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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.

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

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