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Putting Your Accounting Knowledge Into Practice: An Engineering Perspective

What should a business owner do to make sure he has the best possible information at his fingertips? How do you start putting this accounting knowledge into practice?

We’ve already discussed how to identify the key transactions of the business. Also, how to record the information that’s important to your business and pull it into insightful reports. Now let’s look at how you put this all into action.

Making your finances work for you

With your understanding of the financial basics, how do you start putting this accounting knowledge into practice and making your finances work for you?

  • Firstly, you must have systems that are appropriate for the business. Decide who’ll be responsible for the recording of information. The methodology and the level of detail you get into will depend on the size of the business.
  • Secondly, you must list the types of reports you need. What types of information and analysis will help you prepare these reports easily. This involves adapting your accounting system to capture the information needed. Making sure it’s easy to pull the reports from the system, no matter how simple or complex.
  • Finally, you need to have a routine to help you check the information. You’ve no doubt heard the hackneyed phrase ‘garbage in, garbage out’ – it’s a truism that’s as applicable for accounts. When someone gives you financial information, you need to know how reliable this information is.

So how do we sanity check your reports? What should you be looking for when carrying out these reviews?

accounting-knowledge-practice

Using your reports in the right way

In my experience, when business owners get their financial reports, most of them jump straight to the profit and loss report. However, I’ve learned that it’s more important to start with the balance sheet.

I will ask you to remember the ‘Wile E Coyote and The Road Runner’ cartoon that was on television years ago…

The roadrunner was always speeding along a road, with milestones at the side. If he first passed the 5km mark and later passed the 15km mark, he knew (and we knew) that he’d traveled 10km in total. However, what if someone mistakenly put the 15km in the wrong place, say at 14km? The roadrunner would think he’d traveled 10km when he’d actually only traveled 9km!

By unquestioningly relying on the milestones, the roadrunner is misinformed and doesn’t correctly understand its performance.

Similarly, this applies to accountants. The balance sheets provide the milestones and the profit and loss is a measure of the progress or profitability. If you get the balance sheet wrong so will your profit and loss projection be inaccurate.

I recommend that businesses start by looking at the balance sheet. Then ask if the figures for the various assets and liabilities look reasonable and reliable.  If they’re reasonable then the profit and loss are also likely to be reliable.

Checking your balance sheet

So, how do we check the balance sheet?

One way is by comparing the sheet to the records that the bank has. This could be by reviewing your bank statements and being sure that you understand any emerging differences. The only difference we should have is timing differences ie. if we pay a cheque but it’s not yet processed at the bank. Accountants call this checking process ‘bank reconciliation’. Therefore, what you’re doing is simply proving your records are correct by comparing them to another source.

We should also look at customer balances. I find that most business owners are very much on top of who owes them money. If I give them a list of customer balances with something wrong then they’ll quickly tell me. So check your customer balances, look for anything inaccurate. If you find any, correct them immediately. Remember, if a customer balance is wrong then your sales figure could also be wrong.

Let’s move on to the supplier balances. Again, most business owners are aware of who they owe money to and thus will quickly spot any error. Again, if supplier balances are wrong, then your purchased costs could also be wrong.

Your inventory or stock number is a key figure in your accounts.  If your inventory is overstated, this has the effect of making it look as if you got stock for free. In consequence, your profit will be overstated.  If your inventory is understated, then it looks as if you lost stock somewhere so your profits will be understated.   It is very important to get your inventory or stock number right.

Finally, we can quickly look at the other assets and liabilities that might be on the balance sheet. Check if they look ok. For example, if there’s machinery or equipment listed in your assets, do the balances look ok? If there are tax liabilities, do those amounts seem right?

Once you are convinced that your balance sheet is reliable, then you can rely on the related profit and loss account.

Getting your head around shareholder funds

There’s one section of the balance sheet that sometimes confuses clients. This is the section called ‘shareholder funds’ or sometimes called ‘owners equity/capital’. In essence, this section represents the value of the business to the owner.

To understand shareholder funds, you need to ask the question, ‘If the business makes money, who does that money belong to?’ The answer is that it belongs to the owners.

So the difference between what the business has (the assets) and what it owes (the liabilities) represents the value of the business. We call it shareholder funds (or owners’ equity) for companies or owners’ capital for non-company businesses.

Shareholder funds are reduced by money taken out of the business such as dividends or drawings.  So the difference between any two balance sheets represents the profits made by the business in the period.

Check your reports regularly

Your reports are a real goldmine of information. So I recommend to my clients that they get into a routine of regularly – at least monthly – reviewing and checking their reports. By doing so, you learn as much as possible about the business and can quickly identify where action may need to be taken.

If you are familiar with the ‘Lean thinking’ approach to business, you may have heard about the three voices.

