Why you need to review your accounting system set up
Your accounting system should be providing you with useful information to assist you in managing and growing your business. Unfortunately, this may not be the case.
Historically, accounting systems were set up to provide information for tax purposes, the accountant would set it up with a basic format that helped them but didn’t provide information for you, the business owner. Thankfully, times have changed.
Cloud accounting systems have completely turned the numbers upside down and now you have numbers at your fingertips that are accurate and current. The secret is to have numbers that are meaningful and in a format that provides useful information.
Take Stephanie for example. Stephanie runs a catering business. She caters for corporate functions and private functions, she does cocktail parties and sit down dinners, she also will do afternoon teas and picnics. When I first met her we reviewed her accounting system set up and found that she had all her income in one account, all her costs in one account and her overhead expenses listed in alphabetical order. A typical basic format set up.
Stephanie knew that she needed more information and that her accounting system wasn’t set up to provide it. With a few minor tweaks, she now has her income split between corporate and private, she can identify just how much revenue she’s making from each of the different types of functions she caters. That alone is allowing her to get a whole new picture of what her business looks like. Not only that, but she can see trends from month to month of where the revenue is coming from. And she decided that she would go back over the transactions from the beginning of the year and re-allocate the revenue so that she has some history to refer to.
Cost of sales.
One of the challenges Stephanie faced when we looked at her numbers was how to break down her cost of sales across the different income types due to buying for multiple jobs at the same time from the same suppliers. Rather than spend painstaking hours going through and allocating each food item to a job type, the cost of sales will remain in the one account. What she has is a detailed costing system which is separate from her accounting system so she knows what her gross margin is on each job from that system.
The other major challenge she needed to deal with was the allocation of wages across the jobs. Some staff are employed specifically for a job so those ones are easy to allocate, but the chefs and food preparation staff are harder to allocate. After some discussion, she decided to do a rough allocation of their time on each pay run to give her a better idea of what her labour costs are in each job type.
A few surprises.
As with every business where we’ve undergone this process, the information invariably holds a few surprises. In Stephanie’s case, she was surprised to find that some jobs were actually not making her much money but she did have a fairly good idea of her most profitable job type and was pleased to see that her gut instinct was correct. With the detailed information she has at her fingertips, she has the confidence to niche her business into the market that she loves.
The final piece of the puzzle was to re-allocate the overhead expenses into different categories. Namely sales & marketing, rent & occupancy costs, finance costs, employment costs, insurances, vehicle costs and overhead costs. The benefit of having expense split into categories is it provides for better understanding of just where the income is going.
At the end of the day, the power of having your accounting system set up to provide you with useful management information is in it providing you with the focus on the different areas of the business.
By reviewing each category and area of your business one by one, over time you will improve your numbers and increase your profits. Not only that, but you will have clarity and confidence about your business and feel in control of it.
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About the contributor:
Amanda Fisher fuses accounting and technology to help improve business. Amanda’s mission in life is to educate business owners on how to understand and interpret their business numbers to make informed decisions. She shares that knowledge in a fun and inspiring manner. Amanda’s easy to understand style has enabled her clients to come to grips with the numbers and use them to improve cashflow, profits and their take home. Website: http://amandafisher.com.au