Many small businesses treat their book-keeping and accountancy costs as a nasty overhead. They consider the fact that they have to keep records as a nuisance, something they have to do to please the VAT man, the tax man or Companies House. They may only write their books up once a quarter, if they are VAT registered, or if not, maybe once a year, sending a brown paper bag of receipts to the accountant for them to complete. Such business owners are missing a trick. They are not using one of the most useful tools that they have to enable them to run a successful business. They are also incurring a cost, that is the cost of accountancy, whether that be a monetary cost or one of time, without accruing a benefit. They are incurring that cost for the benefit of someone else, i.e. the tax man etc., and not for the benefit of their business.
A properly kept set of books is one of the most important assets that a business processes. It is no coincidence that most businesses that lose their accounting records, due to fire or a similar tragedy, go out of business within eighteen months of the incident. Without accounting records, even in the embryonic form, means that you lose control of the business, at the very least you do not know what you are owed or what you owe to others.
I have written before about the importance of keeping good accounting records and this article is not about that. Instead I want to concentrate on how to work this asset that you have and transform a cost into a benefit.
What are you selling?
The first thing that a business owner needs to know is what his sales are. For a simple business this may be just one type of sale. However, it is important that the sales of the business are known, at the very least on a monthly basis, but preferably on a weekly or daily basis. You need to ensure that your billing is up to date and accurate, or in the case of a cash based business such as a retailer, that your takings are recorded daily. In a case of a more complicated business, where there are a number of different types of sale, your sales information needs to record the various classes of sales.
Are you holding too much stock?
For businesses that sell physical items, proper stock records will tell the business what to, or what not to buy. The analysis of good stock records can ensure that the business does not tie up too much money in working capital or that it is holding enough stock to meet demand, thereby not losing sales.
Businesses that make things need also to take account of work-in-progress when analysing their stock levels.
Are you profitable?
Perhaps the most obvious tool to come out of good accounting records is the profit and loss account. A well constructed profit and loss statement will inform you if you have made a profit or not and also the extent of that profit. Analysis of the profit and loss account will also reveal what margins you are making, both gross and net. If it is designed correctly, the profit and loss account will identify the sales and cost of sales of each sales category, thereby indicating the profitability of each type of sale. It will also enable you to identify the level of you overheads.
Are you solvent?
I indicated above the importance of knowing what is owed to you and what it is that you owe to others. This information is summarised in the balance sheet of a business. You often hear a lay person talk about a balance sheet when really they should be talking about the profit and loss account. The balance sheet of a company is a record of its financial state at a precise moment it time. It is a record of its assets and liabilities at that time, together with a detail of the business owner’s investment. It will indicate if the company is solvent, i.e. that its assets exceed its liabilities, or not, It will also indicate the liquidity of the business, i.e. can the business meet the short term liabilities.
Cash is king!
The importance of cash and a healthy cash flow cannot be over emphasised. The cash flow forecast is a link between the profit and loss statement and the balance sheet. A good cash flow statement is a vital part of the management information that can be provided by a good set of accounting records and will help to identify cash shortages and surpluses.
Good records will help the business consider investment decisions, be that for capital items, the employing of staff or how much to spend on marketing. Making these decisions without the information provided by good accounting records would be like taking part in a night time car rally without lights.
This has been a quick tour on using your numbers as a tool. The length of the article is such that great detail was impossible but I hope that I have persuaded you that accounting records are a benefit, not just a cost.