Why keeping your accounts up to date could mean all the difference between running a successful business, limping along, or failing.
Would you fly a plane while wearing a blindfold?
I ask new clients ‘Would you fly a plane while wearing a blindfold?’. They look at me confused, and always reply ‘No, of course not!’. At this point they are probably wondering why they hired me. Stupid question, right? Wrong! Here’s why:
A significant proportion of my clients proffer similar responses when I start to investigate their bookkeeping and accounting methodology. They invariably tell me that they hand over receipts to their bookkeeper and once a year the accounts are resolved and sent to HMRC, usually at the last minute. Many then look confused again when I don’t look happy with their response.
Why am I not happy? Because their accounts are typically 17 months out of date or worse. They have been led to believe that the accounts are for tax purposes, rather than as a managerial tool. This means that they know what to pay HMRC, if at all, but not how their business is doing, day to day, month on month, quarter on quarter and year on year.
They will be signing accounts that contain information on what the business earned over a year ago! Most can’t tell the difference between cashflow and profit and loss. They believe if there is money in the bank, all’s well, without knowing how profitable the business is, because often they do not know their true costs.
This means that they are managing businesses without knowing overall if it is profitable or not, which parts of it are more profitable than other parts, which parts are losing money, etc. Is this not similar to flying a plane while wearing a blindfold? What if your business isn’t profitable? Wouldn’t you want to know that and be able to make decisions in real-time about how to proceed?
What parts of your business are profitable?
Many businesses comprise a number of profit-making areas. Let’s look at a chain of cafes, for example. Their lunch menu may be less profitable than their dinner menu. They may have an adjoining shop where they make more money selling home-baked items compared with canned goods which carries less of a margin. However, they need to stock the canned goods as their Italian tinned olives are a best-seller and draws people into the café who then might stop for a coffee and slice of cake.
By keeping up-to-date accounts and reviewing periodically (daily, weekly, monthly, quarterly, annually) different patterns will emerge. They may discover that Monday evening’s are the quietest, and/or that between 2pm and 4.30pm there is very little business during the week. January is their worst month, July, August and December are their best months, etc. This, in turn, could lead to changes in marketing and promotions at certain times of day, week or month.
They may decide to sell a product below cost, termed a ‘loss-leader’, because they know that clients who purchase the tinned olives, also purchase the highly profitable olive oil so selling the tinned olives below cost during their weakest season may bring in clients who purchase other much more profitable shop items and then may decide to stay for lunch, etc.
How does the cafe example relate to your business?
If only you were sat opposite me now! I would ask you to think about this question. Do you know which parts of your business are more profitable than others? Have you noticed, via your up-to-date accounts, if there is seasonality in your business? Are there times when you are busier than others? Was it the same last year and the year before? What changes can you make to counteract the slow seasons? Do you know which types of clients are timewasters and which truly appreciate your value-add and are more profitable? If you had this knowledge, how could you use it?
What about costs?
Surprisingly, many clients do not know their true costs. For example, I worked with a software development company for the duration of a year. During our initial sessions I noticed that the person who created the client quote for the development work and the project manager who managed the staff carrying out the work were not the same person.
The project manager’s team comprised junior and senior developers, which meant that there were differences in the team members’ costs per hour. There were no controls in place, and no-one thought to compare the quote to the actual costs during or even after the project ended. Indeed, the time invested by each staff person wasn’t measured. This meant that they didn’t know the actual costs of the project and therefore couldn’t use that information in the future, when similar projects were being quoted.
It was clear that they business could be losing money on any given project and if the project was of significant duration, the risks were increased. The fact is, they didn’t know either way. Flying a plane while wearing a blindfold comes to mind. Know your costs – it’s crucial! I feel like I’m shouting – but that’s because I’m passionate about this topic, so please forgive me.
Management Reports
When your accounts are up to date and you have access to the software (note I wrote ‘software’ and I don’t mean excel sheets!), you will be able to generate reports at the press of a button. You’ll be able to see profit and loss by month, quarter, current year and fiscal year. You will be able to see who hasn’t paid their invoice on time, which clients are spending more with you versus others. You could separate clients by type if you created categories for your various revenue sources. You could even review your costs and this could lead to switching suppliers and saving costs. Saving costs means more profit!
In Short
I do hope I have made a case for ensuring your books are up to date and if so, how the information can be used as a managerial tool rather than for checking what you owe Her Majesty’s Revenue & Customs. There is much more to your accounts than paying tax!
Honing your accounts management approach is one of the areas we cover in our TwentyTwenty Insight business review process, where we provide a snapshot of the health of your business with suggestions on what you might do next to grow your business.
If this is of interest to your business, why not speak to Lesley Anne Rubenstein-Pessok on 020 8868 3163 or email her at Lesley.rubenstein@lgbusinessadvisors.co.uk
About the Author
Lesley is a highly experienced international business developer, executive coach, mentor, advisor, consultant and business transformation specialist with over 30 years’ experience working with a whole cross section of corporates, SMEs, scale-ups to start-ups.