Don’t take a hands-off approach to year end planning

As we head into the fourth quarter and year-end, many agencies will be preparing to work with their CPAs to produce year-end financial statements and tax returns.  This time of year is usually filled with more dread than excitement as agency owners face up to the projected tax bill.  The result of the aversion is a hands off approach that yields assumptions.

The process behind the assumption

In most cases, the agency owner will receive a set of financial statements and tax returns. Their immediate concern is with the bottom line. How well is the agency doing and how much do they owe. With all the attention to the end result, it’s easy to overlook the importance of the process.

There isn’t much to the flow of financial information. Somehow the bookkeeping or accounting department will send some stuff to the CPA and what normally comes back is a nice, professional looking, set of financial statements and a stack of tax returns.  No issue here. Or is there?

Do you really know what your CPA receives?

If you think whatever is sent to the CPA isn’t very interesting, then you have just made the unacceptable assumption. Let’s look at that closer. Generally, internal financial statements including an income statement and balance sheet, or a trial balance of the general ledger are given to the CPA.  The CPA then will make some adjustments for accruals such as payroll and perhaps some depreciation or amortization adjustments and then complete their work to create the formal set of financial statements and tax returns.

So, what’s the issue? This happens millions of times over. The process itself works but there is a crucial first step that is missing. You’ve made the assumption that the balance sheet and income statement provided to the CPA were accurate.

As an owner, you can never assume that the balance sheet generated by your agency management system is correct.  Every balance sheet account (think assets and liabilities) needs to be reconciled by either your internal accounting department or your CPA.  The assumption that your general ledger balances are correct is an Unacceptable Assumption!

Is it really that critical?

Yes, there are many ways for your accounts to get out of balance.  Our Agency CFO catches balance sheet errors all the time. Here is an easy way to look at it:

Somewhere along the line you may have learned this lesson the hard way when you bounced a check when you thought you had enough money in the account to cover it.  Your checkbook had one balance and the bank had a balance that was quite different.  This is bound to happen if you don’t regularly reconcile your checkbook to the bank statement. 

This same concept must be applied to every balance sheet account (asset and liability balance) before your CPA produces the formal financial statements and tax returns.

Resolving the Assumption

It must be someone’s responsibility to reconcile the general ledger.  As an owner, it is crucial you know who it is, when it is done, and how discrepancies are handled.  Before the start of the fourth quarter determine the following:

  • Who is responsible for general ledger account reconciliation (internal or CPA)
  • When will reconciliations be performed (should be performed immediately after year-end)
  • How will any discrepancies be communicated and resolved

If you have clarity around the above, good job.  Don’t let your guard down.  Make sure it happens on schedule. If any of the above three points lack clarity, get clarity now.  Otherwise, you may be making an Unacceptable Assumption that can have very serious consequences.  Don’t get surprised by a big financial adjustment that could carry with it tax, banking, and management consequences.  It’s just like bouncing that check; it’s unacceptable.