Understanding the nuts and bolts of your accounting really does give you an advantage as a business owner. As we outlined in our last blog post, breaking down your transactions into inputs and outputs (and thinking like a process-driven engineer) is the first step in getting in proper control of your accounts and finances.
The next step is to start thinking about the process that takes the inputs and outputs – the transactions – and organises them in a way that provides information and insights.
Getting genuine insights from your numbers
To get useful business information, we need to group the transactions in a way that makes sense. At its simplest, we can think of sales, expenses, assets and liabilities. However, accounting packages allow us to get even more, and better, analysis.
For example, we can analyse our sales in multiple ways:
- We can group the sales by product type or by customer type or by customer region.
- We can group it by salesperson or by selling unit.
- We can group sales by best-selling product or poorest-performing product.
By thinking this through when we set up our accounts, we can design the system to provide invaluable information about how the business is performing – information that keeps you in control of the future financial path of your enterprise.
For example, one of my clients is a business consultant. When he first came to me, he just had one figure for sales, with no further analysis. As we were speaking, it became clear that he had three very specific, and different, types of sales:
- One-off projects – where he helped implement improvements for clients.
- Recurring income – where he was retained by clients on a part-time basis.
- Training income – where he provided custom in-house training courses for clients.
However, it also became clear from our discussion that he was most focused on increasing the share of sales that was coming from the recurring income. He’d set a goal of increasing that recurring income to be 66% of his business, but at present he had no way of measuring that – and no way of telling if he was meeting that percentage target.
I recommended that he use an accounting package and group his sales into four categories: Projects, Recurring, Training and Other – a final category, to catch anything that was not in the first three.
As he raised his invoices, he could then select the relevant category for the type of sale. After that, at any time, he can run a report which summarises the sales by category. And, by doing so, he can easily see if he’s on target or not.
By adding these specific categories into your ‘Chart of Accounts’ (the list of different codes in your accounting system), we make it incredibly easy to track and measure every element of your business and its finances.
Insights into your spending and expenses
We can apply exactly the same categorisation and coding process when looking at expenditure – the cost element of your transactions, where you’re buying from suppliers, whether for resale or for use within the business.
I tend to think of expenses as having a number of main categories:
- Sales & Marketing costs – creating awareness such as building a website, or producing flyers
- Building or premises costs – such as rent or maintenance costs
- Staff costs – such as payroll and bonuses
- Office-running costs – such as utility bills or software subscriptions
- Professional costs – such as engaging an accountant, or solicitor
- Financial costs – such as bank repayments etc.
Within those categories, we can create subcategories to provide additional analysis as we choose. You should choose the categories. The accounts should be working for you – not just for the bank manager, and not just for the Revenue.
Some companies have one ‘big’ expense type in their accounts, while others will chose to break a category down if they think it will help understand what’s happening in the business. For example, some companies have one category for telephone while others split the telephone cost into mobile and landline. It all depends on what’s most useful for the business. And, crucially, if you have an accounting package then it’s no additional work to simply create a new code in your Chart of Accounts and add a new expense category.
Additionally, many software packages provide a facility to group costs by job or project. While it’s easy to see how this might be useful for a construction company or a project based company, it can also be applied cleverly for other companies.
For example, I have one haulage company who use “projects” to gather the expenses for each truck. In this way, they can easily track fuel, repairs and running costs etc. by truck and can then decide which trucks need to be replaced. It might also indicate if some drivers are more fuel efficient than others.
So think about the type of business that you have and what type of information would be helpful to you in running the business. It’s probably a whole lot easier than you think to code, capture and collate this information.
Putting it all into practice
We’ve outlined how to understand your inputs and outputs, and how to turn this data into insightful reports regarding the performance of the business.
The final step is to combine your basic accounting and financial reporting with a proactive focus on your performance – a topic we’ll cover in the last blog post of this series – “putting your accounting knowledge into practice“.
If you’re looking for assistance with your reporting and business information needs, please do get in contact with us and we’ll show you the ropes.