The Power of Due Diligence: Red Flags You Might Have Missed

From the Desk of a Filipino Accountant Who Believes in Building Stable Systems

As an accountant working with business owners across different industries in the Philippines, I’ve come to appreciate one thing above all: Due diligence is not just for big deals or BIR audits. It’s a habit. And when done consistently, it can save your business from disaster.

I've encountered clients who were so focused on growth or survival that they overlooked red flags—until it was too late. But the beauty of due diligence is this: when done right, it reveals what your day-to-day operations might be hiding.

In this blog, I’ll walk you through real red flags I’ve spotted while performing due diligence for my clients, and how building internal controls and stable systems helped turn those warnings into wins.

🚩 Red Flag #1: Cash Flow Looks Good—But No Money in the Bank

One of my clients proudly told me, “We made ₱300,000 last month!” But when I checked their actual cash balance, they only had ₱40,000. Why?

📌 The truth: Their books showed revenue, but they had delayed collections, unrecorded cash expenses, and unmonitored personal withdrawals.

How we fixed it:
We installed a monthly cash flow report, monitored receivables, and implemented a disbursement log. Now, the business has better control and is rarely caught off guard by cash shortages.

🚩 Red Flag #2: No Supporting Documents for Big Transactions

Another business owner asked me to review her books before she filed her ITR. One major transaction worth ₱180,000 had no receipt, invoice, or breakdown—just a note labeled “Project Expenses.”

📌 The risk: This can be disallowed during a BIR audit. Worse, it could be a sign of fraud or internal mismanagement.

The fix:
We created a policy where every expense above ₱5,000 must have supporting documentation and manager approval. We also set up a proper folder system, categorized monthly.

🚩 Red Flag #3: Inventory Shrinkage with No Tracking System

For one retail client, inventory losses were being blamed on “maling delivery” or “customer returns.” But after conducting a basic inventory reconciliation, we saw a ₱90,000 shrinkage in just three months.

📌 What we discovered: No stock ledger, no receiving report, and staff had full access to both inventory and cash.

Our solution:
We introduced inventory tracking using a simple spreadsheet, separated duties for handling and recording, and implemented weekly physical counts.

🚩 Red Flag #4: Owner Not Reviewing Financial Reports

Yes, I’ve met business owners who never check their own reports. They trust the staff or outsource their bookkeeping, but never ask for monthly summaries.

📌 Why this is dangerous: It leads to missed opportunities, late payments, unnoticed tax liabilities, and even employee fraud.

What we changed:
I now send simplified monthly reports to these clients—one-page snapshots that include cash balance, receivables, payables, and major expenses. One of them spotted a ₱12,000 duplicate payment because of this new habit!

🚩 Red Flag #5: Relying on Manual, Scattered Systems

Many of the problems I see stem from using scattered files: receipts in drawers, Excel sheets saved in random folders, and payment history on phones.

📌 The result: Things get lost, mistakes multiply, and you’re never fully audit-ready.

What we did:
We transitioned these businesses into organized systems—some went digital with tools like Google Sheets or QuickBooks; others stuck with physical folders but had consistent monthly routines.

🔍 What Is Due Diligence, Really?

Due diligence means taking a step back to review, verify, and assess the financial and operational health of your business. It's not a one-time thing. It’s a mindset.

As accountants, we are trained to spot patterns, investigate inconsistencies, and recommend improvements. More importantly, we help you build internal controls that prevent future problems—whether it’s fraud, penalties, or business failure.

✅ How to Start Your Own Due Diligence Process

1. Schedule a mid-year or quarterly review.

2. Check for inconsistencies in sales, expenses, and bank balances.

3. Evaluate your documentation habits.

4. Involve your accountant—not just at year-end, but now.

5. Fix red flags while they’re still manageable.
   
   

💼 Final Thoughts

The power of due diligence lies in its ability to uncover the small cracks before they become structural damage. It’s about taking control, not just reacting.

If you're a business owner reading this, let this be your reminder: don't wait for a crisis. Use this lean season to dig deep, clean up, and build stronger systems. I’ve helped many clients do it, and I’d be happy to help you too.

Let’s turn those red flags into redirection—towards a stronger, smarter business.