How to catch financial problems early
August 03, 2015

One of the many keys to success for small businesses is financial health. Just as catching illness before it spreads increases the likelihood of a full recovery in humans, catching fiscal trouble far in advance can dramatically reduce damage to the business over time.

There are several actions accountants can take to better identify financial issues early on:

Be objective
It's easy to be optimistic when business is booming. With tons of cash flowing in, problem areas are easily swept under the rug or ignored until a later date. Accountants especially can serve as voices of reason, pointing out problem spots amidst success in other areas, keeping business owners aware and objective, according to Entrepreneur.

Communicate with business owners
Along the same lines, accounting departments have to offer continuous and honest feedback to supervisors and small-business owners. Even the smallest discrepancy could lead to a larger fiasco. Being able to call out potential threats to financial health and security is a strong skill.

Improve accounts receivable turnover
Commercial Capital LLC stated sometimes clients fail to pay invoices on time, which can throw a big wrench into the accounting department's plans. Depending on customer contracts or company policy, clients may not have to pay an invoice for up to 60 days, which can be a big problem for small business finances. Measuring accounts receivable turnover every month is a good way to catch waning turnover early, giving the business time to course-correct.

Don't use shortcuts
Any accounting method that cuts corners or lacks explicit procedure has the potential to ruin a company's financial health. Utilizing a software platform across the entire accounting department and engaging all accounting professionals in training can dramatically decrease the number of mistakes made due to varying processes or miscommunications.

Have a reasonable cash reserve
Another article from Entrepreneur discussed the importance of cash safety nets. Accountants need to make sure their businesses have significant cash reserves ready for an emergency situation or slow sales period. It's recommended to have at least a few months' worth of funds available and more for any particularly unstable industry. However, too much cash on hand can be bad for business. Be wary of spending what seems like excess cash or letting cash sit dormant, as these scenarios can lead toward bankruptcy if left unchecked.

When it comes down to financial health, accountants have to be ahead of the game in terms of spotting fiscal trouble and ending it before it spreads.  

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