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Decision-making and the importance of understanding cash flow

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As I said in my last blog post, one of the most common areas where my business clients want advice is around decision-making – knowing which of the options they’re faced with will be most beneficial for their business.

Whether you’re a brand new start-up business, or an established family business, it’s vital to make the right decisions over the course of your business journey. Make the right move, and you’re on the pathway to profits and success. Make the wrong move and you’re likely to miss opportunities and reduce your overall profitability.

So how do I help my business clients to improve their decision-making and make the very best of every situation?

A clear focus on cash flow

I originally qualified as an engineer and that systematic, rational approach is something that informs my approach to decision-making and the assessment of financial options.

To know which outcome produces the most financial benefits, I focus on the cash flows in your business. Once we know the different options, and the cash flows that relate to them, we can compare and contrast the various financial outcomes.

 With the cash flows noted down, I enter this information into a table with three columns:

  • The first column is for the cash flows in the current situation.
  • The third column is for the cash flows in the alternative situation.
  • The middle column is for the difference in cash flow between the two options.

Here’s an example of how this table will look, using the example of ‘John’, a painter/decorator who’s looking to buy a new van for his business – you can read more on this example in the previous blog here.

Current VanDifferenceNew VanComment
Investment0-10,500-10,500As I’m only looking at what will happen from now, I don’t consider the cost of the current van.
Fuel-10,8001,500-9,300This is fuel cost over 3 years, based on the info supplied.
Maintenance-6,0003,000-3,000Maintenance cost over 3 years. based on the info supplied.
Van Hire-1,5001,50005 days pa for 3 years at 100 per day
Lost Earnings-2,4002,40002 days a year for 3 years at 400 per day
Tax-900150-750Info as supplied
Insurance-1,500-300-1,800Info as supplied
Resale Value04,0004,000Info as supplied
Net Cash In/(Out)-23,1001,850-21,350 

 

The important number here is the final figure in that middle ‘Difference’ column. Using the cash flows we know, and estimating things like costs and wear and tear, we can reliably say that John will save €1,850 over the year by buying the new van he’s looking at.

For a small, one-person business, having €1,850 more in your pocket will have a positive impact on the company’s overall cash flow – giving you more scope to invest in other areas, like marketing, or new equipment.

Putting the cash flow approach into practise

My previous post mentioned two examples of businesses that were at a crossroads with their decision-making.

  • The dentist – One was a dentist friend of mine, who many years ago asked me if refurbishing his dental practice was a sound financial move.
  • The food manufacturer – The other was a food manufacturing business who came to me recently to ask whether they should keep production in-house or outsource it. 

Lets look at both these scenarios and see how the systematic cash-flow approach helps us to choose the best option for each business owner. 

For the dentist, the decision looks a little easier. He already had a quote for the cost of the refurbishment. This would be a tax-deductible cost, so we could say that the after-tax cost to him was 50% of the quote – all sounding pretty rosy so far!

Then I asked what would happen to his practice if he didn’t do it up. He replied that he wasn’t sure but he would expect to see a slight decline in the number of patients. He considered the quality of dental care would be most important but having a rundown surgery could lead patients to think he was not doing so well and maybe he was not so good – in other words, a shabby surgery could have an impact on the perception of his brand.

Finally, I asked him how he would feel working in a somewhat tired, run-down surgery. He was very strong about that and replied that he would hate it. So, he decided to do it up.

I think that was the right decision and was what he’d really wanted form the outset – he just wanted some reassurance that he was making the right decision.

An important lesson here is that not everything can be quantified. Yes, I know that is heresy for an accountant to say. But some factors in decision-making just can’t be expressed as hard numbers, even though these factors could be vital to the outcome of the decision. Always keep that in mind and consider these less quantifiable factors, even though it is hard to do so.

The right decision for the manufacturer

 Let’s look at the more recent example of the food manufacturer and the thorny question of whether to outsource production, or keep it in-house.

The business owner looked at the costs of producing in-house vs outsourcing to a contractor, and this was what we found:

  • The contractor had much bigger buying power and was able to save on the cost of raw materials (applying the benefits of economies of scale).
  • Labour costs for both alternatives were similar.
  • Overhead costs were lower for the contractor as he had a much larger operation with economies of scale again.
  • There were going to be additional costs for freight and for quality control as the outsourcer wanted to ensure the contractor would maintain standards.
  • By way of intangibles, the outsourcer was concerned that the contractor might gain his production know-how which could lead to contractor becoming a direct competitor – but they put agreements in place to deal with that.

