Since we introduced the Road Map, a tool that helps pinpoint the causes of financial distress in a company, we’ve been traveling through the map and stopping at key locations, including Low Gross Margin and Poor Inventory Control. This month, we take a trip to one of the more costly locations, “Bookkeeping Errors.”

It’s expensive real estate because it can cause Low Gross Margins, a key driver of profitability. For example, bookkeeping mistakes can affect how you account for cost of goods sold and inventory, making it difficult to accurately benchmark and manage these two key areas of gross margin and inventory turns. Bookkeeping errors also can result in lost dollars due to underperformance, penalties due to late payments on tax filings, and, at worst, fraud—all of which can have a serious impact on your cash flow.

Ten warning signs. Here are some common signs that your bookkeeper or accountant may not be providing the service you need:

• Are your financial statements (profit and loss and balance sheet) consistently late? For example, are you still waiting for June’s statements on Sept. 1?

• Are your year-end statements consistently late? For example, are you still waiting for them in the second quarter of the following year?

• Is your bookkeeper’s work area so disorganized that it’s impossible to determine the status of the work?

• Are your bank reconciliations not in written form and not prepared for every bank statement period for every bank account? Do your reconciliations show a different balance from those on your financial statements?

• Do your accounts receivable or payable aging or listings reflect an amount different from those shown on your financial statements?

• Do your computerized accounting reports consistently contain handwritten corrections and notations?

• Does your Cost of Goods percentage seem way off from what you believe it to be?

• Do you find it difficult to communicate with your bookkeeper or accountant?

• Are you paying penalties to local, state, and federal authorities because of late payments or mistakes on tax payments?

• Do you take an accurate physical inventory at least once a year?

There may be good reasons for any one of these issues, but if one or more occur regularly, it’s time to take immediate action. And if you do your own bookkeeping, you won’t have far to go to get to the root of the problem!

Step 1: Look in the mirror. Sometimes the problem is the result of unclear expectations. Sometimes it’s caused by lack of information. For example, if your bookkeeper or accountant needs information from you to finalize your year-end statements, but you’re late getting this information to them, then the fault is yours.

What’s more often the case is that the business owner doesn’t give clear expectations or deadlines to the bookkeeper or accountant about when to deliver statements. That’s often because the owner has no clear expectations (or little understanding) of what kind of reports he should be receiving and when.

The expectations of our FIT Group members for financial reporting are instructive. Many members have gone from accepting poorly prepared, late statements to demanding accurate statements every month. They understand the importance of regular financial review, they’ve set goals, they know how to read and interpret financial information, and they know their peers will hold them accountable at their next group meeting.

The ability to understand financial information and communicate with financial people such as bookkeepers, accountants, and bankers is critical to the success of your business. You don’t need to become a CPA, you just need to know what you’re looking for and how to interpret and use what you see. Improving these skills will also boost your confidence.

One way to gain the education and tools you need is to attend a JCK/BRS Profit Mastery Workshop. I guarantee it will be one of the best investments you’ll ever make in your company and yourself.

Step 2: Talk to your CPA. If you think the problem lies with your bookkeeper, meet with your CPA (certified public accountant) to discuss the situation. (See p. 82 for “Top Ways to Find [and Use] a Great CPA.”) If the underlying problem is a lack of training or expertise on the part of the bookkeeper, devise a plan to get your bookkeeper up to speed with professional training or review by your CPA.

If the problem is a lack of basic competency, take immediate steps to replace this person with someone more qualified. Your CPA can help you write a detailed job description listing specific tasks, skills, and experience level, including experience with your accounting software. Once you’ve defined the job, get the word out through your CPA, other business owners, and job listings, including those on the Internet. Get references from your final candidates, and call them. Key question? “Would you hire this person again?” Ask who else the candidate has worked for and get their names as additional references. Consider having your CPA interview your best candidate as a final check.

Step 3: Six ways to help your bookkeeper succeed. Take your bookkeeper to lunch on a regular basis and ask what he or she would do differently in the company—not just in the accounting area but other areas as well.

If you’re not sure how a part of your business is doing, ask your bookkeeper to think about a way it might be put into a financial report. Remember, it’s easier to manage that which you can measure.

Initially, have your bookkeeper meet with your CPA frequently, and then at least annually (although I prefer a minimum of twice each year) to discuss the bookkeeper’s view of your business challenges and review any questions or upcoming issues.

