stolen or missing cash. Now, she estimates 10-15% of the accounts she’s encountered have had at least some instances of fraud.
“But it’s not just fraud,” she says. Breslin says unconscious money mistakes, banking errors, or overspending without a system of checks and balances can all wreak havoc on business financials.
The good news is business owners can take steps to prevent fraud and other financial errors. The No. 1 secret recommended by bookkeepers? Reconcile your accounts monthly.
How to reconcile your accounts
To reconcile your account, you must compare the withdrawals and deposits on your register to what’s in your bank account records. If you’ve ever balanced a checkbook or done a bank reconciliation, you’re familiar with the process. If not, here are the basic steps:
- Compare the balance in your accounting records (for instance, your QuickBooks account) to your bank statement. Both cash balances should match.
- Review each transaction and make a note of any that don’t match perfectly.
- Investigate the inconsistencies until you can match your bank balance to your accounting records.
Some differences between your bank statement and your accounting records are common. Bank-only transactions, like interest income or outstanding checks, may appear on one record but not the other. Even if they are normal, it’s good to be aware of those inconsistencies because some could present a red flag.
The importance of reconciling your accounts
It’s important to reconcile your accounts monthly. Waiting any longer than that, says Breslin, makes the job more challenging and puts your business at greater risk. If someone is committing fraud, you can catch it earlier.
Pam Brown, CPA, and partner at brown + flatt advisors, pllc, has personally seen the benefits of regular reconciliation.
“Years ago, we were doing bookkeeping for a client who had multiple retail locations,” she says.
Part of Brown’s job was to reconcile the stores’ books on a monthly basis. She and her team made sure all the cash and credit card deposits from each location matched the bank’s records.
“Over the course of a few months,” she says, “we noticed a change in the deposits at one of the store locations.”
The credit card deposits for the store were the same, but the cash deposits were extended. In other words, money that should have been hitting the bank’s account on one date wasn’t showing up for several days.
Initially, Brown’s client was slow to react, not wanting to believe there was a problem. But after another month, confronted with outstanding bank deposits, there was no other choice. He approached the store’s manager, who confessed to committing fraud. The crime, if left undetected, would have cost Brown’s client thousands of dollars.
Brown’s client isn’t an anomaly. But luckily, he had an accounting team reconciling his books regularly. And because Brown’s team was familiar with the books, they were able to pick out inconsistencies immediately. Brown’s story is a good example of why you or your bookkeeper should be reconciling the books monthly.
3 more tips to prevent fraud or financial harm
Reconciling monthly is the No. 1 secret to preventing fraud or other financial errors. Errors could be anything, from employee overspending on a company credit card to accepting a fake check. But there’s more than one way to prevent these and other expensive financial mistakes.
1. Have a relationship with your accountant or bookkeeper
In many cases, business owners only approach their accounting professionals around tax time to find out how the business is doing.
“Many business owners don’t take enough advantage of their bookkeeper or accountant,” says Breslin. “But if you’ve got a good accountant, the real value they can provide is in monthly client advisory services,” she says.
Those monthly check-ins provide an opportunity for the business owner to review the books themselves, note any inconsistencies, and ask questions. It’s also a good time to check the work that’s been done. An experienced bookkeeper should be able to walk you through their work and explain any outstanding amounts.
2. Request detailed invoices for services rendered
Detailed invoices should list out all the services or products that a vendor or partner provides. Getting them from anyone you do business with can help you catch costly mistakes and prevent fraud. The more detailed the invoice, the easier it is to go back later and see where there might be an error.
For instance, say your business pays an advertising agency, but, at the end of the month, your bill is bigger than you anticipated. A detailed invoice can show exactly how much money the agency spent, when they spent it, and what they spent it on. In reviewing such an invoice, you may find someone is billing you for a service you didn’t approve.
3. Track and manage expenses
If multiple people in your business have access to the company credit card, you’ll need to set up a system for managing expenses.
“[Going over-budget] can happen by accident,” Breslin says. “I’ve had clients whose employees were tasked with taking customers to dinner, and the bills got out of control.”
It’s not fraud, but unnecessary spending can happen easily without proper training or accountability.
“Employers should require anyone who holds a company credit card to file an expense report after each transaction,” says Breslin. “Better yet, get company debit cards with limits instead.”
Financial mistakes, including fraud, can have devastating effects on a business. It’s one of the reasons that so many business owners turn to a bookkeeper or accountant in the first place. But even business owners who don’t have a bookkeeper can protect themselves by reconciling their business accounts monthly.
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