I put my table in place for the food manufacturing decision. As I said already, it’s not always about the numbers. Reviewing the table gave rise to a series of discussions about the various elements to be considered, about the reliability of the numbers and particularly about the intangibles or the less quantifiable factors.

By having both the tangible numbers AND the intangible considerations all worked into the decision-making process, we came to an informed (and ultimately more profitable) conclusion – outsourcing production would be cheaper, more efficient and used all the outsourcers’ buying power and economies of scale to improve margins and profit. [I’m making an educated guess that this was the outcome as it’s not expressly stated, but it seems like the outsourcing option makes most sense]

The importance of process and good information

A key point to remember is that while having a good process is important, having good information to feed the process is vital. That information comes from having reliable and insightful management information available – something that I, as your accountant, can help you refine and make into an efficient management reporting system.

With up-to-date business information, a systematic approach to assessing your cash flows and a healthy consideration of the most intangible elements, you’ll make the best possible decision-making for the future of your business. It’s a framework and approach that will let you address most of the decisions that are likely in your business.

If you have any questions, or items needing clarification, feel free to drop me an email.  Remember, we’re available if you want to bring an external perspective to your decision.

Making the best business decisions – how to evaluate your opportunities

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One of the questions that I get asked most often by business owners is how to decide between one or more options – when faced with path A or B, how do you know which fork to choose and what the potential outcome may be?

These sorts of question arise for businesses of all sizes and they’re just as important for the small business owner as for the large business owner. In the past three months, I’ve helped a painter/decorator decide if he should change his van and I’ve helped a large food manufacturer decide whether to outsource production, or keep it in house. For both of them, their decision was important and could have an impact on their business.

The value of good advice

I wasn’t long qualified as an accountant when an old school friend, now a dentist, asked me if he should refurbish his dental surgery. He’d already asked his accountant, who replied “that’s up to you”. That answer wasn’t very helpful. We know it was up to him to decide but his accountant wasn’t providing him with any advice as to how to make that decision.

To put it bluntly, he wasn’t adding much additional value as an accountant.

But (thankfully) times have changed, and most good accountants now realise that a large part of their role it to help with this kind of decision making – whether it’s supplying the right numbers, forecasting the potential outcomes or looking at the strategic implications.

So how do I go about making financial decisions?

I focus on the cash flows in your business and compare the different cash flow relating to all the options.

The simplest way to explain my approach is to imagine that the business has a large barrel of cash and ask what will happen to the cash in each of the scenarios. What money will come in and what money will go out? Once I identify the cash flows, I enter them into a table with three columns.

  • The first column is for the cash flows in the current situation.
  • The third column is for the cash flows in the alternative situation.
  • The middle column is for the difference in cash flow between the two options (I’ll show you an example of a completed table shortly).

Before you do that, you need to decide what sort of a time period you’re going to consider.  Its common to look at a decision over the life of the relevant item – so if it’s a van and you plan on changing again in three years, then you might evaluate it over three years. If you’re looking at outsourcing production, you might just look first at one year and then consider whether you need to review a longer period.

So, let’s look at the van example.

How much will a new van cost?

Let’s say John is currently running an 8-year-old van. His garage has a good 3-year-old van for €12,000 and will give him €1,500 for the old one. John wants to know if he should change.

The first thing I will ask is what the current van is costing him. He tells me his current van works up the following costs:

  • €3,600 a year in diesel to fuel the van.
  • €300 a year to tax and €500 a year to insure it.
  • Repair costs as the van had been giving him trouble which needed repair
  • €100 per day to hire a replacement van while his own was off the road – he expects this to continue and suggests that I allow 5 days a year for being off the road with maintenance work.
  • 2 days a year in lost earnings while he is dealing with the van – where he normally earns €400 per day on average.
  • Overall the van is costing John about €2,000 a year in maintenance, €1,000 of which is normal wear and tear, the other €1,000 is due to breakdowns.

Next, let’s look at the costs of buying a new van:

  • The new van John has his eye on will cost €12,000
  • We can then subtract the €1,500 trade-in on the old van.
  • John reckons he’ll sell the van on in 3 years for €4,000.
  • He estimates that it will cost him about €3,100 a year in diesel.
  • It will cost him €250 a year to tax it but €600 a year to insure it.
  • He’s not expecting to have any breakdown days or van hire.