  1. The first voice is the voice of the customer, giving feedback on the quality of the service your business is supplying to them.
  2. The second voice is the voice of the people working in the business. They see up close what’s actually happening and are often an untapped source of information regarding how well the business is operating.
  3. The final voice is the voice of the process. We access the voice of the process by identifying the key measurements that let us know how the process is doing.

You should always look at your accounts as a voice of the process. A well designed and implemented account will provide extremely valuable information about the performance of the business. Therefore, rather than thinking of accounts as a compliance-type chore, think of it as a hidden hub with rich information. So try to find out how best you can access it.

Getting in control of your business performance

When you understand your accounting basics, the value of good reporting, and the insights provided by your business numbers, you’re in real control of your enterprise.

And when you add the benefit of working with an experienced, process-driven accountant, you’ll soon start to see the positive changes and improvements in your sales, cash flow, and the profitability of your business.

If you’d like to know more about working with AccountsPLUS, and applying our ‘engineer’s perspective’ to your accounts, please do get in contact. We’d love to help you get complete control over your finances and business performance.

Get in touch to arrange a meeting with the AccountsPLUS team 

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Assess your Financial Management Capability

The financial management capability of Irish SMEs varies significantly.

I have been working with many Irish SMEs over the past 20 years. During this period I was helping them to assess and improve their financial management capability.  Over time, I have observed a number of different stages that businesses go through as they develop their skill levels. Therefore, I have set out in the table below the characteristics of the respective stages.

It is true that not every business goes through all the stages nor do they spend the same amount of time in each. However, a high potential business with external professional funding will usually prefer to put a high level of financial management capability in place from the start.  In contrast, a startup that is growing organically will usually develop its financial management capability as the business grows.

Use the table to identify where you are and what you have to do to improve.

Levels of Financial Management Capability

Level
ActivitiesInternal OutputsExternal OutputsResources
MinimumBusiness run from bank statements

Records sent to external accountant who does VAT, PAYE and prepares accounts at year-end

NoneVAT Returns, PAYE Returns, Annual

Accounts at year-end

Clerical Staff
Book-keeping BasicRecord sales, purchases, payments, and receipts.

Payroll Calculations using payroll software.

All files to the accountant at the year-end

VAT Returns, PAYE Returns

Reasonably reliable customer, supplier, and bank records

Annual Accounts at year-endBook-keeper, not necessarily qualified
Bookkeeping PlusAs Bookkeeping Basic with

Checks and Verifications on the bank, supplier, and customer balances

All files to the accountant at the year-end

VAT Returns, PAYE Returns

Highly reliable customer, supplier, and bank records

Annual Accounts at year-endUsually qualified book-keeper with some experience could be a trainee accountant
Accounting BasicAs Bookkeeping Plus with

Management Accounts prepared at least quarterly incorporating accounting adjustments for stock, accruals and prepayments, depreciation

VAT Returns, PAYE Returns

Highly reliable customer, supplier, and bank records

Management Accounts (at least quarterly)

P&L, Balance Sheet, Customer Balances, Supplier Balances

Usually qualified book-keeper with some experience could be a trainee accountant

Part-time controller for management accounts

Financial ControlAs Accounting Basic with

Management Accounts reviewed with Senior Management

Short term cash flow projections

Annual Budgets prepared

VAT Returns, PAYE Returns

Highly reliable customer, supplier, and bank records

Reliable Budgets

Highly reliable management accounts

Including Actual v Budget P&L

Internal accounting staff with experience and some qualifications

Part-time controller for management accounts, budgets, and projections

Financial Control PlusAs Financial Control with

Product costings from budget data

Short term cash flow projections

Financial Projections updated quarterly

VAT Returns, PAYE Returns

Highly reliable customer, supplier, and bank records

Short term cash flow projections

Highly reliable management accounts

Reliable Budgets and product costings

Reliable projections

Basic analysis of variances

Financial inputs to decision making

Internal accounting staff with experience and some qualifications

Part-time controller for management accounts, budgets, and decision inputs

Strategic ControlAs Financial Control Plus

With multi year-long range planning

Full Financial Evaluation of all key business decisions

The robust financial model that can quickly support what-if evaluation of various options

VAT Returns, PAYE Returns

Highly reliable customer, supplier, and bank records

Short term cash flow projections

Highly reliable management accounts

Reliable Budgets and product costings

Reliable projections

Basic analysis of variances

Financial inputs to decision making

Long term funding requirements identified with plans to address them

Internal accounting staff with experience and some qualifications

Usually fulltime (but possibly Part-time) controller for management accounts, budgets, and long-range plans and for decision inputs

What does this mean for you?

You should use the characteristics in the table to identify where you are now. Then, you should ask if this is sufficient for you and for your business. In addition to that, ask yourself if you have the appropriate skill levels to do what you need to do. This article here can help you make an informed decision.

