Blog by Numberz

The what and why of financial management

2012-01-16T14:37:00.000+11:00

There are many statistics thrown around as to the failurerates of small and medium enterprises (SME’s) but whatever the actualpercentage or number, entrepreneurs and business owners don’t expect to becomea statistic. Failure is what happens toother people – who don’t have a solid business plan and good ongoing financialmanagement.

Financial management is recording the business performance(i.e. bookkeeping) and doing something with that data. Every business inAustralia does this but the ‘something’ ranges widely and has a huge effect onthe success and longevity of that business.

I have broken down into a number of broad categories thevarious levels of financial management – at least one of which will apply toevery legitimate business in Australia.

Tax and compliance

The basic legal minimum of financial management is therequirement to maintain adequate financial records in order to prepare andsupport a tax return (whether income or company tax, BAS or FBT return).Depending on the type and size of business there may be compliance requirementsfor other reasons (e.g. Work Cover, State Revenue, ASIC or APRA). This minimumcan range from giving a shoebox of receipts to your accountant up to a completeand consistent accounting system.

For some small businesses this may be sufficient. However itmeans your accounting system is for other parties and you are gaining littlefor yourself. How does your business productivity and efficiency stack upagainst previous performance, expectations or other similar businesses? If yourplans and goals are to improve and grow the business how will you go about it?

Management Reporting

This is an extension to the above with the focus being moreon the business operations and performance rather than just reporting onresults. It is as much (or more) for internal management as for third partiessuch as investors or banks who may only need or want to see selectedinformation that is suitable for their purposes. Management reporting withinsightful commentary and analysis is an essential tool for a dynamic andsuccessful business (or one that wants to be).

The frequency of reporting should allow you to see currentand up-to-date information so you can change and react to conditions as earlyas possible while being practical and fitting in with operation of the business.This can range from weekly (or even daily) in the case of sales (or otherselected areas such as payroll) to monthly (or quarterly at most) in reportingon the business as a whole.

Forecasting

Taking financial management to the next level, good reportsand records can be extrapolated into the future, taking into account expectedgrowth and other foreseen changes. Thiswill show a picture or roadmap of where the business is headed and the processwill also encompass how to get there – this should show what and whenadditional resources are needed (such as capital, assets or staff) or indeed whenor even whether the business can achieve it’s goals.

Business Plan

A good plan is not just done when a business is set-up andthen filed in a drawer. It should be a living document to be regularlyrevisited and revised to reflect changing conditions, goals and performance.Even if things don’t change significantly, going through the planning processmay prompt you to address issues (or even new opportunities) that you may nothave otherwise done.

There is a multitude of templates and information availableon business planning. All are useful but the main questions your plan shouldaddress are:

· Who?This is a description of your business

· What?What do you do or want to do?

· Why?Why are you in this market and why would you be successful? What is your nicheor unique selling proposition (USP) and how do you stack up against the competition?

· How? Howare you going to run your business and market your product or service?

· How much?Are the financials consistent with the words of the plan? Is the bottom line anacceptable and supportable outcome? If not the rest of the plan may be redundant? [I actually often suggest doing draftfinancials first to see if you’re even in the ballpark]

A by-product of good regular ongoing financial management isthat your annual tax return will become more of a formality – which will saveyour tax accountant time and save your business money! You can do it all yourself (it’s not rocket science!) or outsourceto a professional (what is the best use of your limited time?).

Do you want your accounting to work for you (not just theATO)? Do you want to maximise your chance of not becoming a business failurestatistic?

So what level of financial management is best for yourbusiness? The more the better is not always the case – as with most things whatcounts is quality, not quantity.

The small business diet

2011-12-21T13:16:00.003+11:00

Losing weight is not easy but we all know it can reap amazing rewards.Calorie counting is boring but the basic equation is that calories outmust be greater than calories in to actually lose weight (allowing for what isneeded just to exist or stay as you are).

However, achieving a longer lifespan, being fitter, feeling andlooking better (both physically and mentally) etc etc makes us all moreproductive - and it would take a very brave (or overweight and unfit) person todispute that.

With a few exceptions (medical or genetic) there are many waysto improve your health and well-being by altering dietand/or exercise in various proportions to suit your lifestyle and goals.

Your attitude towards your business should be no different. In order toachieve longevity the business needs to be lean and streamlined(i.e. efficient). This is even more important if you want it to becomebigger and stronger (i.e. more profitable). Just as with weight loss or dietand exercise strategies there are books, TV shows and self-help programsfor small business management – yes, even TV shows (see the excellent Kochie'sBusiness Builders). Most of these offer great advice and what worksbest for you is probably a selection or combination of ideas.

