Playing Accounting Catch-Up

I recently completed a finance consulting project to assist a start-up that had not kept its books for nearly eighteen months. As you can imagine, there was a lot of work to do. Here’s how I got the project to the finish line.

To begin, I created a chart of accounts, downloaded all of the bank statements, and entered every transaction into QuickBooks. Because each transaction had to be assigned an account, I made a first-pass guess to categorize them, then reviewed them with the client until we backfilled all of the past history. Once everyone was comfortable with the resultant P&L, I reconciled each statement and performed a month-end closing. I also worked with the client to pull together work papers for each transaction in case the books were ever audited.    

Here are a few of the lessons I learned.

Lesson 1: Tread lightly. At the onset of the project, I noticed that our client was embarrassed by the disorganized state of their books and the way in which they had spent their startup capital. I repeatedly told them that I didn't care. My job was to get the books in order. Period. Once they accepted me as a neutral, non-judgmental party, the project jumped into high gear. This emphasized the value of treading lightly in difficult situations and respecting wherever the client happen to be when they hire me to do work for them.

Lesson 2: Accounting memory is short. Throughout the past the eighteen months, the client had made a number of cash withdrawals, both in the bank and through ATMs. That cash went somewhere: to pay a vendor, a hotel, or to buy office supplies. With so much time having passed, however, it was hard to remember how the money had been spent. I used some forensic skills to help them reconstruct what took place so I could finish entering the books accurately. The lesson: if you don't track cash, it's hard to remember what you spent it on (as opposed to expenses that follow a PO/invoice/check accounts payable cycle). Based on this, I helped the client put procedures in place so cash was tracked much closer going forward.

Lesson 3: Help the cllient help themselves. I assigned two temporary accounts for any transaction I couldn't immediately identify: "TBD Income" and "TBD Expense." Then, I exported that data to Excel and gave it to the client so they could fill in the missing data. The lesson: Help the client to help themselves. Procedures like TBDs helped them save money on billable hours, let them fill in the gaps at a pace that they set and got them involved in the process.

Lesson 4: It's not always income or expense. At first blush, the cash moving in and out of the company's main account looked like income and expense transactions. As I dug deeper, however, I learned that some of the debits and credits were, in fact, several short- and long-term liabilities that the company had taken on. I amended the chart of accounts and reclassified the transactions accordingly. Now, in additional to clean P&L, I also had an accurate balance sheet. That taught me the value of not accepting a transaction at face value. Another bonus: As part of my work, I realized that the company had overpaid one note by more than $20,000, turning a liability into an asset.