Managing Information for Profit
The role of an accountant these days has less to do with number-crunching and more to do with advising businesses about strategy based upon the numbers that the business provides. Before an accountant can do this important work vital managementinformation needs to be assembled. Profit looks at the basic year-end check-list through the eyes of Jonathan Russell in
terms of how small businesses go about easing the burden of
the paperwork that is there only for compliance with regulations and concentrating on that which is good for their business.
To accomplish this we need to look at what we need to meet the compliance aspects of the business and what we need from a
management situation and try to move with as little effort from the latter to the former.
Obviously there is some form-filling for compliance with regulations such as PAYE, and VAT and your books and records have to be designed to assist in these areas. So let's get down to the basics.
What does the average business need to know for its day-to-day management?
A good place to start is the old saying, Turnover is Vanity, Profit is Sanity, Cash is King. Although we must presume all businesses are there to make a profit for their owners and managers and this must be the ultimate goal, cash is the lifeblood that every business needs. Even successful, profitable
businesses can fail if they do not manage their cash flow. So, as management, our first port of call must be cash management and for that we need some basic information.
1. How much cash do I have available, meaning a reconciled bank situation and cash in hand?
2. How much cash am I owed and when is it due?
3. How much cash do I owe and when are creditors due to be paid?
The next step is to look at the short-term requirements for current and future business. So the next series of questions are:
1. What orders do I have at present?
2. When are those orders due to be delivered?
3. What stock do I have?
4. What do I need to buy - stock, labour and other items - to deliver those orders?
Finally there are the ongoing commitments of the business in relation to cash such as:
1. Capital repayments on loans, leases and other borrowings.
2. Rental and property commitments.
3. Future capital expenditure.
So we now have some idea of what we need from a business management point of view. What else do we have to do for
regulations? Well, there is the underlying requirement of all businesses to maintain 'proper accounting records', though these are not defined anywhere. But let's look at the
essentials. We presume that we have books and records - as we need them to give us our management information, but we need also to be able to record our payroll information for PAYE and our VAT transactions for Customs and Excise. In some businesses these may need to be further refined for duties, intrastats
and other regulations.
So what is the easiest way of keeping this information?
Garbage
There is no doubt that the simplest way of recording such information is still in handwritten books and ledgers but the problem with this sort of system, except for the simplest of businesses, is the time it takes to extract information from the basic records. The next step is to use a one-write system but these now are losing appeal as computer systems become ever cheaper. So we look at the computer that the business might have for word-processing or Internet and e-mail and ask
what that can do for our record- keeping. The answer is almost anything you want it to do but always with the knowledge that garbage in is garbage out and in many instances good
information in is garbage out.
Replacement
It is important always to remember that the computer is a tool to be used and in essence is no different from any other piece of equipment. You have to know how to use it to get the best, and in some instances anything, out of it. No accounting system
will do the books for you but if you put the original information in correctly it will do the entire necessary posting for you. You can simply use spreadsheets and the like as a replacement for manual records - great if you have bad handwriting and don't like adding up - but at the end of the day they are simply a replacement of manual records.
Accounting software
The next port of call is to look at the off-the-shelf bookkeeping and accounting packages. To some degree there is some merit in the saying you get what you pay for, but more importantly, you get what you buy. Assess what you want the system to do for you and what you think you are capable of
doing. If you have a simple business you probably only need a simple accounting system and off-the-shelf systems are great for
this, but as they get more complex there are more likely going to be compromises in any standard system. The usual downfall of the off-the-shelf system is things such as job costing and stock control - again fine usually for the straightforward business but often the accounting knowledge needed to operate
them satisfactorily is beyond the small business.
Core information
So concentrate on the core information you need, my first set of information. Can you deliver that? If you can, you may move on to the next set and so on, but it may be better to use a computer system for the core information - sales ledger, purchase ledger and nominal ledger - and have a manual system to handle other areas. You can always add to the computer system at a later date but only if you've got the basics right.
Simple rule
There is, however, one simple rule with all accounting systems - the system will not make you an accountant or a bookkeeper,
but will help you do it and, more importantly, get useful information out. If you do not have or employ someone with
basic accounting skills invest in some training to learn those basic principles. Remember a year end is just another month end, week end or end of day and if you are in business they are all just as important. The year end is just something to
comply with regulations but all the others are to do with running a profitable business.
Jonathan Russell is a partner with Critchleys Chartered Accountants in Oxfordshire, who in turn are members of the UK 200 Group of Practising Chartered Accountants. Jonathan is a former executive member of the Finance and management Faculty of the Institute of Chartered Accountants in England and Wales. He can be contacted on 01993 702418.