Wherever you have gaps, you need to put a plan in place to fill them. Above all, the plan should identify what must be done, who will do it, and when will it be completed.

How I can help?

With many years of experience working with SMEs, I can help you complete your diagnosis and put improvement plans in place. In addition to that, I can coach your financial staff to grow into their roles. Furthermore, where necessary I can assist in hiring appropriate staff. I genuinely believe we can work together to create a practical plan to address the needs of your business.

Offer

I am offering a two-hour assessment of your financial management capability with no obligations on your part. This assessment will be restricted in that, I can only offer one per week.

Do you want to have your financial function assessed? Feel free to send me an email with the subject “Assessment of Financial Management Capability”.

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How to prepare financial projections

Feedback I get regularly from the clients is that they don’t know where to start with the financial projections. So in this article I want to give you a framework and an overview of how I go about doing projections.

My approach is something that has built up over time.  To help myself remember the framework I use the acronym ‘ARC’ which stands for – Activities, Resources and Costs.

Activities

Firstly, sit down and ask yourself what activities do you expect to do, or to be working on, in your business over the next period – a year, three years, maybe as little as three months, depending on what you are doing.

Now when I say activities, the obvious one is sales and everyone sits down and puts down what they think they are going to sell. But there can be other activities. For example, if you’re planning on opening a new office somewhere, say Dublin – that is also an activity.

There might be a new product that you are planning on launching in the next year – that is also an activity.

There might be other initiatives that you are planning to implement which might be a new computer system or you might want to refurbish your premises or you might want to renew your fleet of vans.

Any of those things are activities, but you need to decide what activities you are planning on achieving in the next period.

Resources

Next thing you need to decide on what resources are those activities are going to consume?

When I think about the resources I use a framework that we used to have on lean projects.  We consider the 5 Ms  – Materials, Methods, Manpower, Machinery and Money.

Sit down and ask yourself ‘if I am going to be making sales, what materials will I be using, what manpower, what overhead etc will I use?

If I am going to be setting up a new office in Dublin, what resources will I need? It might not be materials, but it might be a certain amount of my time or somebody else’s time.  Who is going find the office space. I might use an external resource, for example an auctioneer or some sort of real estate professional, to help me find the office and no doubt there’ll be a cost somewhere for that.

If I am going to be working on a new product, I might have to use materials to make prototypes, I might have labour – engineers working on it, production staff, and I may have quality control staff. So what sort of people would be working on the new product? Where will they be working? Do I have the space? Will there be incurring any extra overhead? Will they be using any machinery or equipment?

You need to review the categories – Materials, Methods, Manpower, Machinery and Money and ask yourself how much of those will you be using.  That will help you to develop a list of the resources that you are going to need, and the resources will typically be materials, labour and something to do with overheads.

You then need to collate all the information that you have. Typically you will put them into something like a spreadsheet and you schedule them out by a time period – preferably monthly but sometime quarterly can be enough to start with.

Costs

Then I put costs on those resources and I schedule the costs out by month or quarter.

Typically, you will have sales quantities and prices.  You will have materials purchases and costs.  You will have headcount and the related labour costs.  For some overhead items, you may be able to estimate the costs easily.  For other overhead items, you may need to create tables to build up the costs.

For example, if I have sales reps on the road and I am going to take on one more.  That rep may need a car, a phone and laptop, a travel expenses allowance and an entertainment allowance.  You can identify an average for each cost and build up the costs based on the number of salesmen that you have.

Do this for any other costs that need to be built up in this way.   Check against your annual accounts to make sure you are picking up everything.  If you are just starting up, look at standard business plan templates from support agencies or the internet and use those to prompt you to include everything.

When complete, you will have identified your sales figures and the associated cost figures.

Summarise into your key Reports

Organise your sales figures, your product cost figures and your overhead figures by month to give yourself a profit and loss account.    This will show what you are going to sell each month and will summarise the costs of the activities you will be undertaking each month – materials, labour etc.

You should also look at that profit and loss from a cash flow point of view.

If you are using materials today, when will you buy those materials and when will you receive it into my warehouse? Once you know when you buy it, when will you pay for it? Will you get 30 days credit, will you have to pay up front or will you get 60 days credit?

In this way, you take each of your items and you start to break them down and schedule when the money is going to flow.  Look at sales – you will have a projection of when the sales will happen and based on that you should have a reasonable idea of when the money is coming in.  If you are buying any new machinery, if you are going into a new office, when is the money going to flow for that? And then your overheads, when is the money going to move, or when is money going to flow for each of those various overheads.

This work is essential to help to build your cash flow projections.

This work will also help you build your balance sheet. When you are identifying the timing of sales receipts, you will also be able to determine how much is owing from your customers each month.  To do this you will start with your opening customer balances, then add sales, the deduct whatever is going to come in – this is going to give you your closing customer balances.

