All medium and large companies hold regular meetings at
which the financial accounts are presented and discussed.
While all businesses have problems from time to time rarely
do medium and larger businesses actually go out of business
and if they do it is invariably because financial mistakes
have been made.
Small business should take note of this fact and especially
self employed business that often do not have regular
presentations of the financial statements and the ensuing
discussion. Considering the financial state of a business
is a critical area that is so often missed from the
management of a small business.
Every business has to prepare a set of financial accounts.
Those financial accounts may be produced manually or using
financial accounting software. The main objective of
producing the accounts is all too often to satisfy taxation
requirements and not the financial control and management
of the business.
When accounts are prepared on an annual basis the day to
day financial management of the business is reduced to the
size of the bank balance. When that bank balance reaches a
critical low level the small business will react but the
action required to fix the problem may well have been
endemic for many months. Early action is always best.
By using accounting software and the financial control it
can offer the small business not only provides an early
warning system but also indicates where management action
is required. Financial accounts should be prepared by all
small business on a monthly basis to maintain financial
control.
Accounting software can be a simple system of producing a
monthly profit and loss account and for many small
businesses that may be sufficient as the smaller the
business the more intimate knowledge the owner has of its
finances. Other types of accounting software can produce
balance sheets and with a balance sheet the value of
creditors, debtors, bank balances and assets. In larger
organisations the financial accounts will be more
sophisticated and produce analysis of all main areas of the
business.
During the financial life of a business there are types
when sales grow and times when sales decline. The amount
owed by customers is called debtors and the debtor balance
may grow in line with sales turnover but can also move
according to the efficiency of the financial control and
credit control systems in place. The movement in the debtor
balance potentially having a critical financial effect on
the liquidity of the business.
The overall movement of the debtor balance on a day to day
basis is not always obvious and only by producing a
specific total at the end of each month can the debtor
balance be viewed and questions asked to maintain strong
financial control. Slippage in credit control procedures
must be tackled at the earliest stage to avoid a serious
financial impact on the business.
Purchase expenditure can also increase and reduce and the
creditor balances can increase and decline. There is a
tendency in businesses not making sufficient profit for the
creditor balance to grow as the time taken to pay suppliers
is extended. Such action may be necessary and is a natural
reaction but the real cause should be addressed, that cause
being an inadequate level of profitability.
The profit and loss account for a small business should not
be viewed as an administrative headache but a vital tool in
the financial management and control of the business. A
monthly profit and loss account produced by accounting
software should be viewed more of a financial health check
on the business.
The profit and loss account will show the sales turnover
and a list of purchase expenses producing a net profit or
loss for the month. By comparing the current month to
recent previous months the trend of financial performance
becomes obvious. This is a critical function of accounting
software to produce real numbers that will indicate where
action is required.
The accounting software retains previous financial
information entered that enables sales to be monitored and
the effect of sales and marketing campaigns to be seen in
real numbers. Purchase expenses and business costs can also
be viewed and patterns can be easily detected. Any numbers
produced by the accounting software can then provide the
basis for management action to either improve financial
control or take management decisions to grow higher sales
or reduce costs.
By using a financial accounting system to critically review
the business finances on a regular basis provides both
opportunities for sales growth and higher profit levels but
also serves as an early warning system of business
problems. A profit and loss account and in larger
businesses a balance sheet too are essential tools in
achieving financial control of the business and producing
the desired financial performance.
The absence of a suitable accounting software system or
used purely for tax purposes once a year leaves the
financial performance of the business to the intuition of
the management and is unmeasured. Imagine if the same
criteria were used in a sporting context.
A long jumper practises every day and believes he is
jumping well but never measures his jumps or analyses his
physical condition, training schedule, run up speed. It
would come as no surprise if another long jumper with
similar ability who monitored fitness levels, worked on the
run up and jumping technique and measured every jump would
in competition jump the farthest.
And so it is with accounting software and regular financial
control. If the numbers are produced on a regular monthly
basis the numbers can be diligently analysed and an
improved financial performance will follow but most
importantly business problems can be detected and fixed
before they become terminal.
----------------------------------------------------
Terry Cartwright, accountant and CEO at DIY Accounting,
designs Accounting Software at
http://www.diyaccounting.co.uk/ providing accounting
solutions for small to medium sized business in the UK with
payroll software at
http://www.diyaccounting.co.uk/payroll.htm for up to 20
employees