As small business accountants we often come across business owners who find that accounting is a foreign language that will never makes sense. And the fundamental fault for this lies in the person presenting the information – the small business accountants.
The language of small business accountants is simply a language. And the better the small business accountant the more fluent they are in that language. If your small business accountant simply does not understand the subject matter at hand – then you have no chance.
What are the golden rules of accounting?
1. Accounting is the language of business
Business accounting is the only universal language – whether you are operating a coffee shop in Brazil, a mine site in Newman or a technology start-up in San Francisco they will all adopt double-entry business accounting to explain the movement of money within their business.
And double entry business accounting was created by Leonardo De Vinci (with the primary works done by Luca Pacioli). So it is fair to say that double entry accounting has been around for a long time.
So if somebody is trying to create a different way to explain how money moves in your business – run.
2. Your profit and loss is not enough
The profit and loss in your business does not represent your cash flow. As a business accountant it is important to show how the profit and loss has been invested in the business and how that impacts cash.
Importantly the profit and loss shows how much money you make over time – and the balance sheets for two different points in time show how the profit has been invested.
3. Timeliness is important
Many business accountants are perfectionists – and perfection often comes at the price of success.
Ensuring that you obtain information that is current and relevant to you that is mostly correct is far more important than getting information that is perfect, old and irrelevant.
The use of cloud accounting by smart business accountants has changed the face of business accounting through Perth and beyond. Getting good clean source data for higher level analytic functions has made the provision of quality business accounting services significantly easier and more cost effective.
4. Accounting is about comparisons
When you engage business accounting services it is important to create value. And simply looking at a single line item in isolation for a business is pointless.
If you knew that one of our clients generated sales of $5m in a month you have no idea if that is a “good” or “bad” number. However if you knew that the $5m in sales create a net profit of $4m from a $500k investment you are in a position to understand the importance of a number.
The same comparison is achieved by comparing the analytics of a business through a profit and loss, cashflow statement and balance sheet – and if you compare that position together with a three-way forecast you are able to intricately understand the movement of monies and investments within a family business.
5. The balance sheet must be clean
If you see a balance sheet with a large number sitting in as “suspense” or “contra” you know that the business accountants in Perth have not yet finished their job.
If the balance sheet has a large number sitting in it that does not make sense – the most likely outcome is that the unknown number will hit your profit and loss – easily turning a happy profit into a big loss.
So simply making sure that your Xero file does not have bookkeeping mistakes will make it significantly easier to digest and comprehend.
How can I understand business accounting better?
The starting point to understanding your business accounts better is to understand for what purpose your business accountants have prepared your business financial reports. If your accounts are prepared simply to keep the Tax Office happy – you do not have a business accountant – you have a tax agent.
Income tax and tax structuring is important. However taxation law is created by politicians trying to raise government revenue – business accounting is about showing reality. Your Perth business accounts should be focussed on showing business results – not how much tax you should pay. So keep a lookout for tell tale signs including your fixed assets register and your tax depreciation schedule remaining the same – or if your list of expenses are just sorted by alphabetical order and not by the type of cost.
As an example – superannuation and wages are effectively the same cost of employment. So putting superannuation next to “repairs” does not give the business accounts much insight.
The next step into understand business accounting better is to approach your family business accountants and engage with them in the presentation of the reports. The person providing business accounting solutions has the job of making it easer to understand your business accounts – not the other way around. So giving your Perth business accountant, and your CFO, the time and space to explain the format and function of your business financial reports is important to getting an overall understanding.
Benefits of business accounting
The range of benefits for understanding your business reports and keeping good clean data is far too much to explain here. However, the following are clear benefits:
1. The bank is much happier
The business should be seen as a business partner with your family business. And the accounting reports will allow your bank to properly understand the movement of money within the business and how it is operating.
The clean presentation of small business accounting information is important as your bank manage will often not be making the final say when looking at your business. The reports showing how the money is moving will be of primary importance when doing this review.
2. Investors find it easier to buy
If you come to sell the family business: the purchaser will most likely spend a significant amount of time investigating the family business accounting history and movement of money. And the clean clear history of data will give a possible buyer greater comfort in how reliable your business is and how much confidence the buyer can place in your business.
3. The ATO is happier
If your small business accounting reports (or middle business) are clean and easily understood the reconciliation of business reports to your taxable income is also much easier. And with a tax attitude of trying to collaboratively working with taxpayers the presentation of reports that reconcile and can be understood and significantly easier to comprehend and analyse by the ATO than if the family business accounting reports are simply incomprehensible.
4. You can evolve more easily
As time grows and your business grows from start-up to mature your family business accounting needs will grow as well. Items like stock control, sales lines, treasury and managing fixed assets will become more important.
If you have great family business accounting reports already the next step in evolving your cloud accounting software program to a full CRM will be a much more simple process rather than having to “reinvent the wheel” with a clunky accounting system that is effectively full of rubbish.
5. Tax forecasting and planning is simpler
Tax forecasting is all about getting a hand on the money now so that strategies can be engaged in advance (it is too late once the year has finished). So if your family business accounting reports are accurate you can understand the tax benefit and tax cost for doing things at certain times – from declaring dividends to buying equipment or paying bonuses – the business tax planning strategies are much easier with great business accounting reports.
6. You can control what is going on
In a micro-sized business you can most likely remember straight away every transaction. However as your business accounting needs grow to a small business and then to a middle sized business the ability to control everything falls away.
Having clear family business accounting reports with business accounting allows you to understand and control the money in your business.
And with that deeper understanding of control – you are able to understand the financial cost of making a decision before you make it.
Getting great family business accounting reports is a critical step to growing a great business. And getting a firm that has a single focus on family businesses – from a firm that has started a business – is a natural choice for first generation business entrepreneurs. Given our track record in entrepreneurship together with our deep real world tax structuring expertise – why not give us a call?