You should be able to work something like that out for every month, and you should be able to do that for your suppliers. By doing this you should be able to build a rough-cut balance sheet.

Getting Help

I know that when I start mentioning profit and loss and the balance sheet people are going to pull back a little bit, but there are tools to help with that.

You can have somebody to build a spread sheet for you, a simple spreadsheet that would do some of this for you at the start. You could get help from your accountant to do that or you can buy business planning software of the shelf such as – Business Plan Pro, which costs about $150 dollars. There are other pieces of software that could link into your accounts, and will integrate with your accounts – i.e.  software that take the figures from your accounts and move those forward.

And finally, you can simply outsource it, you can ask your accountant to do that for you. That is something that I do for a lot of clients, where they have all the knowledge and insight, and I sit with them for as long as it takes to complete the projections.  This can be as low as a half a day, but depending on business size and complexity it can take a day or two. It might take a short bit of time to get started, but what I find is that once they get the first pass of the numbers, and they see what the numbers are like, they start to want to start to do the various ‘what ifs’ – if I change it and do this what will happen or if I change it and do that what will happen.  You need to allow time for that exploration and fine tuning.

Summary

Doing the projections is a fairly straight forward process.

Ask yourself what your activities are, and when doing that take a broad view of what your activities are.  Don’t just limit it to sales.

Once you are done with activities, move on to resources that you are going to have to have to deliver on those activities.

For each of those resources – put a cost on them.

Take all that information and collate it, or put it into some sort of document. Typically a spreadsheet or a business planning software and that is going to be your projection.

Take that projection and run your business, run your accounts. Go back and look at your projection, learn from the differences that arise between these projections and the actuals. Tweak the projections and tweak how you are doing them.

And this, as I said in another article, is how you are going to learn about your business and how you build your knowledge.

If you have any questions, or items needing clarification, feel free to drop me an email to jim@accountsplus.ie.   Remember, we’re available if you want some external assistance in developing projections.

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How To Get Better At Predicting Business Costs.

Do you know much it costs you to open your doors in the morning? Thats the easiest way to predict your business costs.

There is a friend of mine, a retired banker who describes business owners in control of their business as ‘they know exactly how much it costs them to open their doors in the morning.’  Are you one of those businesses?  Many people think that this is a very difficult thing to do, but in fact, it’s not. In this article, we will discuss how to get better at predicting business costs.

Overview of predicting business costs

To know what it costs to open your doors, you first need to know what you will be doing when you open the doors.  Therefore you need to have a good sense of what activities you will perform for the day or week.

In most cases that is not too difficult.  You can have an order book that tells you what will ship in the next few weeks.  If it’s retail, you should have data over the last few years that will give good guidance on what happens at this time of year.

Once you know what’s going to be happening, then you should be able to put costs on that.

The importance of a budget on predicting business costs

A good business will prepare a budget of some sort at the start of the year.  When preparing that budget, the business will develop assumptions or rules about the various costs.  They will use these rules throughout the year to help them anticipate what will happen. This will also help them convert the expected activity into reasonable cost estimates.

Direct Costs

If it’s a factory making products, the cost of the product will be made up of direct costs and indirect costs.

Direct costs are those costs that are easily linked to the product.  If I am making a chair for example I can see the timber that went into that chair, I know how much timber was needed and I know what it cost. The cost of timber in the chair can be directly linked to purchases of timber.

Similarly, if it’s a convenience store, I can say that for every item that I sell, eg a litre of milk, then I must buy in a litre of milk in order to have it to sell.  So the cost of the litre of milk is a direct cost.  If I sell 10 litres I have to buy 10 litres.  If I sell 200 litres then I have to buy 200 litres.

Labour can also be a direct cost.  Even though, we can’t point to a chair and see the labour that went into making it, we might know that a workman might make 10 chairs a days.  So if we have to make 100 chairs then we can calculate that we will need 10 workmen to do that.  As we know what a workman costs, we can predict our labour cost.

Indirect costs or Overhead Costs

These are costs where it is harder to make the link between the individual item sold and the costs that the business incurs. For example, if I have a convenience store and I pay €1,000 rent per month.  I cannot link the rent to any particular sale – there is not a direct relationship.  I may sell € 5,000 worth of goods on a Monday and € 15,000 worth of goods on a Saturday but the rent cost for each day is the same.

These costs that are hard to link to a product are often called overhead costs. I think of them as costs that are hanging over the business and that vary little for different levels of activity.

Indirect or overhead costs will include marketing costs, premises costs, office consumables, staff travel, professional fee and financing costs.

