Why don't my accounts tell me whether I'm making any money?
OK - so this is a question we get a lot. It feels silly - of course your accounts should just tell you this right? But we come across some common factors which can result in you just not having a clear picture.
1. Do your accounts match your last Financial Statements?
One of the first checks we make when taking on a new client is to make sure that the accounts on your software matches what has been filed for you at Companies House at your last financial year end.
If your accountant only looks at your accounts at a year end – then it may be that they haven’t yet updated those values for you in your accounts software. If they don’t use your accounts software to prepare Financial Statements, then these adjustments may never be made.
The issue with this is that if you try and run reports after your financial year end – and those adjustments have not been made, then the numbers will be wrong.
The fix? Ask your accountant to post a journal to your accounts once they have completed the year end.
2. Who is doing your bookkeeping?
We take on lots of companies where a relative or friend of a director is completing the bookkeeping. Understandably – it’s an administrative burden that busy owner managers are keen to offload.
And for the most part – many tasks are completed well – looking after supplier payments, raising sales invoices and reconciling bank accounts.
However, we have found that often there are three key issues with an unqualified individual completing routine bookkeeping tasks:
Issues arise in the posting of salaries. Control accounts are not typically used – and so payroll liabilities do not appear on the balance sheet. Mistakes don’t get spotted – and these can compound over time.
VAT is very frequently posted incorrectly – with assumptions made about VAT which would not stand up in the event of an inspection by HMRC
Transactions may be posted inconsistently – or incorrectly.
The fix? Get someone to create some rules for you so that salaries are posted correctly, VAT defaults are sensible and that rules are in place to handle consistent posting.
3. How do your numbers arrive in your software?
This varies wildly from business to business. Some businesses rely on invoices being generated in order to ‘recognise’ the sales income. If there’s only one person who can raise those invoices – and that is the same person who is delivering the work, there’s likely to be a delay. That’s bad for your accounts, but terrible for cashflow.
If your sales numbers come in from an e-commerce route (web sales or POS) then very often this is only ‘recognised’ at the date you receive the cash – not at the date you made the sale. This may not seem significant, but if you did a weekend pop-up shop, or flash sale, those numbers may end up in the wrong reporting month. Not only that – but they’ll be less than they should be – as they’ll be recognised after deducting discounts, shipping, fees.
And your costs? How do you account for the cost of materials on a job? Do you hold stock? Do you order materials for a job? Do the costs of these line up with the related sales on your accounts?
How do you account for the cost of people? If you deliver services for people, one of your major costs in delivering those sales is people.
The fix? This is likely to be a bespoke solution for you. Book in for a healthcheck with us and we can make some recommendations for you. Alternatively, if you have a trusted accountant, ask them to help you with this during your financial year.
4. What accounts are you looking at?
A high number of the clients we take on are looking at their Profit & Loss report. Whilst there may be issues – they are familiar enough with what should appear in the report to make a sensible judgement about whether the numbers are correct or not.
A few clients are also looking at some other kind of report – possibly a cashflow report, or a business health snapshot.
Very few of our clients look routinely at a Balance Sheet. Very few people understand that the Balance Sheet describes the financial health of their business and may need some support to be able to read it.
The fix? We recommend to all our clients that at a minimum, they review their Profit & Loss and Balance Sheet at least once a quarter. Ideally - do this with someone who can help you interpret the results and set goals. Even better, add in a cashflow forecast and you have really powerful information at your fingertips.
But none of that works if the data isn’t right. It really does pay to start with the foundations.
Consider a healthcheck?
We offer a one-off service where we will meet with you to identify those concerns you have about your numbers. We’ll explore what is happening currently – and we’ll make recommendations about making improvements. We’ll write a report. From there, you could ask us to do that work – or, if you have another trusted adviser, speak with them about putting changes in place.
If you’d like to book in for a healthcheck, it costs £650 + VAT. You can book in here.