Making your accounts work for you.

Are your accounts giving you information that helps you manage your business?

Most accounts don’t.

When I go into a new client, one of the first things I do is to review the existing accounts.

I am looking to see if they could get more information – additional analysis – from their accounts.

The Sales account is the first account I see. Most accounting systems have only one line for Sales. Yet, it is helpful for most businesses to analyse their Sales in more detail.

You can analyse by the type of work, the nature of the assignment, the type of customer, the geographical region or any other way that gives useful information.

For example a business consultant might have once off consultancy assignments, ongoing retainer assignments, training etc. I mentioned this to a client recently who has launched an initiative to win more retainer business. Analysing his sales in this way, will make it much easier to see if the initiative is achieving the results he wants.

An engineering business might work for industry or for building contractors or for farmers. When I worked for an engineering company some years ago, they realised that they were making a lot less profit on their farming customers. The accounts analysis prompted further investigation and they ended up pulling back from that sector with the result that they achieved better profits with lower sales.

A medical practice might have GMS, private patients, occupational health contracts or public body contracts.

Breaking down your sales can help you manage margins. It can help you understand if your marketing is working. It can show you which parts of your business are performing best for you.

Each business is different and each business owner should sit down and ask what information would be useful to him/her. And remember , this analysis can be applied to more than just sales. Any Cost of Sales or Overhead account has the potential to be analysed further. If you find it useful to analyse your sales one way, you will probably find it useful to analyse all of your costs the same way.

Ask yourself if any costs are giving you cause for concern. What additional information would help understand those costs better? Go into your accounts and set up accounts that will help you with this analysis.

Your accounts will still show the same overall result. You will be just making the numbers work for you instead of you working for the numbers.

Some of the biggest improvements I have helped make in businesses have come from using this type of analysis to understand what is happening in the business.

I have been able to show that a business is losing money to one set of customers and subsidising that loss from a different set of customers. The information was there but the system was just not set up to deliver it.

So have another look at your accounts. Is there some other way of analysing the information that would be helpful to you? Go ahead, then, and make the changes.

If you have any questions about this post, feel free to send me an email to jim@accountsplus.ie.

Are you missing out on the benefits of budgeting

It’s the start of a new year and larger companies will have their budgets done, or almost done.

Yet, in most owner managed businesse,s there are no budgets or forecasts. Ask them why and they’ll give you all sorts of reasons. They haven’t got time. The current climate is so uncertain its nearly impossible to get it right. They haven’t got all the information they need yet.

None of these reasons are valid.

If something is important and worthwhile, you make the time for it. If you think you haven’t got the time, that means it’s either unimportant or not worth the effort.

In uncertain times, it even more important to understand your business and to have a reasonable appreciation of how it will perform in good, medium or poor conditions. You should be taking actions that will make your business better able to understand the uncertainty, rather than waiting impotently.

If you haven’t got all the information, then you need to identity the key information and get it. The only way to do that is to starting your budgeting/planning process.

A budget is not about the end document. Yes, thats important. But what’s more important, and more beneficial, is the process you go through to prepare a budget.

You need to understand what the business is selling and what resources are used up making those sales.

You need to know what these resources will cost you in the coming year.

You need to understand what overheads you have and what they are going to cost in the coming year.

You need to be clear on what assumptions you are making and which of those the most critical.

You need to understand your payment terms – both incoming and outgoing – and what effect these have on your cashflows.

Overall, the earlier the warning you have of any problems, the better positioned you are. A good budget or business plan should flag up any issues you need to be paying attention to.

The process of doing your business plan should be looked at as part of your learning process.

You set out your budget or plan that tells you where you expect to be at various points in the year. As you go through the year you check to see where you are and how does that compare to where you thought you’d be.

If the differences are significant, you need to investigate and understand where you got it wrong. Out of this, your understanding of your business will grow and your ability to predict will improve.

Bottom line, budgeting or planning is one of the most important things you can do.