In some businesses, eg a convenience store, labour costs are more of an overhead.  I will have to staff my shop to a certain level even though sales for can fluctuate.  For example, a restaurant will have wait staff on in anticipation of trade but the level of trade may vary significantly.  For these businesses, we have to plan on having staffing levels that will not vary much will activity.

When you are doing your budgets or projections at the start of the year, you list down all the different types of overheads that you have and you put in your best estimate of what is going to happen. In that way, you pull together some sort of projection of your P&L as to what your costs are going to be.

Applying this understanding of business costs

As you progress through the year, you know from your order book, or from your activity plans, what’s likely to be happening in the weeks ahead. With this awareness, you are likely to start asking yourself- “if my sales go up – what is going to happen to my materials?”

You can then predict that if your sales are going to go up by 20%, your materials might go up by 20%. If your sales go up by 20%, but the mix of sales differs, your materials mightn’t go up in exactly the same way, but if you understand your costs and you understand your sales, you will have a very good idea of what is going to happen to your materials.

Similarly, if your sales are going to go up and your activities are going to go up, you are going to have a very good idea of what is going to happen to your labour.   Think back to the example about the chair making factory.

So as a good business owner/manager, you will have a sort of sense of what is coming at you and you will be quickly able to turn that sense into rough and ready figures – but reasonably accurate rough and ready figures.

Finally, you will be able to run through your overheads – certain overheads will not vary at all – rent for example. Other overheads, such as electricity, may vary.  If you are running machines for longer, then you are likely to use more electricity.  While some overheads are reasonably constant, there are other overheads that you will need to tweak.

You know what is happening in your business and you should be able to estimate what is likely to be happening to your overhead from that. You can do that very quickly, you can do rough numbers or you can do it a bit more precisely. For most people, it is enough to be able to do this roughly.

Building your knowledge of the business

But how do you develop this knowledge? – That is the question I am most often asked. There is definitely an element that comes from experience, but even with the experience, it all goes down to understanding the accounts and the information that you already have about the business.

If you prepare accounts every month and you spend some time understanding those accounts, and even better, if you have what I call a feedback loop, or a feedback control, you will quickly improve you understanding of what is happening in the business.

The feedback loop

The feedback loop can be summarised as Plan – Act – Review – Adjust.

We’d say that at the start of the year you make a PLAN for the business, and then you go ahead and take ACTION to deliver on that plan.

Out of that action you’re going to get results, so you look at the results, you REVIEW these results. When reviewing, you ask yourself – ‘Did what I expected to happen, happen?’, ‘Was it different?’, ‘Why was it different?’.  As you review these results you’re going to get learnings. You absorb and apply those learnings and then you ADJUST your  plans for the next period.

Applying Feedback Loop to Management

Putting all this together, you start off with a budget or a projection (PLAN)  , you run your business (ACTION), you prepare your accounts and then you go back and see how do my accounts compare to my original budget. What was different? Aah, I misunderstood that or something changed. (REVIEW).  Through this review process you develop your experience.  Then you take that learning and revise your projections (ADJUST).

And that is how you develop your learning.

And that learning helps you develop a good understanding of the costs of your business, and how they relate to the activities of your business.   Then you will be one of those business owners who knows how much it will cost them to open the doors of their 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 improve your financial control expertise.

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Decision-making and the importance of understanding cash flow

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.

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Making the best business decisions – how to evaluate your opportunities

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

 

 

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Why a good budget is vital for every business owner

In one of my recent blog posts, I mentioned the need for a business to create an annual budget.

One of my readers contacted me, saying “I don’t really know why I’d need a budget if I’m already doing the basic bookkeeping”. So, in this post, I’m going to set out why I think budgets are so important for every business owner, whatever the size of your venture.

Feedback for improved decision making

However complex or simple your business model may be, you still need to be constantly monitoring progress and adapting your processes as you go. I come from an engineering background, and in that world we often talk about an ‘engineering feedback loop’, where outputs of a system are monitored and used to help the system operators decide how to respond and adapt to what is going on in the system.

 

It’s not just engineers who exploit feedback. Pyschologists use an approach called Test-Operate-Test-Exit (TOTE), which is a process to apply the same approach to people. With the first Test of the TOTE, we consider what’s happening and make a plan. Then we move on to execute the plan – Operate. After operating, we Test again to get some data or information on what happened. Was the outcome what we expected, or did something different happen? In the final step, Exit, we use the data to decide whether to continue what we’re doing or whether to make changes, possibly even terminate the exercise.

Your annual budget should be understood as part of a feedback loop for your business plan. We start off by creating a plan, which we express in financial terms as a budget. Then we operate the business, getting feedback from our management accounts. We use that feedback to make decisions – whether to continue as is, or to make some changes. So we are going about improving our understanding of performance and feeding that into our management – in short, we’re tracking how well you’re performing against that all-important budget, and then acting if change is needed.