Among the many strategies we have available are:

Lose weight, trim the fat or cut costs. Ideally costs andoverheads should be at the optimum level for efficiency – not as low aspossible as this is often a short term strategy which can be devastating in thelonger term. Instead consider the marginal impact of a cost item – does itpositively contribute to the business or would business suffer if it were cut.
Alter your diet – manage the revenue. After analysing your business by product or service,consider whether you should be changing your sales mix or marketing strategiesto focus on more profitable lines.
Do more exercise – increase or improve your marketingstrategy. Be more aggressive or active in your market – or enter anothermarket. Become seen as an expert or authority in your field drawing attentionto yourself – and by inference to your business.
Use a nutritionist or personal trainer – or both. Outsourceparts of your business to someone who specialises in that area and can do itbetter or more efficiently – allowing you to concentrate on what you do best(and make money!).

You have probably already got a plan for a long healthy lifeand a rough idea of what you will be doing in 5, 10, 20 or even 50 years! By nomeans is this set in concrete as you want to be adaptable and take advantage ofopportunities as they come along. Youbusiness is no different. Do you have a plan? What is your exit strategy? Do you just want tocontinue as you have and shut the doors at some point in the future or do youwant to build as asset that can later be sold to fund your retirement?

So how are you going to approach the New Year? Lose weight,bulk up, get fit or do a combination thereof?

However you celebrate, remember to enjoy life and have funin business - but always in moderation and consider the consequences!

Measure by numbers....but not just dollars

2011-11-25T11:35:00.001+11:00

Congratulations if you'veread past the title because it might seem a contradiction. Of course youmeasure in dollars - it's called bookkeeping. But how far does that getyou?

Raw data

As well as being a legalrequirement you can't plan and manage your business if you can't see or measurewhat is happening. It is essential that the data is being recorded consistentlyand accurately and in enough detail for you to be able to use it - but not somuch so that it becomes a chore and is not useful for anything! Many smallbusinesses use the data to populate their tax return...and leave it atthat.

Accounts

A step up interms of managing your businessis to prepare accounts, whether on an annual or more regular basis. Comparison against prior year figures makes the exercise more meaningful and you can start to drawsome conclusions. However doing that often raises more questions than it answers. For instance you can see yoursales have increased in a particular category (as youhave recordedsufficient detail) - this is great but is it due to increased productivity, more or better marketing, better inventory management or something else?And how has this affected your cashflow, eg higher sales can translate to less cash if you had to offer longer payment terms.

Timely

So producing accounts hasgiven you some more information, but this is historic and may have littlerelevance to current or future businessdecisions. Ok, all measurement will be historic but by producing it regularly and timely, accounting data will becomemuch more useful. Carrying out regular forecasts is also invaluable - these will usually be based on current, up-to-date business data taking into account known or expected changes to your market or business model. Measuring your current data against a previous forecast will also help you draw conclusions, both about current performanceand efficiency.....and your forecasting assumptions and techniques.

Analysis

Businesses exist toproduce profit, but the key to good management is how that profit is produced. You are selling goods or services and the efficient ability of the business to do that is what determines the profit.Therefore it makes sense to measure in terms of those good or services. Eachbusiness is of course very different but objective analysis vastly improves therelevance and applicability of your management information. What I mean by thisis analysis by:

• Product that could be per litre, carton, case, roomor whatever unit is most applicable (just don't overcomplicate it!)

• Services are a bit harder but can still be done e.g.billable hours, hours paid, staff numbers, floor space or whatever is mostappropriate for you

• Combinations such as measuring sales by unit butperhaps overheads by week if they are relatively fixed in nature

By just adding this extralayer into your analysis your accounting data becomes much more valuable.Instantly you can see if an increase in sales revenue over budget or last yearis due to item price or volume or a combination thereof. You could measure byunit by market to give even more useful information and so on.

Once you have all thisvaluable analysis you can start to draw meaningful conclusions and make anychanges necessary. Of course you need to be aware of paralysis by analysis soonly be as specific or detailed as is practical, either to draw conclusions,take action or to measure and record data in the first place.

Get fit for business with the Retail Doctor

2011-10-13T14:36:00.000+11:00

I have just attended abusiness breakfast that was hosted jointly by the Balmain/Rozelle andLeichhardt/Annandale Chambers of Commerce. There was a very interestingspeaker, Brian Walker (aka the Retail Doctor) and I thought what he had to saywould be of interest to many of my followers, as well as to local retailprecincts in general.

There was a lot ofinformation that I won’t (or can’t) attempt to convey in totality – merely to commenton what stood out most to me, and my interpretation of it. For more informationfrom the source please go to www.retaildoctor.com.au.

