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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.

14442056 - close-up of graphs and charts analyzed by business people

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.

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 

Turning your financial transactions into insightful information: an engineering perspective

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.

Magnifying glass, calculator and pen on financial graph, growth concept

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.

Get in touch to arrange a meeting with the AccountsPLUS team 

Getting on top of your to-do’s

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

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

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.

Why you should invest in Management Development

While attending a recent induction session for the SCCUL Mentors Programme, I became aware of a 2010 report by Forfás on Management Development in Ireland. https://dbei.gov.ie/en/Publications/Publication-files/Forf%C3%A1s/Management-Development-in-Ireland.pdf

The Report quotes findings from a McKinsey review of management practices across 14 countries which found that

  • Management Practice in the high value manufacturing sector is above average .
  • Agreggate management practices across all manufacturing sectors in Ireland lag performances amongst similar firms in the highest performing countries.
  • Mean performance in Ireland is also below global averages for almost all sectors of manufacturing other than the high value manufacturing sector.
  • There is considerable variation in performance by sector and firm size, and firm category. Irish firms employing between 50 and 250 employees are ranked just 12th out of 14 countries.

The Report goes on to highlight that there is a strong relationship between management practice and business performance. McKinsey found that improved management practice is associated with large increases in productivity and in output. The research findings suggest that a single point improvement in a firm’s management practice score is associated with an increase in output equivalent to that produced by a 25 % increase in the work force or a 65 % increase in working capital.

Statistics such as those make a very strong case for firms to invest in management development. Who would not want output increases equivalent to a 25% increase in the workforce? If the research is correct and we are starting from a low base, then it must be quite realistic to achieve single point increases in the management practice score.

A first step for any firm would be to carry out a Now Assessment – where are we now as regards management practice. From there establish where you want to be and then put an action plan in place to close the gap.

A very quick way of doing something like that would be to complete our GPS diagnostic which can be found here – https://www.accountsplus.ie/component/content/article/75-growth-and-profit-solutions-diagnostic.html.

If you have any questions about this blog post please contact jim(at)accountsplus(dot).ie

Making Time for what’s important

There is a lot of good information available from my colleagues in Mindshop that will be very helpful to readers of this blog. From time to time, I plan on sharing some of the best thinking with you. Today’s blog post was written by David Duffy of PrincipleFocus in Australia (www.principlefocus.com.au). Here’s David’s article.

“Most of us have felt swamped at one time or another with hectic work schedules, family responsibilities, and social engagements. However, once we learn to manage our time wisely, much of the day-to-day chaos can be reduced or even eliminated.

We all have the same amount of time; it is just how we use it to do what is important. The first step is to decide what it is that we want to achieve – our goals.

The next step is to list and prioritize our activities by identifying critical deadlines, value, routine tasks, fun/relaxation time, etc.

Now we can develop a general work schedule. Many business people do not put it in writing and therefore have problems, no time for themselves or time for planning of their business. Your schedule is where you program in your daily tasks aimed at you reaching your goals.

As part of our coaching of clients to increase their effectiveness, we have developed a list of time management tips. Some of these are:

· Contract out tasks. Contract out tasks you do not have the expertise to complete. Your client will appreciate your honesty and effort to get the best result.
· Start with the most worrisome task. Start the morning, afternoon, or evening with the most worrisome task before you. This will reduce your anxiety level for the next task.
· Complete deadline work early. Not only will this reduce stress and lighten your work schedule, but it will also give you more self-confidence about managing your schedule.
·Know your capacity for stress. When you are hitting overload, take the break you need (even if it is a short one) when you need it.
· Stay organized. Take time at the end of each day to briefly organize your desk and make reminder lists of tasks for the next day or week.
· Take advantage of “down time”. Allow yourself some “down time” between busy periods to review your schedule and re-evaluate your priorities.
· Get physical. Physical exertion helps to discharge stress. Exercise, playing with children, or doing yard work are types of therapeutic breaks you should consider during times of stress.
. Have fun. Be sure to have some fun while working or playing. A good sense of humor can keep most problems in perspective.
· Divide up your time. Decide how much time to spend on business development, personal needs and family. Start by allowing 25 percent of your time for yourself.
· Build flexibility into your schedule. Your availability to family and friends depends on the flexibility you build into your schedule.
· In the bigger picture, consider the relationship between your business life and your personal life. Be realistic, keeping in mind what is most important to you.

Don’t underestimate the toll that emotional stress takes on your physical health and your ability to concentrate on your work or enjoy time with your family. Make sure you have time for the important things.”

Helping individuals achieve balance between business and personal life is a prime objective of AccountsPLUS. Contact Jim on 086 2323525 or email him at jim(at)accountsplus(dot)ie.