How banks are evaluating lending requests

I was talking with a banker last week about their lending policies at the moment.

One thing was very clear. In the current climate, they expect companies to have up to date accounts.

The days of the bank accepting accounts from last December are gone. Now they are looking for much more up to date accounts – monthly accounts preferably, and if not monthly quarterly.

When they get the accounts the key areas they look to are the ageing of debtors, the creditors balances and the value of stocks and work in progress. They also like to see a healthy open order book. They also look to see what sort of commitments you already have. Finally, they look at your position with Revenue Commissioners.

They know, as much as anyone else, how tight things are right now and while they are willing to lend they will try to minimise risk as much as possible.

If you are looking for funds, then you need to be able to demonstrate clearly why your proposition is a low risk proposition.

If you have any comments on this article or if there are any areas you would like to address, please do let me know.

Best Wishes

Jim

A framework for Improvement

Applying the TOTE principle to business.

In personal development work, the TOTE principle is an iterative problem solving strategy using feedback loops. This principle can be applied equally well to business.

The First T is for Test. Test the environment and identify what needs to be improved. At this stage you also need to be clear on how you will know whether or not an improvement has occurred – your success criteria.

The O is for Operate. Once you have decided what you want to improve, you take action to bring about the improvement. Each individual situation will call for its own set of actions.

The second T is for Test again. After you have completed the action, you test again and check if the desired improvement has been achieved. You will examine if the success criteria have been met. If yes proceed to the next step. If no, go back to step 2 and change or refine your actions.

When the desired result has been achieved, exit. You’re finished.

This simple process is used intuitively by most people. To me, it’s essentially the engineer’s feedback loop.

Applying this to business, you need to firstly decide on what success is. In recent years we talk about setting our target business metrics or our target KPIs (Key Performance Indicators). This is where we establish our success criteria. Then we need to measure the gap between where we are and where we want to be. This is the Test step. Our accounts or other performance reports should be designed to highlight the size of the gap, if any.

Second step then is to take action to improve the performance i.e. to close the gap. This might be the easiest to say but usually it takes the most time.

Third step is to Test again. Our performance reports will tell whether or not our improvement initiatives have yielded the desired results. If not, we need to review what we did and the results we got. From this we should modify our action plans and try again. If yes, we exit and go on to something else.

It’s a nice elegant framework and, looking at business this way, our accounts are a key tool for testing. For them to be successful we need to be clear on our success criteria. Each owner manager should spend some time identifying their own key success criteria and should ensure that they are measured regularly as frequently as is useful.

If you have any comments on this article or if there are any areas you would like to address, please do let me know.

Best Wishes

Jim

Getting Better information from Computerised Accounts

I attended an Insolvency Update last week and one of my own hobby horses appeared again.

One of the speakers, who regularly works on examinerships, commented on the lack of good accounting information in most of the companies that go into examinership. This really struck a chord with me. In most of the improvement projects I have worked on, the accounting information was either poor or non-existant.

What I find difficult to accept is that, while most companies now use some form of computerised accounting software, very few are getting management accounts. Even where businesses are getting reports from the system, the reports will be either out of date or unreliable.

There’s nothing worse than picking up a report, asking the owner about it and hearing “Ah, sure. That’s not right”. And I’m thinking, “well, if you know something’s wrong, then why haven’t you fixed it?”

But they don’t fix it. They’ve done 70-80% of the work needed to have good accounts but they haven’t finished off the 20-30%. So the information they have is more than likely misleading,

It would only take a few things to make huge improvements in the quality of the information.

  1. Review the setup of the accounts and ask are they designed to give you the manangement information that you need
  2. Check are the opening balances correct. You will probably need help from your accountant here but I think they should be adjusting the opening balances for you anyway.
  3. Sanity check the information that has been input. Prepare bank reconciliations to prove that your bank account is reliable. Review your debtors account and make any corrections necessary for discounts, bad debts etc. Do the same for your creditors – reviewing for discounts and writeoffs etc.
  4. Finally print off a Profit and Loss and Balance. Go through the Balance Sheet first. Is every asset listed correctly? Do the liabilities look correct? If your balance sheet is reliable, then the net profit to date must be reliable. When looking at the Profit and Loss, I like having a drilldown feature. When someone says “whats in telephone or whatever”, you can just drill down on the account to see what transaction make up the figure for telephone.
  5. If you do all of that, you accounts will be reasonably reliable and good enough to work with.

