Accounting Software Is the Key To Early Warning Of Problems
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All medium and large companies hold regular meetings at which the financial
accounts are presented and discussed. While all businesses have problems from
time to time rarely do medium and larger businesses actually go out of business
and if they do it is invariably because financial mistakes have been made.
Important as self employed business usually dispense with regular
presentations of the financial psoition and the ensuing discussion. Considering
the financial state of a business is a critical area that is so often missed
from the management of a small business.
Every business has to prepare a set of financial accounts. Accounting or
bookkeeping software can be used to produce the accounts as can the manual
recording of the numbers. The main objective of producing the accounts is all
too often to satisfy taxation requirements and not the financial control and
management of the business.
When accounts are prepared on an annual basis the day to day financial
management of the business is reduced to the size of the bank balance. When that
bank balance reaches a critical low level the small business will react but the
action required to fix the problem may well have been endemic for many months.
Early action is always best.
By using accounting software and the financial control it can offer the small
business not only provides an early warning system but also indicates where
management action is required. Financial accounts should be prepared by all
small business on a monthly basis to maintain financial control.
Accounting software can be a simple system of producing a monthly profit and
loss account and for many small businesses that may be sufficient as the smaller
the business the more intimate knowledge the owner has of its finances. Other
types of accounting software can produce balance sheets and with a balance sheet
the value of creditors, debtors, bank balances and assets. In larger
organisations the financial accounts will be more sophisticated and produce
analysis of all main areas of the business.
During the financial life of a business there are types when sales grow and
times when sales decline. The amount owed by customers is called debtors and the
debtor balance may grow in line with sales turnover but can also move according
to the efficiency of the financial control and credit control systems in place.
The movement in the debtor balance potentially having a critical financial
effect on the liquidity of the business.
The overall movement of the debtor balance on a day to day basis is not
always obvious and only by producing a specific total at the end of each month
can the debtor balance be viewed and questions asked to maintain strong
financial control. Slippage in credit control procedures must be tackled at the
earliest stage to avoid a serious financial impact on the business.
Purchase expenditure can also increase and reduce and the creditor balances
can increase and decline. There is a tendency in businesses not making
sufficient profit for the creditor balance to grow as the time taken to pay
suppliers is extended. Such action may be necessary and is a natural reaction
but the real cause should be addressed, that cause being an inadequate level of
The profit and loss account for a small business should not be viewed as an
administrative headache but a vital tool in the financial management and control
of the business. A monthly profit and loss account produced by accounting
software should be viewed more of a financial health check on the business.
The profit and loss account will show the sales turnover and a list of
purchase expenses producing a net profit or loss for the month. By comparing the
current month to recent previous months the trend of financial performance
becomes obvious. This is a critical function of accounting software to produce
real numbers that will indicate where action is required.
The accounting software retains previous financial information entered that
enables sales to be monitored and the effect of sales and marketing campaigns to
be seen in real numbers. Patterns of movements in costs are visible. Any numbers
produced by the accounting software can then provide the basis for management
action to either improve financial control or take management decisions to grow
higher sales or reduce costs.
By using a financial accounting system to critically review the business
finances on a regular basis provides both opportunities for sales growth and
higher profit levels but also serves as an early warning system of business
problems. Both a profit and loss account and balance sheet are definitive tools
in the armoury of the accountancy function to achieving financial control of the
business and producing the desired financial performance.
The absence of a suitable accounting software system or used purely for tax
purposes once a year leaves the financial performance of the business to the
intuition of the management and is unmeasured. If you are a sports fan and your
team mangement wa sleft to guesswork you would not be a happy bunny.
A long jumper practises every day and believes he is jumping well but never
measures his jumps or analyses his physical condition, training schedule, run up
speed. It would come as no surprise if another long jumper with similar ability
who monitored fitness levels, worked on the run up and jumping technique and
measured every jump would in competition jump the farthest.
And so it is with accounting software and regular financial control. If the
numbers are produced on a regular monthly basis the numbers can be diligently
analysed and an improved financial performance will follow but most importantly
business problems can be detected and fixed before they become terminal.
About the Author
Terry Cartwright, accountant at DIY Accounting, designs UK Accounting
http://www.diyaccounting.co.uk/ providing bookkeeping spreadsheets for small
to medium sized business at
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Article Published/Sorted/Amended on Scopulus 2008-01-14 00:11:51 in Tax Articles