“Few businesses put enough effort into understanding the numbers.”
The Office for Tax Simplification has just said that keeping simple accounts, based on receipts and expenses alone, rather than relying on more formal accounting principles, would benefit small businesses. This is just one of several recommendations the office is proposing to help businesses in their first year of trading. It’s a way to lessen the regulatory burden, all that “red-tape” that gets people so steamed up these days.
At present, these proposals are for just the very smallest businesses with turnovers of up to £30,000 a year. There are an awful lot of those out there, so I guess it is thought it will stop a lot of pointless work. Some commentators suggest that a higher cut-off should be used, so that even more businesses can avoid “proper” accounting. I don’t agree.
My experience of working with many businesses a lot larger than this, but arguably still SMEs, is that rather than reducing the amount of time they spend on their accounts they actually need to do the opposite. It is quite amazing, really, how some businesses with multi-million-pound turnovers have very little understanding of their business from a financial perspective. They often rightly focus on cash first but then leave it to their accountants to keep score at the end of the year.
More use of general accountancy principles would be a good thing for smaller businesses. I have often found that even in quite large organisations management is not completely clear about where the majority of the profit comes from and rarely does it have more than a feeling for the products, or services, that make the most money or those that make a loss.
Why does this matter? Because accurate numbers help you make better decisions. One of the reasons that businesses, of all shapes and sizes, make such awful strategic decisions is that they don’t understand clearly enough exactly what is going on in the business.
If your business is too small to have a full-time finance manager you will benefit considerably from getting some financial help to reveal, on a fairly regular basis – monthly, or at least quarterly – just what is going on under the bonnet of your business. Many smaller businesses don’t have management accounts; they just rely on the financial accounts produced at the end of the financial year – but by then it’s often too late to take meaningful corrective action.
If you are in a bigger business then don’t for one second think that you know more about your business just because you have several layers of financial administration. With such complexity comes many other barriers to understanding and while there may be lots of data there is often less information available than you will find in a smaller business. Big businesses often make the biggest mistakes for this very reason.
If you are in a smaller business and you doubt what I am saying, invest in a little more financial help, perhaps from your accountant, to prepare some monthly management accounts and you might be surprised by what you find out.