So, overall the new van should cost about €1,000 a year in maintenance, which is all for normal wear and tear.

Note – these are not real numbers. They’re my best guesses to develop a reasonable example for you.

I put my table together, taking three years into account.

Current VanDifferenceNew VanComment
Investment0-10,500-10,500As I’m only looking at what will happen from now, I don’t consider the cost of the current van.
Fuel-10,8001,500-9,300This is fuel cost over 3 years, based on the info supplied.
Maintenance-6,0003,000-3,000Maintenance cost over 3 years. based on the info supplied.
Van Hire-1,5001,50005 days pa for 3 years at 100 per day
Lost Earnings-2,4002,40002 days a year for 3 years at 400 per day
Tax-900150-750Info as supplied
Insurance-1,500-300-1,800Info as supplied
Resale Value04,0004,000Info as supplied
Net Cash In/(Out)-23,1001,850-21,350 

 

Positives in the cash flows are ‘cash in’ and negatives are ‘cash out’. In the difference column, positives show where the new option is better than the current option; i.e. cash in, or less cash out.

So, what the above table tells us is that a new van looks like it will save about €1,850 over the three years. We need to be careful and remember that we’re making assumptions, albeit reasonable ones, about the performance and reliability of the new van. We need to be confident that we are aware of, and considering all of, the costs.

We’re not taking into account intangible elements like the effect on his business profile of driving in a newer van. Also, we’re not taking into account the effect on customers of cancelling work because the van let him down. And we’re also not taking into account the effect of having a reliable van and less stress and worry on John himself. We can allow for those in our decision but it’s hard to quantify them and put them in the table.

The bottom line is that the new van looks like it will save him €1,850 over the three years but there are some intangibles that might also be worth a lot to John and only he can put a value on those. I think most of us would change the van based on the info above.

The time value of money

Another factor to take into account is what accountants call the ‘time value of money’.

If I ask you which would you prefer – €1,000 now or €1,000 in 1 year – you’ll all intuitively know that if I get €1,000 now I could invest it somewhere and maybe make another €10 to €30, say €20, in that year. That means that €1,000 now is really worth €1,020 in 1 year. This is what we call the time value of money.

For some decisions, it can be worth taking this time value of money into account.  If you have high interest rates and two options with very different cash flow patterns then it may be worth looking at. But for most day-to-day investments, it’s not worth the additional work – and in any event it will involve other assumptions.

A systematic approach to decision-making

So, that’s how I recommend that you approach decision-making – by systematically breaking down those cash flows and seeing which scenario works out best for your business.

  • Identify the options available to you.
  • Note down the cash flows for each option.
  • Put them into a table and see which one looks best.

Put a little bit of time into challenging your assumptions and into thinking through the options to make sure you have considered everything that is relevant. And armed with your outputs you can be confident you’re making the best decision for the future.

Next time we’ll look at some more practical examples of how this can be put into practise.

If you’d like any assistance with your business decision-making, please do get in touch to see how we can help

 

 

You’re a start-up: what are the key things you need to know about accounting?

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I’ve had several new business owners come to me over the years saying, “We’re a small start-up, but nobody tells us what we really need to know about accounts”.

If this is the situation in which you find yourself, you’ve probably gone into business because you had a great idea or a valuable skill to exploit – not to spend hours looking at numbers and spreadsheets.

And because you’re not trained in accounting, at times you haven’t ticked the right tax and compliance boxes along the way: but no one shared this with you until it was too late.

Many times it’s because you didn’t know you had to do it, or because there was simply too much information to process and understand.  Maybe you just got too focussed on developing the product or service.

However, none of those is an excuse that will carry much weight in terms of compliance – you’ll still be obliged to pay penalties, and other problems may occur down the line.

So, it’s best to get up to speed with your financial responsibilities from the beginning. Here are a few ways you can do this.

Your accounting and tax requirements

The easiest way to do this is to work with a business adviser who can explain and demystify the financial processes for you.

We’ve broken down the accounting fundamentals into three key levels, each of which will help you to not only grow and prosper your business, but stay compliant and, best of all, worry-free.

No Offences – for the brand new start-up

At the starting point, you need the absolute basics done well and the comfort of knowing you’re ticking that accounting and tax compliance boxes.

