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Edition 368 – Dirty Cleanup

I was talking to a colleague in the financial space recently and we discussed the quality of financial information inside of small and family businesses.

As we chatted away and discussed our respective experiences, he remarked to me “with some clients, we simply have to do a ‘dirty cleanup’ at year end”.

The term caught me and I asked him to explain. In essence, his response was that when a business’ financial records are such a horrendous mess, you just need to do a “cut and shut” of the old data to tidy up the financial year end and start the new year with a clean slate.

Now, before you start thinking a “dirty clean-up” is all about trying to hide things away and make the numbers just add up, it’s not like that. In essence, over the years, I’ve seen financial records where:

  1. There is duplicated information….lots of it.
  2. Items aren’t reconciled.
  3. Reconciliations are done incorrectly.
  4. Refunds are not processed correctly.
  5. Monies that are banked into one account are taken up as a transaction inside a second account, in the financial software.

Essentially, it requires a bit of detective work to filter through the crap and come up with a result that makes sense and is a true reflection of what is happening in the business, financially.

However, the problem with a “dirty clean-up” is that if you do it once, that’s OK. If you’re always doing it, you have a big problem!

You need clean financial data inside your accounting software in order to make informed financial decisions in your business. Just because the software is cheap and more functional than it’s ever been, most business owners devote little attention to the whole financial process and whether or not it’s right. The problem with that – when it’s not right, it might be too late before you find that fact out.

If you’re forever doing “dirty clean-ups” inside your financial systems, it means:

  1. People with the wrong skillset are involved in the financial process.
  2. Your financial process is band-aided – not strategic.
  3. You’re potentially using the wrong software.
  4. You’re entering data on a catch-up basis, motivated by a deadline (e.g. Quarterly Business Activity Statement or Annual Tax Returns) rather than being motivated by a thirst for knowledge.
  5. You don’t appreciate the importance of financial data – and therefore, don’t truly understand the financial position of your business.
  6. You think it’s cheaper to do the work yourself, when it actual fact, when you mess it up, it costs more to fix it.
  7. You can’t analyse the performance of your business.
  8. You could be staring down the barrel of a big tax bill, a massive loss or a debtor falling over. However, because your whole financial process is shoddy, you’re not aware, before time, of any of those eventualities arising.

Right now, if you can’t call up your current Profit & Loss Statement or a Balance Sheet and a get a true picture of what your business is like in the here and now, you’re pretty much driving down the highway at 100km/h with your eyes shut, in the dark and your headlights off….surrounded by fog!

A little bit of care and attention to improving the financial reporting in your business could do wonders for the analysis of your business performance – and potentially, save it from experiencing a catastrophic financial event.

This Week’s Tip

Pay experts to keep your financial records in order – don’t cheapen out and try and do it yourself if you don’t have the skills, time or aptitude to do so.