Your Financial Audit Will Scrutinize Your Financial Management Information System, And Its Ability To Deliver Accurate, Timely, Critical Information.
It is impossible to overstate how important a financial audit is to managing for a profit. A business that I evaluated for purchase serves as a horrible example of not having a functioning financial management information system. The owner couldn't get an income statement or a balance sheet until at least six weeks after the end of the month. The net income on the statement was an illusion. Cost information appeared to be created out of thin air. Equally bad, the accounts payable and accounts receivable numbers were always incorrect.
As you can probably imagine, this made the company and its owner extremely unpopular with the bank, and its suppliers. Customers were also aware that invoicing was very late, something that reflected badly on the company's credibility.
You may have thought that a financial audit was something that was only important to very large companies. Or that was imposed by the SEC on public companies. If you did, the example cited above has hopefully convinced you otherwise. Our purpose is similar to these, but with much greater emphasis on useful, timely information for management.
What are the minimum financial management information requirements to satisfy a financial audit? Start from the top. You want to be able to record orders and revenue in an appropriate fashion. You also need to get paid and to pay suppliers. Getting paid means that you deposit money to your account. To get paid you need to invoice, and to collect. And before collecting you want to record what is owed. You need to know what you owe, and when you need to pay. You need to issue offsetting payment as needed. All of this must tie together.
That is at one level. And that involves having a good accounting system. But it also involves following a good system once you have it. Perhaps the best way to determine this is to bring in your outside accountant once each quarter to work with your in house personnel. With the sole purpose of reviewing the process of preparing the various statements for compliance with your good system. And to recommend changes, or remedial action.
A useful financial audit will examine the systems that collect cost information, and relate cost to the product or service delivered. In some circumstances, it will only be possible to collect partial cost information. And that may be labor cost, as it is easiest to collect and relate to work done. Your objective is to analyze unit cost and take remedial action where they vary from expectation or history. It is difficult to control cost at the macro level, if you cannot measure and compare various constituent parts. Back to the smallest relevant measurable activity.
Raw material consumption and cost should be collected and relate to work produced. It should also tie to raw material inventory and purchasing. If you have a system in place, doing this will be part of what the system can do. But in order to do it, you need people to follow the system. So once again, compliance with the reporting requirements inherent in the system is critical to a successful financial audit.
If you don't have a financial management information system, get a good one. Your outside accountant can help you select one that is right for you. Follow it. Demonstrating that your business adheres to your system will go a long way toward satisfying the requirements of your audit. And of greater importance, satisfying your need for accurate, timely, financial management information.
Remember as you carry out your financial audit, that the first thing a prospective buyer will analyze is your financial information. Being reassured that it is accurate, timely, and useful as a management tool will enhance his confidence in his ability to operate your business. Which will in turn enhance his level of interest in buying.
Remember, you only get one chance to make a good first impression. If you lose credibility here, prospective buyers will question your overall credibility. So it is critical for all of your monthly information to tie together, and also to tie to your year end information. Although it sounds obvious, it is frequently overlooked.
This type of credibility is important for another reason. Prospective buyers usually want to do some type of sensitivity analysis using the financial information provided. They want to see what will happen to profit if labor cost is increased by a certain percentage, or if raw material cost decreases. The analysis will depend on the assumptions that they make about the future operating environment. They need to be confident that the financial management information that you present, provides an accurate reflection of reality. They need to feel confident projections they make for the future have a solid foundation.
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