We can, of course, help you with any of these, but whether you do it alone or not,  you should have the basic information you need so that you know what has to be done, at whatever level your business operates.

Here’s what your business needs to take care of, at a minimum:

  • Register your business with the Revenue and Companies Registration Office.
  • Set up a business bank account (or multiple accounts – talk to us if you’re unsure).
  • Basic bookkeeping and invoicing.
  • Produce and file your statutory accounts.
  • File your annual tax return.
  • Review your accounts regularly, and get a report at least every quarter so you can identify potential profit improvements and cost savings

No Surprises – for when you need more control over your finances

As your start-up begins to gain customers and turn a profit (we hope!) you’ll get to a point where you need a better overview of your key numbers.

Your finances will become more complex, and you’ll want to improve the predictability of cash flow, profits and longer-term financial planning.

This is when you need to address the following:

  • Create an annual budget for the business
  • Update your annual budget on a regular basis (a full 12 months is a long time)
  • Set up metrics to measure profit, loss, and performance against those budgets
  • Get a clear overview of your cash-flow situation
  • Create forecasts of future cash flow
  • Ensure you are receiving proactive tax planning
  • Address costs and profitability at a deeper level
  • At a minimum, carry out quarterly reviews of your business and financial performance

No Regrets – for when strategic advice and long-term planning is needed

When your business becomes a more stable and established enterprise, your needs will change. Our experience is that, at this level, you’ll need the best possible advice on profit improvement, strategic planning and creating a business model that’s scalable and expandable in the future.

This is for the truly aspirational business owner. You know your business has even more potential and you don’t want to look back in the future and think ‘If only we’d done this…’ to secure that future success. So you’re willing to give it a lash and invest that little bit more to make sure you realise the full potential of your business.

At this level, you’ll need:

  • Regular monthly management accounts to keep you and your management team informed so you can make good decisions
  • A long-term strategic plan for the business, with clear goals, milestones, and budgets for each area of the company
  • A real focus on making the business efficient, systemised, scalable and ready for sustained, fast growth
  • Proactive support and advice from your business adviser to help you spot the pitfalls and grab the right opportunities.

Talk to us about improving your accounting basics

Wherever you are on your start-up journey, AccountsPLUS can help you address the accounting and tax fundamentals, and improve your control over your finances.

If you’d like to get your head around all those confusing numbers, do get in touch with us. We’d love to help your start-up become tomorrow’s success story.

Get in touch to arrange a meeting with the AccountsPLUS team 

If you  want to know what returns or filings you have to make for your business, read our post on Reporting/Return obligations.

Getting on top of your to-do’s

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I was talking recently with a friend who commented that he doesn’t feel that he is achieving enough. He sat down at the start of the year and made a list of all the things he wanted to get done. This list included ideas for 2 new products and improving his skills. He is half way through the year and he realises he has made about 20% progress.

We talked through the list and his approach to completing the tasks. As we spoke, I made a number of suggestions to him about how he could improve. I think these suggestions will apply to many people so today’s blog post is focussing on tips for improving success at getting on top of your
to-dos.

1. Review how you are spending your time.

The key questions here include

  1. are you working on the important stuff. Stephen Coveys Urgent/Important Matrix is helpful here?
  2. are you doing stuff that would be better done by someone else eg admin tasks?
  3. are you working effectively – do you stop/start items; do you do match your work to the time of the day?

2. Prioritise

I often quote Jim Collins’ phrase “if you have more than 3 priorities, you have none.” The key thing is to identify for top three priorities for now. You should set these for a reasonable horizon – 8 to 12 weeks is a good timeframe. However, it depends on the size of your priorities. Maybe you need to break them down into bite size chunks. So if you have a large project, break it down into elements and decide what elements you want to achieve in the next 8-12 weeks.

3. Work a system

There are a lot of suggestions for systems out there – many of them quite complicated. But they all have a few key components.