Prompting a review of the business

In the normal running of a business, it’s very easy to get caught up on the treadmill and not take time out for important reviews. But there’s real value in making the time to focus on your budget and to make proactive use of it.

To prepare a budget, you must start with some key assumptions. These include:

  • What will we be trying to achieve in the budget period?
  • What will be happening with our key inputs – raw materials, labour, overhead, distribution etc?

Your budget provides, indeed prompts, a forum for these key discussions about the direction of the business. And the budget process forces you and your management team to formalise those discussions, reducing them to a set of guidelines that will be used in developing the budget to make it work comprehensively for your company.

Helping to anticipate what might happen.

In the western films that I watched when I was younger, the wagon trail or cattle drive would send someone ahead to scout out the land coming up, identify obstacles and find the best path to be followed, while the main train or drive remained behind – in other words, they never put the whole wagon train at risk, only the poor scout who’d pulled put the short straw!

We can’t really do that in a business – running a business comes with inherent risks that impact on the whole ‘wagon train’. But what we can do is to build a model of what we think is going to happen and use that to identify obstacles and make plans for how to deal with those obstacles.

For example, when we prepare a budget, comprising profit and loss, balance sheet and cash-flows for a business with peak sales at Christmas, we might see that it’s necessary to build up a substantial stock in the run-up to Christmas. This means we’ll need to buy raw materials from our suppliers to build this stock up, but we won’t have sold the product yet and won’t have received the sales proceeds. So we’ll be spending, without recouping any revenue and that’s going to put pressure on our cash flow.

By planning a sensible budget we can quantify the scale of the problem and plan how to address it. We might ask the suppliers for extra credit or we might ask our bank for an extra short-term credit facility – anything that eases the pressure of that increased outlay.

But unless we run some numbers, we wouldn’t be able to quantify the issue – we’d be basing any decisions on estimates and guesses, and that’s never good practise.

Developing our understanding of the business

To prepare a budget, we start by making some assumptions about what will happen in the business and how the different elements of a business relate to each other.

Depending on our experience and our knowledge of the business, the quality  of assumptions can range from very poor to excellent. The only way we know how good these assumptions are is by comparing what actually happened with the budgets and studying the outcomes so that we improve our understanding.

By doing this on an ongoing basis:

  • We gradually increase our understanding of what is happening.
  • We improve our ability to predict.
  • We also learn to identify key predictors of performance.
  • We use these key predictors to make early interventions if things are not progressing as we expected – and keep the ‘wagon train’ on a safe passage through the pass.

Using our budget, we can also determine some key metrics for the business. For example, we should always know the break-even point for the business – the point at which our gross profit will match our overhead costs.

If the business is still in its early stage, the budgets can help determine just how viable that business is.

Budgets vs forecasting

Budgets and forecasts are very similar. They’re both financial projections of what’s expected to happen in the business in the future, with the aim of helping you move forward as effectively and profitably as possible.

Budgets are usually annual while forecasts can be run as often as needed. Well-run businesses will prepare an annual budget and then prepare less detailed forecasts during the year. These forecasts will usually incorporate changes that are occurring in the business and help management decide how best to respond to these changes.

Additionally, budgets are often used to set spending limits. In larger companies, the budgets are broken down by departments or cost/profit centres and individual managers are allocated responsibility for their portion of the budget. Usually, they won’t be allowed to spend in excess of a budget without first getting additional approvals from more senior managers – in other words, they place a restriction on the costs that department can incurr.

In smaller companies, the control process won’t be as formal. Usually, an owner manager will hold the purse strings tightly. However, the budget can be used to help them decide on how much they can spend on different types of expenses and, also, if there are better times than others for spending. Once the busines owner know what their limits are, they’ll soon realise if spending is exceeding the pre-defined plan.

Getting product costing right

An area that many businesses struggle with is product costing – working out the amount it costs your business to produce each product or service in your range.

Some businesses use product costs to set selling prices. Even when prices are set by the marketplace, using product costs to understand profitability will help you determine if it makes sense to be trying to sell in the market place.

Most product costs have two fairly distinct components:

  • Direct costs – these are usually the easiest to determine and will include things like labour and raw materials etc.
  • Overhead costs – these can be more difficult, and can include things like building rent, repairs to equipment or utility bills etc.

To determine overhead costs, the first thing we must do is determine the total amount of overhead costs we expect to have – that will be provided by the budget. Then we should figure out the best way of allocating the overhead costs to the products – effectively spreading the overhead costs across our products so that each product gets a fair share of the overall costs.

While all elements of the costing process are important, we must start with a reliable estimate of what the overhead will be and that’s provided by the budget.

The foundation on which your business plan is built

So, there you have it – a number of strong reasons why every business, both small and large, should take the time every year to build a budget and to spend some time comparing actuals with budgets.