Multi-channelling

The whole retail landscapehas changed dramatically over the last decade. However, and despite the protestationsof Gerry Harvey and others, online sales account for only 7% of retail sales.Brian estimates that in five years this will have gone up to 12-15% - hardlysignalling the demise of the bricks and mortar store. Shopping online has had a lot of mediaattention but that doesn’t mean online-only retailers are sitting pretty – oneof the biggest, Amazon, has only recently started to turn a profit.

There are multiple facets orchannels in the whole shopping experience. These range from the moretraditional high street shopping strip, large shopping malls, catalogues andmail order to websites, e-commerce, blogs, or social media. These areconstantly evolving and changing – for instance there is a move in Australiafrom malls back to a community ethos of high street shopping.

Each method appeals todifferent demographics in different ways and there are not many retailbusinesses that can just stick to one or even two channels – unless perhapsthey are in some sort of monopolistic position.

Cross-channelling

The proportion of customerswho research before buying is very high, particularly for high ticket items –whether this is online before buying in-store, in-store before buying online orany permutation thereof, not forgetting the research (or sale) may be done withthe competition.

Research will also be donewith other customers, past and present. This can be face to face orincreasingly through online reviews and social media. The latter cannot beunderestimated, as previously word of mouth was one-to-one, now it is to thewhole world and sometimes can make or break a business.

So not only should a retaileruse multiple channels, but these channels must be complementary and guide anexisting, new or potential customer to the ultimate goal of a sale.

Shopping experience

Good customer service,pricing and good staff are not really unique selling points – not manyretailers would admit to falling short on any of these. Rather they are justexpected and are prerequisites to being fit for business and growth. Whatbusinesses can compete on successfully is providing an experience.

Customers are people who havefive senses to which you can appeal. Online you can (currently) only appeal totwo, sight and sound. Of course there are many other ways to attract a customersuch as having a unique product, appealing to vanity or fashion, or just goodmarketing (“you can’t afford not to have this product!”).

Whatever the strategies orchannels used the experience needs to be about the customer – but keep it real!

How do you put together a financial model?

2011-09-30T09:33:00.000+10:00

The quick answer is anyway you want - there are no rules but there is best practice, and following that will make the process more efficient and increase the credibility and shareability of the results. A forecast (or budget or other projection) in its simplest format is plotting values against time periods (generally weeks or months). However if you want more than a one-off exercise or for the forecast to have some level of credibility (either to you or another party) you will need a financial model.

A financial model is a theoretical representation of a financial decision-making process or project. It is a mathematical model designed to represent financial performance.

There are a number of elements that make up a good model:

Variables

To give credibility to the model each line of the model should be supported by calculations and showing the assumptions and methodology used e.g. $x per unit sold or per week/month. This also allows for scalability and can be backed up by evidence e.g. invoices or sales projections.

Sensitivity

Variables or input fields should allow changes to be easily made (to values or methodology) so as to instantly flow through the model and show the effect on the final result. This is sensitivity or what-if analysis.

Rolling periods

The model should allow for future use to add on additional, or roll forward to later periods. This should be able to be done in a relatively straightforward manner without having to rewrite the model. This keeps it dynamic and the process continual and consistent.

Format

The outputs of the financial model (whether Profit & Loss, Cashflow or other Statement) should be relatively easy for another user to read and understand and be in a familiar format such as the regular management accounts. In addition the assumptions and inputs must also be straightforward to read and update. The backend, or calculations, of the model should also be logically laid out and be consistent to allow for possible future changes or updates.

Integration

Ideally the model should produce both a Profit & Loss (P&L) and Cashflow statement to give a more complete and thorough picture of the business or project. A Balance Sheet (BS) should also be included to act as a check as well as provide information. The opening BS plus P&L and Cashflow movements will give a closing or current Balance Sheet.

Not all of these elements are essential and some may be omitted depending on desired outcomes, audience and time or other resource constraints.

There are templates, programs and other tools available (many free of charge) for business owners or managers to utilise. An Excel spreadsheet is the most widely used tool for reasons including flexibility, ease of use, cost and portability or sharing.

However the process will usually be far more efficient if it can be delegated to a qualified staff member, or outsourced to a professional, to manage the completeness and integrity and allow you to stay focussed on the business inputs and outputs.

Profit & Loss and Cashflow Statements – what’s the difference?

2011-07-04T16:22:00.000+10:00

They both provide different information about a business – this difference may be minimal (especially for small or micro businesses) or quite substantial.

The Profit & Loss Statement or Account is also commonly known under other names such as an Operating Statement or Statement of Financial Performance. It measures the profitability of a business – that is the return on it’s trading or day-to-day operations. This is also known as the revenue side of the business - as opposed to the capital side, which is all about investment, funding and equity.

