Are you getting the most from your accounting systems and personnel? Do you trust the data to be accurate and available when you need it so that you can make important business decisions?
If not, then follow these 5 steps, so you can run your business smoother and more cost effective than ever before.
Step 1: Set up Internal Accounting Systems & Controls:
Why do big companies have documented procedures and financial controls in place? The same reason small companies should – to ensure that you are not missing out on any deductions, that you are invoicing all your work and that all your customers are paying you, to ensure you are paying your suppliers (and not twice!), to ensure your staff are being paid properly and that all of your statutory obligations are being met. That is to ensure nothing is slipping through the cracks and when the tax man comes knocking, he will be satisfied with what he finds.
Step 2: Set up Xero Effectively:
If you want to analyse your businesses performance, you need to be sure your accounting system is set up and capturing your information in the right format from the outset. The starting point is having your chart of accounts set up properly, particularly your Income & Expense accounts. It is important for you to be able to measure and monitor your Gross (Trading) Profit (Sales less COGS) as well as your Operating Profit (GP less Overheads) and your Net Profit (after all other income & expenses).
Why? Because each area can harbour different problems that can be disguised or overlooked if they are not analysed separately and accurately. You should also consider the use of other reporting tools built into these systems such as job and departmental costing/reporting. You may need to be able to “drill down” further to find out what parts of your business are doing well and what areas need improvement. You may be very surprised by what you find! At least you will have better information at your fingertips so that you can start making informed decisions.
Step 3: Ensure your data entry is accurate and efficient:
The saying “garbage in is garbage out” couldn’t be more to the point here. If the information you or your bookkeeper is entering into your accounting system is not being allocated accurately, then your accounts will be pretty much useless. As we have touched on, big companies are fortunate enough to be able to afford a CFO to oversee what they term the “integrity of their General Ledger”. Without GL integrity, you are doomed. A good starting point is to overview your P&L every month and ensure it “looks” reasonable (i.e. a sensibility check if you like).
Further, you need to make sure your Balance Sheet accounts are ALWAYS reconciled. This will pick up the majority of potential mistakes and problems, however the best way to avoid costly errors is to have someone qualified oversee your accounts. Also, make sure someone qualified is preparing your BAS returns – it is not as simple as printing the BAS link report and writing those figures on your BAS!
Step 4: Forecast and plan for the future:
The next step in ensuring you have “Best Practice Financial Systems” in place in your business is to have a plan you can easily update to take into account changing conditions. Why budget? Failing to plan is planning to fail! The starting point is to set a 12-month Profit & Loss budget. This will outline how profitable you expect your business to be and how much you expect to earn and spend. This allows you to see a comparison each month and an opportunity to ask why your actual results are different from your budget, and to then make the necessary corrections.
Following on from this, you should have a cash flow forecast that will tell you when you expect to be paid and pay for the income & expenses you have outlined in your Profit & Loss budget. Furthermore, your cash flow forecast needs to take into consideration the timing of delayed payments such as:
- Income tax
- Employee entitlements including annual/long service leave & superannuation
- Loan repayments (principal)
- And any new asset acquisitions you need to plan for
You should also factor in “drawings” if you have not factored in a salary for yourself in the Profit & Loss budget. It is very important to understand the difference between profit and cash flow as there can be large timing differences between the two which need to be planned for with sufficient working capital. It is very easy, particularly for a rapidly expanding business, to quickly run out of cash, especially when tax payments are not properly planned for.
Finally, your cash flow forecast should be flexible enough to allow you to easily update it on a monthly basis so you always know where you are heading and are confident you will have the funds you need when you get there!
Step 5: Monitor and analyse performance:
Assuming the previous 4 steps are taken care of, the last step is to make sure you are monitoring your businesses performance on a regular basis. Time is of the essence here. There is no use analysing financial information that is months old as by then it might be too late. You need accurate reports, but on a timely basis.
Firstly, identify the Key Performance Indicators (KPIs) of your business and then measure them over time and against a budget. This will enable you to monitor trends and identify potential problems early enough and be able to make the minor adjustments required to get back on track or stay on track to your goals.
This unique process will arm you with everything you need to eliminate headaches from your accounting process and ensure you can get the information you require to manage and grow your business.
After you get this ‘best practice’ accounting system working for you, it’ll be like a mobile phone, car or email: you’ll wonder how you ever managed without it. It has changed the lives of many Adelaide business owners, and it can change yours too – just give us a call on 8471 7007 or contact us via email and we’ll show you how.