Your budget is the financial foundation on which the whole of your annual business plan is built, so the more detailed, the more accurate and the more realistic you make it, the more solid your financial progress and agility will be over the course of the year.

If you’ve got any questions about building a solid 2017 budget for your business, please do get in touch to see how we can help.

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Putting your accounting knowledge into practice: an engineering perspective

What should a business owner do to make sure he or she has the best possible information at his/her fingertips?

We’ve already discussed how to identify the key transactions of the business and also how to record the information that’s important to your business and pull it into insightful reports. Now let’s look at how you put this all into action.

Making your finances work for you

So, with your understanding of the financial basics, how do you start putting this knowledge into action and making your finances work for you?

  • Firstly, you must have systems that are appropriate for the business and decide who’ll be responsible for the recording of information. The methodology for this and the level of detail you get into will depend on the size of the business.
  • Secondly, you must list the types of reports you need and what types of information and analysis will help you prepare these reports easily. This involves adapting your accounting system to capture the information needed and making sure it’s easy to pull the reports from the system, no matter how simple or complex.
  • Finally, you need to have a routine to help you check the information. You’ve no doubt heard the hackneyed phrase ‘garbage in, garbage out’ – it’s a truism that’s as applicable for accounts as anything else. When someone gives you financial information, you need to know how reliable this information is.

So how do we sanity check your reports? And what should you be looking for when carrying out these reviews?

Using your reports in the right way

In my experience, when business owners get their financial reports, most of them jump straight to the profit and loss report. However, I’ve learned that it’s more important to start with the balance sheet.

To explain why, I will ask you to remember the ‘Wile E Coyote and The Road Runner’ cartoon that used to be on television many years ago…

The road runner was always speeding along a road, with milestones at the side. If he first passed the 5km mark and later passed the 15km mark, he knew (and we knew) that he’d travelled 10km in total. However, what if the 15km had been mistakenly put in the wrong place, say at 14km? The roadrunner would think he’d travelled 10km when he’d actually only travelled 9km!

By relying unquestioningly on the miletones, our road runner is misinformed and doesn’t understand his performance correctly.

Accounts are similar. The balance sheets provides the milestones and the profit and loss is a measure of the progress or profitability. If you get the balance sheet wrong then the profit and loss will also be wrong.

I recommend that businesses start by looking at the balance sheet and ask if the figures for the various assets and liabilities look reasonable and reliable.  If they’re reasonable then the profit and loss is also likely to be reliable.

Checking your balance sheet

So, how do we check the balance sheet?

We check the bank accounts by comparing them to the records that the bank has – the bank statements – and being sure that we understand any differences. The only difference we should have are timing differences; e.g. we pay a cheque but it’s not cleared at the bank yet. Accountants call this checking process ‘bank reconciliation’, but what you’re doing is simply proving your records are correct by comparing them to another source.

We should also look at customer balances. I find that most business owners are very much on top of who owes them money. If I give them a list of customer balances with something wrong then they’ll quickly tell me. So check your customer balances, look for anything that looks dubious and correct when you find something that needs correcting. Remember, if a customer balance is wrong then your sales figure could also be wrong.

Lets move on to the supplier balances. Again, most business owners are very aware of who they owe money to, so they will quickly spot anything that’s wrong and we can fix that. Again, if supplier balances are wrong, then your purchased costs could also be wrong.

Your inventory or stock number is a key figure in your accounts.  If your inventory is overstated, this has the effect of making it look as if you got stock for free so you profit will be overstated.  If your inventory is understated, then it looks as if you lost stock somewhere so your profits will be understated.   It is very important to get your inventory or stock number right.

Finally, we can quickly look at the other assets and liabilities that might be in the balance sheet and check if they look ok. For example, if there’s machinery or equipment listed in your assets, do the balances look ok? If there are tax liabilities, do those amounts seem right?

Once you are happy that your balance sheet is reliable, then you can rely on the related profit and loss account.

Getting your head around shareholder funds

There’s one section of the balance sheet that sometimes confuses clients. This is the section called ‘shareholder funds’ or sometimes called ‘owners equity/capital’. In essence, this section represents the value of the business to the owner.

To understand shareholders funds, you need to ask the question, ‘If the business makes money, who does that money belong to?’ The answer is that it belongs to the owners.

So the difference between what the business has (the assets) and what it owes (the liabilities) represents an amount owing to the owners. We think of it as a liability to the owners and we call it shareholder funds (or owners equity) for companies or owners capital for non-company businesses.

Shareholders funds are reduced by moneys taken out of the business as dividends or drawings.  So the difference between any two balance sheets represents the profits made by the business in the period, less any profits taken out in the same period – in other words, the profits kept by the business.

