Managing the financial side of your business may have come second or even third to your primary purpose. However, all companies must manage their finances with diligence, control, and accountability to be successful. One key financial practice to master is account reconciliation, which helps your business maintain accurate records and ensure financial health. Learn some of the benefits of prioritizing account reconciliation and how to put these practices into action.
Track Profitability
You do work for a client; you bill them, and then they pay. If these three things happen, your company will be successful, right? If this is your standard thought process as a leader, it may be a sign that your profitability is vulnerable. Without a clear process to track, report, and manage profits earned for work completed, margins can get out of whack. You could be over-billing or under-billing, both of which put your company at risk.
When you under-bill, you won’t be bringing in enough to cover your labor, materials, and operating expenses. If your invoices start to exceed what the market can tolerate, you could be pinching off your customer pipeline. Start by completing regular reconciliations with your accounts to identify your current state. The process may seem arduous, but it’s an essential part of business that you and your team must prioritize.
Reserve time among key personnel to conduct your first reconciliation, using a month or quarter as your reporting period. Double-check your bookkeeping by comparing your business accounts against bank statements, which should match up. If they don’t, you’ll need to dig into why and understand what went wrong. In some cases, it may be a clerical error, and in others, it could be a red flag for fraud.
Once you’ve matched up expenses and income, you can accurately determine your profit margins. When you reconcile, you can see that the cost of materials for your plumbing business has increased. Use this data to track monthly costs, which can help you determine if and when price increases are appropriate. Increased fuel costs have encouraged many businesses to pass a fuel surcharge on to customers. When you reconcile your accounts, you can see if this is needed for your business and what amount is appropriate.
Spot Potential Fraud
You’ve seen the headlines of companies and governments bested for hundreds of thousands of dollars from innocent-looking bookkeepers. While you want to think the best of your thoughtfully-hired team, you can’t relinquish all control. Account reconciliation can help identify potential fraud like duplicate payments, large reimbursements, or unknown vendors.
Strong financial management and controls limit access and often require shared responsibilities to complete transactions. Split responsibilities and approvals for printing checks and signing them. Require sign-offs for payments over a certain dollar amount to create friction that deters internal fraud. Review your vendor approval and setup process to ensure false vendors aren’t inserted into your payment system. While these changes will require additional administration and training, they prevent fraud and protect your business.
Outline potential red flags for fraud like unusual transactions or rush check approvals. Unusual transactions should require additional review by an approver to ensure their validity. While rush payments may occur, they shouldn’t eliminate controls. Develop criteria for rush payment approval and review to ensure fraud doesn’t occur due to a sense of urgency. These internal controls strengthen your process and deter fraud by making it harder for variances to fly under the radar.
Identify Growth Opportunities
Gut feelings are helpful starting points for exploring growth opportunities for your business, but they aren’t enough for official decisions. Use your account reconciliation data to monitor your current state and identify potential opportunities for growth. Maintain your monthly reconciliation process but pinpoint key indicators for leadership discussions. If your customers are requesting more tree removal work for your landscaping business, there may be a widespread opportunity.
Tighten your information-gathering process outside of accounts, too, combining customer feedback, reviews, and field notes. Encourage your job leader to note customer mentions or questions, which could indicate new services to offer or promote. Increased tree removal work may align with recent pest infestations that have run their course. Seek to align your growth with customer demand and what your accounts indicate to grow strategically.
Conduct a profit margin review in addition to new service lines or offerings. If your profits are high for labor-intensive work while materials costs are low, it can reveal what’s best to market. For example, professional landscapers generally get a discount on mulch from suppliers. However, preparing landscaping beds and laying mulch is a dirty, time-intensive job customers are willing to pay a premium for. If your reconciliation confirms that your labor costs are well-managed, your profit margins might be best for this work.
Apply this analysis across your offerings to pinpoint where to invest marketing efforts and upselling pitches and what to minimize. Be careful not to slash your menu of services, as some may function as an attractor for new customers. Your free plumbing inspection offer can open the door for greater profitability for plumbing repairs or water heater replacement. Align your reconciliation to customer profiles to accurately depict customer longevity and return on investment.
Establish a High Standard of Financial Control
Regular account reconciliation is a proactive, professional approach to managing your business’s finances. When you establish a series of financial control practices, you manage financial risk that could break your business. Create a culture of accountability, transparency, and diligence within your organization to reduce risks and solidify your financial management. When you do, you’ll be able to grow strategically, manage risk, and protect your bottom line.
Published By: Aize Perez
