As promised, in my updates I will be interviewing a specialist in any area of business, and this quarter is on the subject of accountancy. I put my questions to Libby Berg from Iceberg Accountancy. Libby works with CEOs and business owners to help identify where to focus on achieving financial clarity.
She will ask you the tough questions and hold you accountable to get you and keep you on track.
That critical friend you need to help you achieve the business and lifestyle you are capable of. If you're ready to commit to turning your potential into a reality, call her 01582 82 55 85 for a 40-minute Business Improvement Session - "I'm investing my time in your future, so there is no charge!"
In the meantime, find her answers to the questions below.
Q - If I wanted to review the overall health of my company, which financial statement would I use, and why?
As business owners, it’s important to know the key measures that are important in our own businesses. Even looking at a bank balance can be unrepresentative depending on the day in the month. The profit and loss statement, aka. the income statement shows the financial performance of the business – the income earned and the costs spent to generate it – its profitability.
The balance sheet shows the value of the business – made up of the assets owned or are owed to the business against the liabilities owed to others. As a minimum, we want this to have a positive value, although in some businesses that can take time to achieve. The best determinates of a business’s health are to identify the key performance indicators specific to that business and monitor these on an ongoing basis.
For example, these might be, the cash balance, sales revenue/turnover, sales conversion; but all of these need a context to understand if they are good or bad.
Q - What is working capital?
Working capital is the way we fund our businesses and the business’s ability to generate the money to sustain itself.
Flashback to a maths lesson……
Working Capital = Current Assets – Current Liabilities
In short, we need money coming into the business to fund the money going out of the business. The money coming in can be cash, well, bank transfer and card payments these days; but worth considering how quickly people pay the business’s invoices. The average days between raising the invoices and receiving payment are the debtor days.
For money going out, the average days the business takes to pay its suppliers are the creditor days. If debtor days are more than creditor days, then there is a funding gap. This means that the business is paying money out quicker than it is getting it in and therefore the owners/shareholders must be funding the business personally or with long-term debt, in order to just pay the normal costs.
The management of working capital is fundamental for business survival and growth. Consideration of payment terms is one aspect of this, always ensure a business’s invoices include payment terms and a due date.
Q - Can you explain what making tax digital really means to the small business owner?
Making Tax Digital (MTD) is coming and there are various stated reasons for it to be bought in.
• For small business owners, it means that they need to get organized and keep on top of their financial information.
• Embracing technology is essential, and to get the value from that technology, it is worth utilising not just for the minimal requirement levels but to utilize it fully to help understand the business better and work more efficiently as a result.
• If reviewing business financials is an annual process, it will need to become a quarterly, potentially monthly, process. Keeping things up to date is always much easier than gathering it all together once a year, but this is likely to become vital to enable MTD reporting.
Q - What is a bank reconciliation and why is it so important to do at the end of each month?
A bank reconciliation is simply reviewing through the transactions that appear on the bank statement and check them back against all the accounting entries in that period. If the business is using software then completing a bank reconciliation can be a very simple process. Another great reason to embrace technology!
By completing a monthly bank reconciliation the business ensures that:
• The financials are up to date;
• It is aware of how money is being spent;
• It is aware of who owes the business money;
• It is aware of who the business owes money to.
This means that on a regular basis there is consideration and review of all banking activity.
Q - Can you recommend a basic free accountancy package that would be an ideal start for a business owner who has previously used spreadsheets for accountancy recording?
Sorry I can’t! Mainly because I consider that it worth paying for accountancy software. If you want software that is keeping up to date and being supported then I would always point towards a paid-for software.
For me, I love Xero. There are often several ways to do things within the system so users can find the way that works for them and it has a great support function if you cannot work it out yourself. Its integration with lots of varied apps is brilliant too.