As we start work with a client, there are many times that the owner will say, “My accountant does not provide me advice on my business, they only compile my statements and do my taxes”. What most business owners do not understand is that in most cases, they are only paying their accountant to perform those two tasks when they visit them once a year. In order to provide you advice on your business, the accountant would need to come in and learn more about your business in a lot more depth than your accountant does for what they are doing now. To fully understand this, it is imperative to understand the difference between financial accounting and management accounting, along with what functions you are asking your accountant to perform.
Financial accounting is for presenting the financial position of your business to its external stakeholders in order to understand the health of your business. External stakeholders can include your Board of Directors, other stockholders, investors or lenders. Your financial statements represent the results of your business over a specified time period and are used to compare present results to your past results to see if how your business is performing. Financial statements reporting is based upon what has happened, so they are ‘backwards’ looking.
As a private corporation, your financial accountant creates financial statement compilations (Notice to Reader). Your compiled financial statements are then used as the basis of calculating your business income tax. Your accountant may make recommendations based on the information you provide them, but they are not going digging into your financials to uncover any issues or misclassification's or any wrong doings – that would be done through an audit or review and is not what you are paying for when you ask them to compile your statements. The reports they provide with the compiled statements do not provide an opinion or give any assurances that the statements are in accordance with Generally Accepted Accounting Principles (GAAP). In some cases, an investor or lender may require you to have an audit or review which will require the financial accountant to go through your financials in detail to provide some level of assurance that the statements are free from material mistakes and fairly represent the operations of the company.
It is very important that when you review financial statements that you look at the beginning of the report to see one of 4 things:
Management accounting is used by business owners and other management to make decisions concerning the day to day operations in your business. Management accounting is based on current and future trends and does not require exact numbers to be used. Because you often have to make decisions in a short time period through a fluctuating environment, management accountants rely heavily on forecasting of markets and trends when working with you. Management Accounting combines accounting, finance, and management with professional insights and methods.
Unlike financial accounting where financial statements reporting is based upon what has happened; management accounting makes use of these statements combined along with analytical tools and techniques and will focus primarily using ‘forward’ looking analysis and reporting suited to managements needs.
Financial Accountants and Management Accountants
It is important to understand your requirements and your expectations when you hire or engage an accountant, as well as understand what functions they are able to perform for your business. Not all and in fact most do not perform all functions. In some cases you might have a financial accountant to compile your statements and help you file your business taxes. You might then need to engage a management accountant to come in and help you with functions such a performing feasibility studies or helping you with functions such a budgeting, pricing, costing, productivity analysis, or profit analysis. In many cases you will have accountants that will perform some functions of each based on their background and clientele. If you have an accountant that performs all of the functions you require, it is essential that you engage them for all the purposes you require. As with any professional you hire, they are not going to just provide you with advice on a particular issue with your business when that is not what you have hired them to do.
Business owners often struggle with what professional services that they should purchase or hire for internally for their business. The problem with bookkeepers is like any profession, all bookkeepers are not created equal. Though there are college programs for bookkeepers and there is the Canadian Bookkeepers Association that offers Registered Professional Bookkeeping Certification; there is nothing that permits anyone to call themselves a bookkeeper and provide bookkeeping services to the public.
Many business owners assume that bookkeeping is nothing more than someone that performs data entry into their accounting system and possibly takes care of paying HST and administering payroll. In some cases this may be true, but if this is the case, they are most likely not a professional bookkeeper and can end up costing you a lot more in back-end fees with your Accountant at the end of the year to straighten out your books before they compile your statements or do your taxes.
A good bookkeeper will spend the time to understand your business before performing your bookkeeping. How the books are setup for a manufacturing business is quite different than a services business that probably has little to no cost of sales. A bookkeeper is not an Accountant but should understand enough about accounting in order to create transactions and allocate them to the right account. A good bookkeeper will work with your Accountant versus independently of your Accountant.
The compilations your Accountant will prepare will be based upon what you have handed them. Stated within the Notice to Reader is: “based on the information provided by management”. If you assume that everything is correct and you hand your Accountant information filled with mistakes, they are going to prepare your statements and your taxes based on what you have in your accounting system.
If something stands out as offside to GAAP (Generally Accepted Accounting Principles) your Accountant will make adjustments, but if there is something specific to your business that needs to be accounted for in a specific way. Accountants are not going to look further unless you pay for their services to do so.
Over the last few years, we have found where mistakes performed by a bookkeeper has ended up with the financial statements being incorrect because transactions were put in the wrong accounts which could also affect paying too much tax or not enough. This is an important enough function whether you outsource or hire within your business, that you need to investigate their background and credentials thoroughly.
We find that businesses that have good bookkeepers tend to have a better handle on their financials and a better understanding of where they stand. We find that they usually have a good relationship and work directly with the Accountant for the business. When this happens you will find the business financials are very clean and easy to follow if help is needed and problems within the business need to be investigated. Not only does this save you on accounting fees (because it should take less time) at the end of the year with your financial Accountant that generates your statements and your taxes, but will also save you in consulting fees from a management Accountant or consultant that comes in to help you uncover and resolve a particular situation in your business.
Before you hire a bookkeeper, ask your Accountant if they can recommend one that they have worked in the past with other clients. If they cannot provide a name, make sure that you check client references from businesses that they have worked in the past and find out what credentials they have. You could also look to organizations such as the Canadian Bookkeepers Association, the Canadian Institute of Bookkeepers or the Institute of Professional Bookkeepers of Canada for guidance.
RK Fischer & Associates
Our offices are located now in Sarnia, Ontario but are able to provide services across Canada for a majority of services remotely. Our local service area for onsite services is Sarnia, London, Chatham-Kent and surrounding areas.
We will provide onsite services that require at least one full day of onsite services in Windsor, Kitchener, Woodstock, Leamington, Waterloo, Cambridge, Kitchener, Guelph, Milton, Oakville, Mississauga, Burlington, Hamilton, Toronto, Vaughan, Markham, Brampton, Richmond Hill, Newmarket, and Durham Region.
For other businesses in Canada who want service onsite and are outside our onsite area, please contact us to discuss your requirements.
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