Unless you're in a big Fortune 500 company, you probably equate the word "audit" with a letter from the IRS. However, accounting audits can be a valuable tool for any size business. To keep your business healthy, consider conducting an internal audit at the following times.
Before Seeking an Investment
If you ask investors for money, they're going to want to do a full review of your financial statements. How embarrassing would it be to have them find something that's inaccurate? They might even think you were trying to hide something.
Before speaking to any investors, prepare formal financial statements that you can present on demand. Before presenting them, check and recheck both your prepared statements and all the data used to prepare them.
If You Notice a Mistake in Your Books
At the end of the month, it's often common that an account has just a little more or a little less money than you were expecting. Don't make the mistake of just writing off the discrepancy.
Math is an exact science, so your numbers should always add up exactly. It could be as simple as going back through your journals and finding that two numbers were transposed. You might even determine that there's a weakness in one of your processes that is causing employees to make errors.
Even if the discrepancy seems small, you want to make sure it isn't the symptom of a larger problem that could add up and cost you a lot of money over time.
When Key Employees Leave
When key employees give notice that they're leaving, try to do an audit of any areas they were involved in before their last day. You don't want to later be in a situation where you don't understand something and the only person who can explain things is gone.
To facilitate this, encourage at least two weeks notice from all employees, and don't develop a reputation of immediately walking them out when they give notice. Except in cases of terminations for misconduct, you want departing employees involved in the transition, and you want them to leave on good terms so they'll give full effort through their last day.
If Profits or Cash Flows Are Declining
Profit or cash flow declines are usually blamed on market conditions, but market conditions aren't always the real issue. For example, your company may not be paying enough attention to cost controls or accounts receivable.
To explain a decline, audit operational areas such as production and inventory as well as finance areas such as billing and collections. Even if you've already identified an outside cause for the decline, you can always look for ways to improve internally to help you weather the downturn.
On a Regular Schedule
While problems with your business might signal the need for an audit, it's better if you have regular audits that can detect potential issues before they turn into major problems. If you want to turn a profit, making sure your financial situation is healthy is just as important as regularly checking your product quality and customer service levels.
Audits can range from daily counts of cash and key inventory to monthly account reconciliations to a full annual review of all your books and records. Outsourced bookkeeping services can help you keep track of and review your records throughout the year. Even if you do some of your accounting in-house, it's never a bad idea to have an additional set of eyes looking over everything.