What do you think of when you hear the word audit? Did the letters IRS pop into your head? Hopefully your books are never subjected to an audit by the government. However, you should perform internal audits regularly. In fact, there are several scenario’s that would warrant conducting an internal audit.
As part of your ongoing financial management
Be proactive and catch potential problems before they turn into major ones. Regular auditing your books doesn’t necessarily mean extra work as these practices should be part of your regular schedule already.
- Count your cash on hand. This should be done at least quarterly. Even more frequently if you have large amounts on premise or if multiple people have access.
- Monthly account reconciliations
- Regular inventory counts
- A complete annual review by an external source. This may cost a little bit, but a new set of eyes may see issues you don’t.
When your books are out of balance
It is common for your books to be out of balance when you first run your financial reports at the end of the month. I know it is tempting to just write off the discrepancy, but it is important that you resist. $1 here, $10 there. It adds up over time and a high balance in your discrepancy account is not something investors, stockholders, and bankers want to see. Even more importantly you need to be sure the difference isn’t the symptom of a larger problem.
To have a true and accurate understanding of your finances you must go back through your books and find the errors. It could be as simple as a transposed number.
If profits or cash flows are declining
Declining profit or cash flow are normally the result of market conditions. However, there could be other causes. Perhaps your profit margins need to be adjusted. Have production costs increased since you set your prices? Is your marketing strategy missing the mark? Are sales down? Do you need to reduce your accounts receivable? Even if the market is to blame, it never hurts to make internal improvements to help get you through.
Before asking for funds
Few things could be as embarrassing as an investor pointing out inaccuracies in your financial reports. It certainly wouldn’t improve your chances of obtaining the funding you asked for. If you are going to seek funding, it would be a good time to conduct an internal audit and if possible have a second set of eyes look as well.
Spend time now to save money later
Internal audits don’t have to be difficult and time consuming. Especially if you take the time to confirm the accuracy of your books on a regular basis. This practice will give you a complete and accurate view of your financial health allowing you to make informed decisions and grow your business. Oh, and remember when the IRS flashed into your mind at the mere mention of the word audit? Having impeccable books due to regular internal audits will reduce the likelihood of being visited by the taxman. If they do drop by, you will have everything in place to make the process quick and painless.
If you need help incorporating these actions into your regular financial management program or need someone to be your “second set of eyes,” please consult a professional.