Check your reports regularly

Your reports are a real goldmine of information. So I recommend to my clients that they get into a routine of regularly – at least monthly – reviewing and checking their reports. By regularly looking at your reporting, you learn as much as possible about the business and can quickly identify where action may need to be taken.

If you are familiar with the ‘Lean thinking’ approach to business, you may have heard about the three voices in any business that give feedback, helping you to manage and improve.

  1. The first voice is the voice of the customer, giving feedback on the quality of the service your business is supplying to them.
  2. The second voice is the voice of the people working in the business. They see up close what’s actually happening and are often an untapped source of information regarding how well the business is operating.
  3. The final voice is the voice of the process. We access the voice of the process by identifying the key measurements that let us know how the process is doing.

Your accounts should be looked at as a voice of the process. When your accounts are designed and implemented well, they provide extremely valuable information about the performance of the business.

So, rather than thinking of accounts as a compliance-type chore, think instead of the rich information that’s hidden within your accounts – and consider how best to access this.

Getting in control of your business performance

When you understand your accounting basics, the value of good reporting and the insights provided by your business numbers, you’re in real control of your enterprise.

And when you add the benefit of working with an experienced, process-driven accountant, you’ll soon start to the postive changes and improvements in your sales, cash flow and the profitability of your business.

If you’d like to know more about working with AccountsPLUS, and applying our ‘engineer’s perspective’ to the machinery of your accounts, please do get in contact. We’d love to help you get complete control over your finances and business performance.

Get in touch to arrange a meeting with the AccountsPLUS team 

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Understanding the nuts and bolts of accounting: an engineering perspective

Understanding the nuts and bolts of accounting: an engineering perspective

I was a latecomer to accounting. I first completed a degree in engineering and only moved to accounting after that.  Almost everyone who heard what I was doing told me how difficult I would find it and that I would struggle to get to grips with it, never having done it before.

However, I actually found it find quite straightforward and not nearly as daunting as I was led to believe. While there’s a lot of jargon that can be off-putting to someone new to accounting, it becomes a bit easier if you try to think of it in terms of processes with inputs and outputs, as an engineering training would encourage.

Let’s start with the inputs.

Understanding your inputs

It’s useful to start by thinking of your accounts as a database of all the various transactions that happen within your business. So the first thing to do is ask what sort of transactions go on in your business – and, funnily enough, the types of transactions are relatively common across most businesses, regardless of industry and sector.

  • Sales – every business sells something to customers. This means that we need to record our sales and we need to have customer records to track what we’re doing for each customer.
  • Purchases – The business will also buy things from suppliers. This means we need to record purchases and we need to have supplier records to track our activity with each supplier.
  • Payment and receipts – Finally, we need to receive and spend money, so we need a way to record these as money in and money out to/from the business.

That gives us three main types of transactions – sales transactions, purchase transactions, and payment/receipt transactions.

Next, we need to think about how to capture and record those transactions – creating the financial records that, ultimately, will become your accounts.

There are a number of ways of setting up and maintaining those records. You can have paper records (traditional but on the decline in the digital age), you can use Excel spreadsheets or you can buy accounting software. Unless your business is very small, it’s better to use accounting software. Most accounting packages will do what we need fairly easily. However, if the software is well designed, it can also give you a lot of other useful information that would be impossible to collate with paper files or Excel files.

Understanding your outputs

Next, we should move to focus on the outputs for the business. What sort of information do we need our accounting records to provide?

  • Business health – we need a measure of how well the business is doing and whether were actually getting a return on our investment (both time and money).
  • Financial reporting – we need reports that will prompt us when actions are necessary; i.e. when to pay a supplier, or when to chase a slow-paying customer.
  • Business performance – finally, we need information that will help us to understand what’s going on in the business and why we’re getting the results we’re seeing.

To understand how well a business is doing we need to know the ‘net worth’ of the business. The net worth is the difference between what a business has and what that business owes.  Accountants call “what a business has” the assets of the business and they call “what the business owes” the liabilities of the business. So the key report in accounting language is the ‘balance sheet’ as this lists the assets and the liabilities of the business.

The other thing you will want to understand is where the business is getting money from and where it is spending money. You probably already know that this report is the ‘profit and loss account’ (we’ll talk about this more in a future blog post). It’s the report that shows how money moves into, and out of, the business – a vital way of measuring performance.

The need for insightful information

So, we’ve explained the basic nuts and bolts of accounting for you. You now understand the importance of breaking your transactions down into the ‘inputs’ and ‘outputs’ that explain the flow of money through your business.

The next step is to start turning these financial transactions into insightful, useful business information – a topic we’ll cover in the next in this series of blogs.

If you’d like some help to understand your accounting basics, please do get in touch with us and we’ll be happy to help.

Get in touch to arrange a meeting with the AccountsPLUS team 

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

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.

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