A Cashflow Statement shows all cash and bank movements belonging to the business. A Bank Statement may serve this purpose, particularly if it contains all the business funds (ie no other accounts, loans, floats or other cash or cash substitutes). However this is usually summarised Cashflow Statement and shown in a format which gives useful information such as by categories, by month rather than a merely a list of receipts and payments. It includes transactions that are either revenue or capital in nature. The Cashflow Statement measures the liquidity of a business and is a key indicator of solvency – that is the ability of the business to meet its debts and liabilities.

For very small businesses, or those with low and negligible timing differences a Cashflow Statement alone may be sufficient. By timing differences I mean the lag or amount of time between issue of invoice and receipt of payment, and between receipt of purchase invoice and payment made. The Australian Tax Office generally only requires small businesses (usually with turnover up to $2m) to report on a cash basis.

Where reporting on a cash basis is neither permitted nor sufficient the accrual basis is used. This then produces the Profit & Loss Statement. The accrual basis means that revenues are matched with associated costs regardless of when they actually arise. A simple illustration is a wholesaler might buy their stock in March but nor sell it until April – both transactions will be reported in April’s Profit and Loss. In accounting terms this matching is done through tools such as inventory management and the recording of accruals or prepayments.

Either Statement on its own will tell a lot about the company but they need to be considered together to get a clearer picture. For example a business that is otherwise profitable may not be good at collecting debts, or is paying its bills ahead of terms, which puts cashflow under considerable strain and may negatively affect solvency. The longer invoices are outstanding the greater the chance of a bad debt occurring – when this happens they will be reflected in the Profit & Loss but this is too late for remedial action.

Generally the more ways you can look at information the more it will help with the management of your business. It is also vital that it is good quality information which makes it so important to have a good system set up from the beginning with good, accurate and timely data recording.

Chart of Accounts: mapping the genome of your business

2011-05-26T12:21:00.000+10:00

To use this medical metaphor financial records will be a meaningless jumble of nothing, a blob of ectoplasm, without a chart of accounts. The chart is a map of the business – a list of unique nominal ledger accounts or records that break down the business into its constituent parts.

This chart can be laid out in any pattern but to be most useful there should be a logic, methodology and consistency to support it. The list of accounts and their balances at any particular point in time is called a Trial Balance. This is just a list, so in itself is not terribly helpful apart for checking the control of debits equalling credits. Producing financial statements is the application of this database to show the performance and position of the business.

The chart of accounts is generally grouped into ranges of accounts:

Assets
Liabilities
Equity
Revenue
Cost of Sales (or direct costs)
Expenses (overheads or indirect costs)
Non-operating income and expenses

Depending on the business these ranges may be further subdivided into income/cost centres and/or business divisions….or really in as many ways as management want to look at the business. The more detailed the chart then the more possibilities for analysis – although each layer of additional detail requires more work and increases the chance of inaccuracy or error.

Businesses want as much useful information as possible, while avoiding paralysis by analysis. If the objective is to populate a tax return a limited chart is all that is required – albeit with some specific requirements. A solo or micro business may not need a long list of accounts if it is relatively easy to control. However more detail is always better than less as more reporting options become available – this needs to be balanced against the effort and resources required. The determining factor is what information you require, or may be likely to require in the future.

For ease of use and versatility accounts are nearly always given codes. These can be numerical, alphabetical or a combination of both. The number of digits will depend on the level of detail and hierarchy chosen. Depending on the recording method (usually software program) the basic structure may be pre-determined but otherwise there is no set format – but again logic and consistency should prevail.

The reason the chart of accounts should be decided at the outset of your business is that the more time goes by, with data collected, the harder it is to change your chart or add in more detail – harder but not impossible! For instance do you only need one account for income or multiple accounts for different revenue streams or products?

Designing the chart of accounts may seem like a daunting task with a lot of considerations, present and future, to take into account. However you generally don’t start from scratch. There are numerous pro-forma lists around which may suit your industry - perhaps within the software program used or on the Internet. Your accountant will probably have a suitable structure you can use and in any event they should be consulted for their input and feedback before implementation.

Debits and credits – what are they and what do they mean?

2011-05-11T15:21:00.000+10:00

Debits and credits are the names given to each side of a double-entry bookkeeping transaction. Business transactions are stored in records or ‘accounts’ whereby similar transactions are grouped together. These accounts are made up of debits and credits and will show a balance which is total debits less total credits (this may be zero in some cases).

By convention debits are on the left and credits on the right (or sometimes shown as positive or negative numbers respectively). This is purely for consistency and ease of use and does not in itself have any meaning.

As the system has to have a point of origin, assets are debits and liabilities credits. This doesn’t mean you can’t post the credit side of a journal to an asset account – you can, it just means that it is a reduction in the book value of the asset (most likely depreciation). Similarly you can debit a liability, which reduces the value of that liability – such as a payment to a creditor reducing what you now owe to them. Equity (or Capital) is usually treated as a separate category but it is really just a (non-current) liability of the business to the owner or shareholders.