If you have any comments on this article or if there are any areas you would like to address, please do let me know.

Best Wishes

Jim

Online Accounting – what’s that about?

Recently, I’ve been looking into on-line accounting software (also known as Cloud Accounting or SaaS Accounting.  I am interested in it for a number of reasons.

I have a number of friends who want me to act as their accountant but they are located quite far from me and it did not seem practical to have them as clients.  That’s what got me looking at it in the first place.

Secondly, having a background of improvement projects and business process reengineering, I was looking for something that would simplify or streamline the annual accounts process.

Finally, I believe that many businesses need to improve their management improvement and I was looking for practical ways to help to do that.

There are many things that I like about on-line accounting.

As the accountant, I can either setup or help set up the accounting system at the very start.  In doing so, I can let the client have the benefit of my experience from the beginning.

With all of these systems, the client can give me a log-on and if the client has a question about something, they call me, I log-on and deal with the query quickly and much more cheaply than if I had to go to the clients premises.

If the client is nervous about filing a VAT return, they can give me a call and I can quickly review the VAT before its submitted.

Similarly, I can log-on every now and again, say every quarter, and have a quick review of the clients account’s and if I see something unusual or strange I can raise and deal with it there and then.  And remember, its always much easier as an outsider to see something than it is for the person who is looking at the numbers every day or every week.

You will have better information to be bringing to your bank manager.  Right now, lack of good information is one of the things that stops banks lending.  They want to eliminate uncertainty and if you can only show last years annual accounts that’s not great.

At the year end, I will have much better and more reliable information.  This will make preparing the accounts easier but will also mean I have more time to analyse and advise compared to the more traditional approach.

Finally, when the accounts have been completed, I can post any adjustments to the accounts so that the accounts are up to date.  You would be amazed at the number of clients whose accounts have not been adjusted to agree with the last years accounts.

Finally, most online accounting have much better back up routines than your typical SME office.  So the chances of losing key data are greatly diminished.

Is online accounting for everyone?  I don’t think so.  It is definitely a good solution for independent consultants that use computers in their work anyway.  It will work for SMES where one person looks after the book-keeping/accounting.  You need to have a good broadband connection – although I am told that it does not need to be the fastest. or anyone with good computing skills.

In my research, I spoke to a number of people using the various packages.  The most common response I noticed was the increased sense of knowing what was going on in the business and of feeling in control.

If you have any comments on this article or if there are any areas you would like to address, please do let me know.

Best Wishes

Jim

Simple things to improve Cash Collection

I have been working with a number of clients lately where cash management is an issue. I am sure that’s true for every accountant now.

There are so many simple things that make a difference here.

  1. Think before you extend credit.
    Decide if you want to give the customer credit and how much credit you want to give.
    Set limits – on both time and on amount of credit.
    Then if they don’t with within the time or if they have already used up their credit allowance, don’t give anymore credit.
  2. If you are in a sector where Credit is the norm, offer discounts to people who pay up front – make it an attractive option.
  3. If the amount of credit asked for is big, do a credit check.
    Think, how much would it be worth now to know if this customer has a good record.
    If the cost of a credit report is less than that, get the credit report.
  4. Don’t give credit to someone who is already over their limit.
  5. Chase the money when it becomes due.
    In my experience, they who shout loudest get paid.
    So be methodical and keep a log of calls, letters etc
  6. Through it all, be Consistent – if you make a decision, stick to it.

If you have any comments on this article or if there are any areas you would like to address, please do let me know.

Best Wishes

Jim