The Seven Deadly Sins of Financial Reporting

7. Underestimating the Bad Debt Expense
Yes it is certainly tempting to be overly optimistic and hope beyond hope that somehow we will ultimately collect that open invoice from December 2001. But let's face it; it is never going to happen. We aren't fooling anyone (other than ourselves) by keeping it on the books. Make it a policy to take a reserve against bad debt after 120 days and to remove it from you books after 1 year.

6. Inflating Billable Hours
Make it a habit of only invoicing the hours you actually worked. Resist the temptation to inflate the actual hours because of the "extraordinary value" you have created under your hourly agreement. It is unethical to invoice phantom hours, not to mention fraudulent. Follow the industry trend and negotiate more fixed fee contracts. These contracts allow you to capitalize on your intellectual property and be fairly compensated for the value you create.

5. Invoicing for Work Not Under Contract
You know what I am talking about. After working on a project for a year or so and being substantially over budget, you finally dust off the contract to review the scope of work. To no ones surprise, you find that you have attended extra meetings, the program has changed, the construction budget has increased by 50% and the project is now 4 months behind schedule. You quickly put together some numbers and send the client and "additional service" invoice for $125,000. While I am all for getting paid for our work and we should definitely approach the client, please don't recognize the revenue until the client agrees to pay you. This would be wishful thinking at best.

4. Recording Work in Progress that is Questionable
Item number 5 above would fall into the questionable category. If you don't have a contract for the scope of work -- don't record the revenue. As a matter of fact, I am not a fan of recording Work in Progress on a regular basis for most (not all) firms. I prefer to have a system of issuing invoices at the close of every month and posting them in the period the work was performed. The only Work in Progress entries should be for those contracts that call for milestone invoices (e.g. 100% Schematic Design, 50% Design Development).

3. Not Accruing Consultants
I have seen many firms that do not recognize consultant expenses until they receive an invoice from the consultant. This is a huge mistake and can cause wild fluctuations in net income. If you are invoicing a client on a fixed fee contract through 80% Design Development, you had better be sure to recognize 80% of your sub-consultants expenses on your books. The profit (or loss) implications can easily exceed $100,000 or more depending on the size of the contracts involved.

2. Intentionally Not Recording Legitimate Expenses
It is far too easy to "forget" to enter an invoice in the proper month or year. If the

current month or year seems a little bit weak, don't be tempted to defer the expense and record it several months after the fact. Nobody wins and we are only deferring the day of reckoning.

1. Invoicing in Excess of the Actual Percentage of Completion
Don't' juice up the current revenues by invoicing in excess of your percentage of completion. In the short run, the most difficult thing to face is the truth. If revenues are down, so be it. Armed with the truth, we can take the action that is needed. Disarmed by deceit, we wander aimlessly towards disaster.

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