OK, so that is the balance sheet side of double entry but because it is a self-balancing system the principal equally applies to the profit and loss account. Here debits are costs or overheads and credits are income or revenue – you can think of it as income being an increase in owner’s equity.

DEBIT	CREDIT
Asset	Liability / Equity
Reduce Liability	Reduce Asset
Expense	Income
Reduce Expense	Reduce Income

A frequent comment on this is “but I have a positive bank balance which is in credit”. This does cause considerable confusion, as it is where most business owners are likely to come across the debit/credit terminology. It is not a contradiction – to the bank your bank account is a liability, they owe you that money. It is perhaps just egocentric of them to display information to the customer from the banks point of view.

A more helpful way to look at this is to equate it with buying something on credit which is very common and easily understood. In bookkeeping parlance you are crediting your general ledger credit card account and debiting whatever the transaction was – either an asset or an expense.

The terminology is often abbreviated as debit (Dr.) and credit (Cr.). An example of a journal transaction as it would be written or posted to a ledger account – an electronic bank payment to pay for a reference manual:

Dr.	6-3300	Books & Periodicals	$50.00
Cr.	1-2010	Bank Account		$50.00

The above codes are fictitious and will depend on the structure of the chart of accounts – which will be subject of a future post…..

A change is as good as a rest...or even better

2011-05-08T05:05:00.000+10:00

Finally, I’m happy and everything is in its place (sort of!). Moving office can be a daunting experience but once done, brings a great sense of satisfaction and an impetus to do more work (or write a blog!). Not that my experience was a huge change in real terms – except to me! I swapped my office and bedroom.

To put this in context the bedroom was at the back of the house overlooking a park – great outlook and fantastic light. The office was in the ‘spare room’ that is a bit smaller and much darker as it doesn’t have much direct natural light – which I love. That didn’t make for an overly productive work environment but my mindset was that the bedroom should have precedence and be in the nest room. There is an easy chair in the bedroom with a footstool – I love it but was always banging my shin going around the bed. After hearing this a few times my partner suggested why not swap around the rooms. Initially I didn’t think much of this but it got me thinking……

I spend much more of the day in the office whereas the wonderful light in the bedroom was largely going to waste. The easy chair could also stay in the ‘new’ office with more room for the footstool – a great place to read documents and texts. There was a phone connection in both rooms so that wasn’t a constraint. Ok, decision made…work to do.

Well, it didn’t really take that long to do and after a few trial layouts (and more advice) I had a great office – better structured and above all, a better working environment. The other side of this is there is also a terrific new bedroom – although it is slightly smaller it is a different shape, which is actually far more conducive to fitting in bedroom furniture. The fact that is darker is also a good thing and aids sleep. The other benefit of the big move was that it was an excellent opportunity for spring-cleaning and re-organising (and finding things that I forgot I had!).

Now why am I sharing all this? I know one of the reasons I enjoyed the whole exercise was that I like change – but only if I think (at the time) it makes me more efficient with my use of time or resources. Shifting around my furniture from time to time is something I’ve always done – without analysing the why too much. This is also how I approach my spreadsheet financial models.

Constantly thinking about ways of making them more efficient, smaller in size or with less detail – while at the same time giving more relevant results and being more user-friendly – this is especially important if others are to use them as well. Starting to use a spreadsheet that has been developed by someone else usually has a steep learning curve and the more sophisticated the model the longer this takes. Of course a good modeller will use methods and techniques that can cut this down greatly (such as putting assumptions and variables together on one page rather than scattered throughout the spreadsheet).

From time to time this means that the whole spreadsheet gets turned on its head if you come up with a different way of looking things (such as allowing for a breakdown by day if you’re looking at coming up with both weekly and monthly data – and that doesn’t have to be as hard as it may sound). Also if the you or the client wants to introduce another variable into the picture (such as multiple cost centres with individual reports) that might require a radical reworking of the model.

Of course the other side of all of this is that you can’t spend too much time on change or re-organisation or do it too often – it can be a good way to prolong procrastination or to defer something. However if done right it is another and better way of looking at things, whether that is your workspace, personal life or a financial model of your business.

Double Entry Bookkeeping - What is it and why should you know?

2011-04-28T05:01:00.000+10:00

Bookkeeping, as the name implies, is the recording of financial transactions of a business. The double-entry concept is a set of rules that has been universally adopted and around since the 12th century. It was famously codified in the late 15th century by Luca Pacioli, an Italian monk.

Ok, enough of the history lesson. As the name implies, every transaction has two sides, (known as a debit and a credit). For example a cheque or other payment affects both the bank account and a cost category. A sale creates income as well as a debtor (or money in the bank). It is possible for a transaction to involve more than two entries but the total debits must equal the total credits. Things like the GST and inventory management will complicate this by creating additional entries – but the basic rule still applies.