Assign a few of your expense items to your bookkeeper to review and get recommendations on how the expenses could be reduced. Offer an incentive for a reduction.

Send your bookkeeper to at least one professional education course each year.

Let your bookkeeper participate in company incentive programs even if it isn’t related to accounting. For example, she will have great incentive to make sure managers have the accounting information they need to succeed if she gets a small part of the sales department bonus program.

How to use your CPA. If your only contact with your CPA is once a year around tax time, then you may be missing out on a great resource.

Besides involving your CPA in selecting a bookkeeper, here are some other ways to use him or her. At the very least, have the CPA review your statements quarterly. Don’t wait until tax time to discover corrections your bookkeeper needs to make.

While CPAs still handle traditional accounting services such as tax filing and financial statements, many also act as business advisors on a broad range of issues. These can include creating budget plans, preparing cash flow projections, and helping your business secure financing and make sound investments.

Top ways to find (and use) a great CPA. To find a CPA who best suits the needs of your business, consider the following:

• Make sure you select only accountants who have a CPA designation and a state license. That means he or she has passed a rigorous national exam and meets standard and ongoing educational requirements.

• Look for a CPA who has retail experience with a company about the size of yours (and the size you expect to grow to over the next five years). Ask your business colleagues and banker for recommendations. Ask for references and call them.

• A good CPA should be able to provide your business with the kinds of resources it needs. That might mean finding a CPA who has a relationship with a network of banks that provide small-business financing.

• Talk about your expectations and the CPA’s style: Do you want him to review your financial statements on a regular basis even if you only meet once every quarter? Can you call him for advice, or does he prefer to set up appointments? Who will handle most of the requests, and if it’s a junior accountant, how will that person’s work be supervised?

• You’ll want to feel comfortable talking openly about your company’s financial situation. How will he communicate with you? Do you really understand what he’s saying, or does he use too many technical terms that go over your head? Trust your instincts and walk away from CPAs who look good on paper but don’t put you at ease.

• Ask about your CPA’s involvement in professional organizations. While this shouldn’t be a deciding factor, membership in associations such as the AICPA (American Institute of CPAs) or state CPA societies show a commitment to a professional code of ethics and ongoing learning. Their firms also are subject to three-year quality reviews to evaluate their performance in accounting and auditing.

• Ask about his or her experience with accounting and inventory software. If you’re looking to change your software, you’ll want someone who can recommend alternatives. If you want to keep working with the software you’re using, make sure they’re experienced with the product.

• Ask about his or her practice mix. If 90% of their business is tax related, you won’t get much service from January to April 15, usually a key time for producing final year-end statements.

• Talk to your CPA about putting controls in place to prevent bookkeeping fraud. (Visit our Web site at www.brs-seattle.com/jewelers.html for a fraud symptoms checklist. You will also find links to CPA search sites.)

CPA fees and three ways to save. Most accounting firms base their charges on an hourly rate that ranges from $75-$300 per hour, depending on the types of services provided and who handles the work. You can avoid surprises by asking for an engagement letter that outlines expected costs, billing arrangements, and services. Discussing the following with your CPA can help you save money and get your information in a timely manner:

• Several months before the end of your fiscal year, find out what information is needed at year-end and when. Then ask what work the CPA has performed in the past on each document and how you can give him or her better, more complete information.

• Ask what have been the most time-consuming parts of your CPA’s work on your account and what you can do to streamline them.

• Find out if you can supply your CPA with information in a different format—for example, an Excel spreadsheet—to save time.

When you need more internal resources. If significant growth is in your plans, you will eventually need to hire a controller or chief financial officer. Here’s a review of what each does:

Controller. Because a good controller is trained to have a perspective that transcends day-to-day numbers, he or she can do everything a bookkeeper does but also much more. Count on your controller to choose and maintain the best accounting software for your company, to generate timely weekly and monthly financial reports, and, of course, to keep cash flow on track with a well-run payables and receivables operation.

Chief financial officer. There’s no rule that tells you when to upgrade from controller to CFO. If you need only a relatively small credit line from a local bank, a CFO is probably unnecessary. If you envision significant ongoing growth with longer-term financial needs, you’ll probably need to bring in a CFO. A qualified CFO can prepare a comprehensive business plan that includes financial and market projections. A competent CFO also knows how to handle in-person interviews with bankers and prospective investors. That will allow you to concentrate on what you do best—growing your company.