  1. Declutter your head – dump all to-dos out of your head and onto paper or some system. Update the dumped list weekly. It can be useful to use a notebook or an app to record new ideas as they occur and save them for processing later. Your list will contain everything and will be big – essentials, nice to dos, sometime items etc. You can sort and process those later. For now, just record them.
  2. Identify your overall priorities for your selected time period keeping in mind that you will have no more than 3 priorities. You will still have day to day things to get done but they tend to look after themselves.
  3. On a weekly basis, schedule your week to allow time to work on your priorities while spending time on your other routine but necessary activities. You may want to work on your priorities for a little time every day or it may make more sense to block out a large amount of time on a single day to work on them. Decide on that at the start of your week. Decide what you really need or want to go done and schedule that. If you haven’t enough time for them all, decide on the priorities and consider if you can outsource etc.
  4. On a daily basis, schedule your day so that you make time for your priorities. Your day will be made up of meetings and calls and work on specific projects. Schedule your day so that you get to work on those tasks at the most appropriate/productive time for you.
  5. Mark off as complete the things you get done. This makes your progress visible and gives a great sense of satisfaction. Review your day and learn from it. Did you achieve all you wanted to achieve? If not, what should you have done differently?

This system can be made to work for you. You won’t stick to it all the time at the start. There will be time when something pops up that sucks you in but as you review the progress you are making with the system and you realise that working the system gets more done, you will find it easier and more natural to adhere to it.

Have you any comments on the above. It would be interesting to hear your comments and to develop a pool of best practice ideas/suggestions.

If you have any questions on this feel free to email me at jim(at)accountsplus(dot)ie.

Improving Productivity with Smartphone Apps

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On a number of occasions over the past few weeks, I have had discussions with friends and clients about how they use their smartphones. I am getting great use out of mine and would be lost without it. However, others are barely using the capabilities of their phone. So here are some of the features and apps that I find most useful. I am sure they won’t all be of interest to you but I suspect at least one or two will.

Scanning Documents to PDF

This is an app I use regularly. I have an Android phone and I use Camscanner. This essentially takes a photo of a document and converts it to a pdf which I can email or save to cloud storage (Dropbox or Drive). I use it for copying receipts, forms, identification documents and for capturing the flipcharts of meetings. Its a really useful app to have.

To Do Lists

To do lists are great for quickly capturing ideas when you are away from the desk or for reminding yourself about what else is on your list when you get very busy and are in danger of losing sight of your priorities. I was using Wunderlist until recently and I have moved to Trello now. Trello gives me more organisational features.

File Sharing

We all know about Dropbox and Google Drive. I keep some key documents in Dropbox and if I need to send such a document to someone, I can send it straight from the phone. This has come in very handy for me a couple of times. For example, once I was away from the office and got a call from a prospect asking for a copy of a document I had mentioned to them previously. I was able to access the document in the cloud and send it immediately, without having to go back to the office.

Managing Passwords

We all know how important it is to manage passwords for the various programmes, systems and websites that we access now. There are several password managers. I use Keepass on my computer and I save the file to a Dropbox folder. I then use Keepassdroid on my phone to access the same file so I always have my passwords available. Keepass can generate random passwords and can hold the various verification questions that some sites need. Keepass itself is password protected and thats the one password that you do need to remember.
As an aside, you would be amazed at the number of companies that have no passwords or else have the password written on a post it note and stuck to the computer screen. You should have a separate secure password for each key service you use.

Capturing Notes

I use Evernote to capture notes. I have a copy on my computer and on my tablet and on my phone. Once I record my note on any of those, it syncs to the cloud and is available to all the others. I now use this for taking notes at meetings and for lectures/talks. I can attach files or photos and email the note with attachments to any of my contacts. I can also record speech to Evernote (like a dictaphone) and attach the recording to a note. I can search all my notes by keyword which is a huge benefit as this means I no longer have the problem of trying to remember what notepad I wrote a note in. Notes can be organised into folders or by assigning tags to them.

Foreign Exchange Rates

There are a number of apps that will provide you with up to date FX rates. The one I use is XE currency but there are loads of them.

Voice Recording

Another very useful, but easy to forget, app is the Voice Recorder app which is usually standard on the phone. It can be used to record meetings or random thoughts that you might have where you don’t have access to a note pad or you want to participate without having to worry about note-taking.

Cloud Accounting

If you use a Cloud Accounting package like Kashflow or Xero they both have apps for the phone that let you access the data. You will not do your accounts on the app but you will be able to check balances etc.I am not going to mention email or calendar. If you are not using those, you won’t be interested in anything else.In summary, there are two apps that I wouldn’t be without – Evernote and Camscanner.

As always, if you have thoughts or questions on anything in this article, let me know.

How to overcome the Knowing-Doing Gap

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Many people go on courses and learn some very powerful techniques but don’t go on to apply the techniques. Some of these people are serial course/workshop attenders. They have all the knowledge. They can tell you how to solve your problems but they don’t seem to be able to apply it to themselves.