A transaction is entered (“posted”) as a journal into the accounting system (whether this is software, a book or ledger or a cloud application – see future newsletter about the latter!). A journal shows the account name (or code) for each debit and credit created by that transaction. Part of this may be automated as a ‘specialised journal’ so you don’t see the transaction in this way, for example

A payment will automatically credit the bank account so only the debit needs to be manually coded)
A sale or invoice will automatically debit Trade Debtors (Accounts Receivable) with the credit then coded to the appropriate income account

Often when a journal is posted from scratch (select debit and credit) it is called a general journal.

The beauty of this system is the inbuilt data integrity check, or internal control.

Each transaction updates the balance of an account (whether that is the bank, debtors, income or expense) that can be independently reconciled and verified (such as to a bank statement, list of debtors, invoice register etc).
A list of the balances in your accounting system at any point in time is called a Trial Balance. The total debits must equal the total credits (or the overall total of balances must be zero if credits are shown as negatives which is sometimes the case).

This is not a guarantee of error-free accounting but can reduce the risk – the wrong ledger accounts may still be used.

Now, I can hear many people asking why should they know this? Well it is very difficult (if not impossible) to make a system work for you if you don’t fully understand how it functions – not necessarily in detail, but at least conceptually. That is, unless you’re looking after the bookkeeping yourself, which many of us are – in this case an understanding of the subject will help you to more efficiently use your accounting software which uses the same principles....

What or how much, accounting does your business need?

2011-04-14T07:07:00.000+10:00

The way your bookkeeping system and chart of accounts are set up will largely be determined by what type of accounting you want. You don’t want to put time, effort and money into detailed recording of transactions if you are not going to use all that information. Do you need or want to have the ability of producing top quality reports about your business now or in the future? The size and structure of the business may predetermine some or all of this but for small and medium enterprises [SME’s] there are usually more options available.

Tax Accounting

Many small and microbusinesses only need, or want, their bookkeeping to be able to produce reports and summaries which can be given to their tax advisor to do the annual tax computation. Minimal detail is required but there are specific requirements which you will need to meet – such as on entertainment, assets and personal v business use as appropriate. If the business is required to register for GST more detail will be required but again, if tax is the sole motivation then a relatively simple (and probably cheap) system can be maintained.

It is best to seek tax advice as early as possible from your accountant. Also you may be able to reduce their bill if your records are well kept and in order.

Financial Accounting

This is generally associated with compliance – whether with the Corporations Act or other legislation, or indeed with other requirements such as a debt covenant or external investor or stakeholder.

There are strict rules and guidelines which reports must follow, such as IFRS [International Financial Reporting Standards], and that will determine in turn how the accounts need to be set up. In most cases financial accounts or statements will also be subject to external audit.

Management Accounting

This area of accounting is the least defined but probably the most useful to SME owners or managers. It is generally more detailed and tailored to each business – and also to must be able to produce and be consistent with tax or financial accounting reports as necessary.

Management reporting shows the business the way the owner wants to look at it, generally focussing on KPI’s [Key Performance Indices] which are the drivers of the business. The analysis should be in practical terms that can be used to grow or make the business more efficient – such as revenue or cost per room for a hotel, or per litre for a fuel business, or percentages for a service business etc.

The detail, accuracy, consistency and timeliness of the bookkeeping will determine how informative, reliable and timely the reports are – and ultimately how useful they are.

So whether you manage your business based solely on the bank statement or on detailed reports and analysis, the accounting will determine the resources needed and the desired outputs will determine the type of accounting.

Holiday with a business plan

2010-09-07T09:19:00.000+10:00

Having recently been on an overseas holiday it struck me how much of the planning process mirrored that of putting a business plan together. My own approach (to a holiday or business plan) may not necessarily align with others but many of the same factors are in play between both plans, regardless of the level of risk or planning chosen.

Obviously I wanted to give my partner and myself the greatest chance of having the best possible holiday we could within our means and resources. Before doing anything else we had to articulate our strategy or vision - what it was we wanted to achieve from the holiday in terms of activities, relaxation etc.

Choosing the destination was next – we could have chosen somewhere safe and familiar or tried something completely new where English wasn’t spoken! [That is the risk profile]. In the end a destination was chosen only a couple of hours flight away but that was also quite unknown and did offer a language challenge.

Then research, research, research!! I got a guide book and used online travel sites and forums to get as much information as possible about where to go, what to do, where to stay etc. The amount of information was staggering but aligning this with our strategy helped to cut it down. Being as specific as possible with your vision helps you keep more focused but on the other hand you may want to allow scope for opportunities and possibilities that may not have been considered.

