One issue that often comes up with new clients is the frustration they feel when the accounting results turn out to be significantly different from what they expected. They may have had a very busy period, worked hard and expected to show good results and, yet, when the accounts are finalised they are disappointed because the results are not as good as they think they should be.
It doesn’t have to be like that. Other clients are able to predict with reasonable accuracy the accounting results as they come up to the period end.
So what’s different? What is it that the accurate predictor is doing that the inaccurate predictor is not doing. There are a number of key elements.
Understanding the business
Firstly, the accurate predictor usually has a good understanding of the business and the relationships between the key drivers in the business. That understanding did not develop overnight – it usually builds up over a period of time. It can be developed and that development can be accelerated by preparing projections or forecasts and then comparing those projections with the actual outcomes.
Preparing projections can seem difficult at first. It can be challenging for a business owner to set sales targets, then identify the related costs and finally compile all of those into Profit and Loss and Cashflow projections. However, the only way to get better at it is to do it.
Once you have the projections complete, you should be much better able to identify your Key Performance Indicators (KPIs). These are indicators that do either of two things. They give you feedback on whether you are on track to achieve key targets or they help you predict something that is going to occur. If you know that you have a very high rework rate on a production line, then you can predict that either you won’t achieve target output or you will achieve it but only by incurring overtime.
Designing informative accounts
Using the insights that you gained from preparing the projections, you should review your accounts and ask yourself if they are providing you with sufficient information to be able to compare results against the projections. You may want to split sales by product, region or customer type. You may want to split raw material costs by category or by product or maybe by specific job. Remember that your accounts are first and foremostt management accounts. They are yours – to help you run the business and not just for year end.
Ensuring Timely and Reliable Accounts
Accounts are only useful if they are up to date. You need to have a routine for reviewing the numbers and checking that everything that should be included is included. For example, are you confident that all the supplier invoices are recorded for any deliveries that were received and included in stock before period end? Do you have accurate stock or work in progress counts? Have you recognised all bad debts or disputed amounts? Do your payroll figures include the costs of all taxes or are they just the net payments? One hour per month would be sufficient to complete an accounts review. Of course, depending on what you find, the accountant or book-keeper may have to put in additional time to investigate any issues that crop up.
Including Non-Accounting Items
There are a number of items that affect your profits that are often not picked up until the year end. These can include write-offs, scrap and rework. Maybe even something like the disposal of an asset such as a truck or van. If you are aware of these, you should make sure that the accountant/book-keeper knows so that they can be reflecting in the numbers during the year and not just at the year end.
If you have a good understanding of your business and the internal dynamics of the business, you will be able to predict your results with a high degree of accuracy. It takes some work and it takes discipline but it can be done. One of my favourite quotes is that your accounts should confirm your profit predictions. In other words, there should be no surprises.
If you would like a no-obligation review of your accounting systems and routine, call or email me, Jim Cahill. My contact details are 086 2323 525 or jim (at) accountsplus (dot) ie.