This phenomenon is common and is often called the knowing-doing gap. And it’s possible to overcome it.

The best tool that I have found to do this is one called the DVP tool, a tool often used by change practitioners. This tool helps you understand why there’s a gap and encourages you to create a strategy to overcome the issue. The tool proposes that a rough probability of success with any change endeavour can be estimated by rating three essential factors out of ten and then multiplying the three ratings.

The three rating factors are

  1. D for Dissatisfaction. This is the WHY or motivational factor of the tool. How dissatisfied are you with your current situation. If you don’t have a high level of Dissatisfaction then you will not be motivated to take action.
  2. V for Vision. This is the WHERE factor of the tool. Disatisaction can motivate you to get away from where you are but it doesn’t provide a direction or an end point. Vision pulls you towards change by providing a strong direction and pull towards the change. The vision is how you would like your situation to be in the future. Where there is no vision, there tends to be lots of activity but focussed on the wrong things.
  3. P for Plan. This is the HOW factor of the tool. A clear strategic plan with clear activities and deliverables can help increase the motivation for change. We use a simple one page plan to develop a practical one page summary of an action plan. The Plan shows clearly what will by done, by whom and by when.

So let’s say you have been on a time management course but you are not putting the learnings into practice, what you would do is rate each of the factors.

Let’s say you give 6 out of ten for Dissatisfaction, you give 4 out of 10 for Vision and you give 2 out of 10 for Plan, when we multiply those we get 48 out of 1000. That rating is so low that you can be pretty certain that nothing will happen. Dissatisfaction usually needs to be high for change to occur – a rating of 8 is recommended.

So next time you think of attending a course, firstly ask yourself how dissatisfied you are with your situation relative to the course. If you are not dissatisfied, then ask yourself what’s the value of doing the course.

Secondly, consider the possibilities. Maybe the course will help you build your vision of what might be possible. If you don’t leave the course with a compelling vision of how you can apply the course to your own situation, the workbooks will go and sit on the shelves.

Finally, you should have a practical plan for implementing the learning. On a good course this will be part of the material. If not, do it yourself later, in your own time.

Finding time for Strategic Thinking

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This blog update comes from Mindshop Colleague, Paul Hopwood. (http://www.paulhopwoodconsulting.co.uk) Paul is a longtime Mindshop Member and is one of the Support Coaches for Mindshop members.

“Very often, the biggest constraint for business owners is their time. Those who make time to think strategically tend to punch above their weight. We know this intuitively, but operational issues can easily get in the way.

“Strategy is the great work of an organisation. In situations of life and death, it is the Tao of survival or extinction. Its study cannot be neglected – Sun Tzu “The Art of War”

“Plans are useless, but the process of planning is indispensible” – Eisenhower

If you are guiding your business or a customer on their strategic agenda, it’s your job to isolate the right quantity and quality of strategic thinking time.

Here are 10 tips for doing so:

1. Split board meetings between strategy and operations. This could potentially be done in separate meetings, possibly with a smaller steering group
2. Schedule the dates for the entire year ahead and never cancel the meetings
3. Use the One Page Plan as a framework. If you are discussing something that isn’t on the plan – either the plan is wrong, or you probably aren’t being strategic
4. Get the administrative protocols right – E.g. agenda in advance, circulate papers a week in advance, start and finish on time, bullet point minutes of actions and follow up action progress between meetings
5. Be aware of where the conversation is leading while keeping a balance between strategic and operational issues
6. If there are some short-term, burning issues, factor them into the One Page Plan, but don’t get bogged down – decide how they should be tackled outside the meeting (e.g. project team) and move on
7. Be conscious that you don’t spend too much time managing exceptions (i.e. actions not completed and excuses). This is a total waste of everyone’s time
8. Ensure someone is responsible for keeping the meeting strategic. Usually this will be the chair or facilitator
9. Make your planning process iterative. Don’t put all your effort into the annual away-day, but evolve the strategy as you go along
10. Define the rules for each meeting – E.g. ego-less, listening, not interrupting, allowing everyone a turn to speak.
Do this well and everyone will get good value from their strategic time and be able to reduce the time they waste fighting fires.”

As always, if you have any questions on this blog post, feel free to contact jim (at) accountsplus (dot) ie.

Are you missing out on the benefits of budgeting

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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

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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