You can be armed with loads of relevant research and information but the reality can often present something unexpected or challenging. Depending on the level of risk with which you are comfortable, these unknowns can be either obstacles or opportunities.

The next decision was what, if anything, should be pre-arranged or pre-booked. We could have left this to chance and been ‘fun and spontaneous’ but my risk profile and experience told me that spontaneity can be inefficient and not necessarily the best way to get the most out of limited time and resources.

There was a domestic flight where I wanted to be sure of getting seats as there weren’t too many alternatives – similarly I didn’t want to find out that all the good hotels were sold out. So the decision was to pre-book flights and accommodation (only) and to be pre-armed with as much other information as possible. This then allowed for a fair degree of flexibility and spontaneity – within parameters that we controlled.

So when we landed the first challenge was to get from the airport to the hotel – about 50km. The most popular method for tourists was a shuttle but my research told me there was also a public bus for a fraction of the cost, which was comfortable enough but required allowing a bit more time and a bus change. This fitted our strategy so we took this – and had the added benefit of seeing more of local life than just the expressway to the city!

There were many other decisions over the week, not all of which we had prepared for, but the element of chance could have been reduced or even removed if that’s what we had chosen (eg for reasons of time availability or independence). We were happy with the level of risk/spontaneity.

Going back to the business plan (or had I left it?)

What is the strategy, vision or goal?
With what level of risk are you comfortable? Do you like to ‘wing it’?
Do you want (or need) to plan everything you can control (or think you can)?
Who are the other stakeholders? A partner, investor or bank will look at this very differently – plans will have to be adjusted accordingly. Trust and experience play a big role.

Finally, I hear you ask, how was the holiday and did the plan work out? Yes it did, and we had a fabulous time thank you! How do you approach your business plan?

City2Surf Business Plan

2010-08-10T04:38:00.000+10:00

August - another City2Surf and I did a fairly good job, even if I do say so myself. But….if the buses ran better at either end, if there wasn’t so much congestion at bag collection, if etc etc….I’m sure I would have done better and enjoyed the day more.
August…..another financial year over and annual results are in – a fairly good year but it could have been better….if the banks weren’t so stringent with their credit policies, if my marketing had been more effective, if etc, etc….

Running a business, or a race, involves many components working together effectively. Obviously hard work (or fitness), motivation and focus are fundamental, but in order to take advantage of opportunities or avoid obstacles along the way, we must anticipate these as much as possible in our business or race day plan.

This was my eighth City2Surf so you’d think I should have learnt something from previous years like to allow plenty of time for public transport, to come back later to collect my bag (or don’t have one to collect). I make excuses to myself that things are different this year and previous lessons are out the window – there are more people in the race this year (80,000!!), more people to move and bags to sort. However things aren’t really that much different, I just forgot what previously happened as I was wrapped up in the euphoria of the day. Maybe this time I’ll record it while I remember and let it form part of my race day plan for next year!

Was this my first year in business? As it happens it was, but the above lessons still apply. Ok, I didn’t have a previous year to learn from but there are many ways of learning other than trial and error – advice from friends, colleagues, experts or peers at business or social occasions, on-line forums etc. Of all the advice and suggestions I received, how much did I take on board or did I think I knew better what applied to my business. Well of course I didn’t know everything and yes, there are many things I could or should have done differently. Will they now be recorded to form part of my business plan for the new financial year – I’d like to think so.

I’m happy with my race time too – although I hadn’t given myself any targets (eg split and end times) apart from finishing. My training regime had not been as good as it should have been (less haphazard and more structured would have helped). If my time had been just one minute better I would have been ecstatic as it would have moved me up a category – how much extra effort or planning would have been required to achieve that? Perhaps not very much.
The first year of my business was solid, but not spectacular. Could it have been much better with more, or better directed or planned, effort? Almost certainly yes.

A business (or race) plan that anticipates many opportunities and obstacles will help grow your business. Breaking this down into numbers helps demonstrate what effort or investment is likely to be required at each stage in order to achieve the desired outcome. This may be a training plan, a race day plan and a series of targets or a business plan with forecasts, projections and sensitivity (or what if) analysis.
Or are we happy to have a wait and see attitude and let outside circumstances guide our performance rather than manage our own destiny?

And for the record…..I had a terrific day and can’t wait for next year's City2Surf!

The bank wants a forecast for my business! Where do I start?

2010-08-07T06:07:00.000+10:00

If you are looking for a bank (or indeed anyone else, not just an investor) to support or advise on your business then you are going to need to give them information. Trading history is invaluable, and essential in many cases, but what most people will want to know is how the business will perform in the future. Short of having a crystal ball how can you show this and, most importantly, how can you convince others that your forecasts and projections are accurate – or at least fair and reasonable.

