Implicit Errors in Your Books: A Guide for Small Business Leaders
In the realm of software development, an implicit error is an error that is occurring, but you don’t know it. You think everything is fine and make decisions based on the reports, but they are not telling the real story.
This issue can be catastrophic when applied to the financial statements of a small business. Implicit errors in your books can cause you to make decisions based on inaccurate information.
What Is an Implicit Error?
As a small business owner, you make any number of important decisions daily, and most of them are at least partially dependent on your business’s current financial standing.
Your financial statements must be as accurate as possible, and you should audit your books regularly for implicit errors.
There are two types of implicit errors: logical and semantic.
Logical Errors
Logical errors occur when the code runs, and no error messages occur. However, the output is not what you expected.
When you translate this to business leadership, you read reports showing everything is okay. You look at the Profit and Loss (P&L) statement, and the net income looks great. You look at expenses, and they are lower than expected. All seems good, right?
But first, you have to check your balance sheet. Do you have any assets on the books that don’t exist? Perhaps inventory isn’t in the warehouse, or worse yet, you don’t have a warehouse, but you have been booking some of your purchases to inventory without consuming them as expenses on your P&L.
Semantic Errors
Semantic errors occur when you are syntactically correct – using the right grammar, but the meaning is off. In the case of accounting, this may mean that you booked a transaction, but not to the correct account.
For example, a customer overpays and then you book a credit memo even though the overpayment is already represented in the books. Or you create an adjusting entry but reverse the credit and debit. Or you book the payment of sales tax or insurance to an expense account even though the liability is sitting on the balance sheet to be paid.
Identifying Implicit Errors in Your Books
What can you check for to identify these errors that could be causing you to fly blind?
Here are three steps you can take to identify implicit errors in your accounting:
- Gut check
- Bank check
- Financial check
Gut Check
The first step to identifying an implicit error in your accounting is to look for any anomalies in your Profit and Loss (P&L) and Balance Sheet:
- Run the P&L for a series of periods (such as 13 months). Are there any unexpected variations from month to month along any of the line items? Some accounts to pay extra close attention to accounts that are relatively consistent month to month, like payroll and utilities.
- Run the Balance Sheet. Are there any unexpected values? If the Inventory account has a value, does that match the amount of inventory you own? Do your sales tax, insurance, and other monthly accruals approximate the monthly value of those expenses?
Bank Check
The next step is to ensure that the transactions in your bank accounts match those on your bank statements:
- Match transactions – Do the transactions in your accounting software match the transactions on your bank statements?
- Check each bank account reconciliation – Are there any unreconciled transactions from prior periods?
Financial check
Finally, compare your P&L and Balance Sheet, looking for discrepancies between the two.
In conclusion
By taking these steps, you can identify any implicit errors in your books and ensure you have the information you need to make informed decisions and guide your business toward success.
Don’t let implicit errors in your books keep you from achieving your business goals. We specialize in workflow optimization and can provide the professional services you need to streamline your processes and improve your bottom line.
Contact us today to learn how we can help you prepare for year-end and set your business up for success in the coming year. Let’s make your business the best it can be, together!
