“Cooking the books” is a term that most people have heard, but few really understand what it means. Of course, the obvious implication is it occurs when a company provides misleading (or flat out incorrect) financial information to make their position look better than the reality. But just how does it happen?
Well, for those really interested, here is a recent article that gives some of the ins and outs of how it is usually pulled off. For those that aren’t interested in diving that far into it, I think a good summation of it is that this does not happen by accident. To make a big difference, it takes the knowledge of multiple people to make it happen. One person in a sizable corporation, for example, cannot suddenly decide to report a bunch of income at another date and not have someone else notice that it happened. This is also why it doesn’t take much for these schemes to fall apart. The more people involved in the scheme, the more people who can ruin it.
We work with smaller businesses than those with their own accounting departments, but all the same rules apply, including the potential for everything crashing down around you.
To see this, one must think about just what financial information is meant to show. To many, this may just be that you need to pass along numbers to someone at the end of the year so they can file your taxes. But that sounds like it’s not quite enough, doesn’t it? They must do more, right?
Yes, they do more than this and your financial information should be the place you go to when making decisions about your business. Are you spending too much money in any area? Are you earning enough money on all your services? Is the money you’re spending resulting in increased revenue? If you are keeping good records, you can answer these questions and those answers can move your business forward.
If you are fudging numbers to make yourself feel better (or have that tax return be more beneficial to you), you are still only a small step away from everything falling down around you. After all, what you do to make things seem better today is going to come back and get you tomorrow. That tax return may look better at the moment, but you have probably shifted things that are going to make the next one worse.
There is power in those numbers and there is power in being honest with them. The more you stay on top of them, the quicker you can fix things so that those distant moments of comeuppance do not have to come. So in this time when there are many going through the worst times their business has seen, if you legitimately operate the best you can, you are setting yourself up for long-range success.
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