For an established business, trading history is the place to start - although not an indicator of future performance as we are constantly reminded with superannuation and other investment advice! However what you will get is:

A framework or format for the forecast – this should be the same as your financial reporting for reasons of consistency and accountability
A comparison which can lend credence to projections

No history? New business or business idea? The same principles apply but the starting point will change. Before you even look at an accounting system your business plan (or feasibility study) should set out your business as you wish to see it. This can then be converted into a chart of accounts (and/or budget) and then uploaded/imported/copied into an accounting system. Most systems will offer you a default chart of accounts but that will often be too general if you want to measure and control your business – if you just need to give something to your accountant to prepare the tax return then the default will usually be more than adequate. You really need to consider how you want to look at your business – professional advice is always a good idea but ultimately the decision is yours, most professionals will be able to put this vision into reality (or a model thereof).

Financials are what the bank most wants to see but the rest of your business plan needs to support this and demonstrate how the figures will be achieved (eg with a marketing plan). This is more important for a new business venture or a significant change over prior results.

Your forecasted projections are not just done once – forecasts should be regularly revisited and updated in light of current circumstances and performance and to take full advantage of future or potential changes, internal or external. The closer this is aligned to regular management reporting, the easier and more reliable will be the whole forecasting process.

Is Cash King?

2010-06-17T12:12:00.000+10:00

That might seem like a rhetorical question. Not many businesses can exist without a positive cash flow – at least in the medium to long term.

There is a well-worn adage in business that turnover is vanity, profit is sanity, but cash is king. However to use an analogy a king is not what he used to be – how many absolute monarchs are left in the world today?

Certainly it is cash that will make or break a business but unless it is being managed as part of an overall business strategy cash management is just not enough. After all using your reserves and selling assets may keep you trading but that is hardly a sound way of doing business. Another way to look at this is to ask if cash is king, can we get by without credit cards? In the vast majority of cases the answer will surely be no.

A sustainable long-term cash flow for your business can only happen if you also have in place strategies for:

Profit management which includes looking after
Margins
Cost control
Asset management – using business resources efficiently
Debt management – in many cases you will need money to make money
Credit control – or how your profits translate into cash

Volumes can be, and have been, written about how to manage your business and dig deeper into the concepts listed above (as well as others). There is no one answer – what works for one person in their business could be very different from another business, or even someone else in the same business.

Another view is that cash flow is merely a by-product of other strategies (e.g. profitability and credit control) and a cash management strategy is actually making efficient of surplus cash in the business.

So is Cash king? Probably, but only as part of a constitutional democracy of other business strategies and methodologies.

Why are financials often at the back of a business plan?

2010-05-27T09:14:00.000+10:00

That’s a good question and there’s no hard and fast rule, just a widely accepted convention. The Profit & Loss and/or Cash Flow Statements are invariably the most important parts of the plan, and will be the first port of call for many readers (e.g. banks or investors).

The End Result

The financials could be at the back because everything else leads up to there – but if the numbers don’t stack up, no amount of justification or support in the rest of the plan will make any difference. However if the figures do look good, most cautious (or sceptical?) readers will want to see if, and how, they are supported.

Numbers aren’t everything

This is true but they’re a common language for all parts of the business and, most importantly, are how the outcomes of the business can be expressed i.e. money in the bank! We can be creative with numbers and it’s not too hard to put together a set of figures that tell a good story. The words (research, competitor analysis, demand studies, operations, marketing etc.) and numbers must combine to show a rounded and reasonable business plan.

Numbers aren’t sexy

I can (reluctantly) accept some people might think that. For many new business owners their passion is their business idea, whether it is marketing, design, retail or whatever. And while that makes such a difference, usually it is the business owners who don’t or can’t use their numbers who are amongst the 90% of new businesses that collapse in the first three years of operation. Like it or not, you live and breath by numbers.

Planning the Plan

So should the financials be done as the last part of the business plan i.e. the conclusion? I think the answer should categorically be no. Imagine doing all that work and finding out that when you add up all the pieces there isn’t a viable proposition! So the first draft should probably be done before anything else and, as the rest of the business plan is being complied, the assumptions and variables in the model can be tested and updated.

Update early and often

One of the great things about a financial model is that it can (and should) be changed. This does mean that the model needs to allow for quick and easy changes, even ‘on the fly’ – you should be able to test a hypothesis, like what would be the bottom line effect of selling 100 X widgets instead of 50 Y widgets, without having to wait for all the calculations to be redone.

Live the Plan

Even after the plan is completed your assumptions and variables will change (that is why they are called variables!). The whole business plan, and in particular the financials, should be a dynamic document. A budget or fixed plan is a snapshot in time from the model, and as such it can be a very useful measurement tool to keep you and your business accountable and on the right path.

So remember, the order your business plan is laid out will often not be that in which it is read, and certainly should not be the order in which it is prepared.

What do you think?