Tag Archives: financial management

Financial and Managerial Accounting Are Not One and the Same

As a business owner, you’re constantly jugging a host of decisions. Is it time to move your business to a new location? Do you need to expand your staff? Is it time to increase your advertising budget? Is it time to add a new product or service to your business’ offerings? These are not easy decisions. Fortunately, business owners can rely on financial and managerial accounting to help make them.

These two accounting methods are quite different. When you hire an accountant to perform managerial accounting tasks, that accountant will report directly to you and the other managers in your business. The goal here, is for accountants to study your business’ financial health and prepare a report that summarizes the findings in language that is easy to understand. You can then study this report to help decide if moving to a new location will boost your company’s bottom line or place undue financial stress on it.

Financial accounting is a different entity, but one that is just as important. This time, you’ll hire a certified public accountant to again study your business’ finances. This time, though, the accountant will make sure that you are correctly filing your taxes, are properly balancing your books and have a cash-flow projection that is accurate and realistic.

In short, managerial accounting helps you make the big decisions for your business. Financial accounting helps you make sure that your small business is operating in a fiscally sound way on a day-to-day basis.

The difference may sound minor, but it’s actually not. Financial and managerial accountants have vastly different jobs to perform. The end result of their reports, too, is extremely different.

If you’re debating whether it’s time to expand your business, you might consider hiring an accountant to perform some managerial accounting for you. If you’re just hoping that your books are balanced and that your expenses are totaled correctly, you’ll be fine hiring an accountant to concentrate on financial accounting instead.

James enjoys helping new accountants make decisions about their careers. He believes that managerial accounting provides accountants with a rewarding career where they get to use some of the skills that not ordinarily associated with accountants. Management accountants get to offer consulting advice and be involved in the strategic decisions of a company.

Article Source: http://EzineArticles.com/?expert=James_Wallace

Small Business Management, A Balancing act- Part One

So you have taken the plunge, and embarked on the painful, yet rewarding journey of starting you own business. With so many books on small business management, and advisors offering help, what do you do? As always the answer is never straightforward, but here is my humble contribution, to these vexing small business management questions.

 

 

 

Managing a business, is an exceedingly difficult exercise, as all small business people, only discover, after having established the business. For the most part, business management is a balancing act.

 

 

 

Allow me to expound on this balancing act. If a plumber quits his normal job, to go into self-employment he will be an expert in his chosen field, and remain confident that the money will roll in. Later on, he runs into cash flow problems, customers shortages etc. He then comes to the sobering realization, that business is not the bed of roses he thought it would be.

 

 

 

A small business owner concentrates at what he is good at, i.e. computer services, building, carpentry etc. But any business, no matter, how big or small needs an admin department, and an operations/production department. No matter how good you are at what you do, if you lack certain skills and competencies in administration, you business will constitute part of the 75 to 80% small business failure stats. 

 

 

 

You might create a workshop for you product and services, but do you have a proper administration department? Businesses collapse due to a lack of proper administration.

 

Here the balancing act comes in. Divide time equally between your administration and operations duties, as a small business owner.

 

 

 

Many new business owners cannot grasp the fact that an inadequate administration department leads to eventual business failure. This compels me to provide numerous examples to my clients.

 

Here are some to ponder on:

 

 

    • A potential customer sends you a fax or an e-mail requesting a service or product. The fax or e-mail goes missing. By the time you have located the e-mail, the potential customers have gone to the competition.

 

    •  You don’t maintain a customer list or e-mail list. You have many products and services to offer, but customers don’t know about it! You lose business.

 

    • You don’t maintain records on how much your customers owe you, and is therefore not in a position to collect.

 

    • You’re phones go unanswered, or messages are not noted from prospective clients.

 

    • Inadequate stationery (no business cards, letterheads with contact info)

 

  • You don’t maintain proper books of account, so spending and income patterns are not monitored, leading to stock and /or cash losses.

 

 

 

Jack up your admin department, to the same level of your operations department within the first three months of your new business. I am not suggesting you spend less

time on operations, only equal time on administration. That is a good start, but the balancing act  between admin and operations department goes much deeper. 

Small Business Management, A Balancing act- Part Two

As depicted in part one, business management is about balance between your admin department, and your operations department (your service or product). Both departments are equally vital your business’s survival.

 

More sub-departments, however, are necessary to ensure the efficient running of your business. The hard work, and even the fun, really kicks in when sub-departments are established. These sub departments, are not mysterious. They well known in business, but rarely implemented. It’s just that small businesses assume that only big business needs them.

 

Admin sub-Departments:

  1. Office Management: Office furniture, computer equipment, printers, faxing, correspondence, e-mail, incoming and outgoing mail, filing and storage, legal/contracts.
  2. Human Resources: Staff requirements, hiring and firing. If the business is very small this department can fall under office management.
  3. Marketing: Central files of clients, prospects, ezine publishing, e-mail lists and  auto-responders. Website, Advertising on and of-line.
  4. Finance: Bookkeeping, taxes, debtors, creditors, banking, cash management.

 

 

Operations sub-Departments:

  1. Production: The main product or service of the company.
  2. Quality Control: What is the quality of the service we render? Do we check products prior to delivery. Are clients called to verify their satisfaction?
  3. Training: If staff lack core skills, mistakes are inevitably made, which could cost your business thousands. Regular courses, internal training, and even further college studies might be needed.

 

If the preceding sub departments are in place, no further departments are necessary, be it a business with 1 owner and employee or a company employing 20 000 people.

Would additional staff be required, to run these departments for a very small business?

No additional staff  have to be employed, the owner wears different hats, in different departments. Divide time between all departments.

 

As the business grows one employee can take up, a position as “Operations Manager”, overseeing the three departments under him/her. A competent secretary can become “Office Manager” , later on she/he can assume the “Admin Managers” position.

 

Small business owners are normally bogged down in Production and Finance, to the detriment of all other relevant departments. Your excellence in your product means nothing if the product is not marketed (marketing department), you cannot market, if no proper contact or e-mail lists are maintained, (office management). And if you have a office, you market extensively, and manage your finances well, you will lack capacity without training for yourself or employees (training department). All

departments are inter linked, and equally important, whether you big or small. No getting away from that.

 

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Avoiding The Costs of a Forensic Audit

From time to time the management of finances of a particular organization, or company raises suspicion. It could be a company that you hold shares in, or a public benefit organization that you part of or donate funds to.

The custodians of other people’s funds are always held in suspicion. Office bearers and treasurers are often subjected to harsh criticism by fellow office bearers or members of a particular club.

In many instances, the criticism leveled at a treasurer, is unfounded, and normally motivated by fellow members interest in a particular position.(Normal organization politics)

There are, however, serious cases of gross financial mis-management in organizations, ranging from churches, schools, companies and even government. It remains important for members of a club/organization to be vigilant, without being petty.

When suspicions about fraud or theft surface, in organizations, the members normally call for an audit or a forensic investigation into the financial affairs of the said organization. The costs of forensic audits, can be prohibitive. And even after fraud has been detected the legal costs can spiral out of control. If the auditor is not available to provide his expert testimony in court, the accused walk free.

Forensic accounting or auditing is considered to be a new specialized field in accounting. And accountants who want specialize in this field ,enhance their skills with additional studies in forensic accounting. Hence it is so costly. Investigations into amounts as small as $20 000.00 can cost an organization as much as $25 000.00 in audit and legal fees!

To save costs, internal investigations can be conducted * Ignore spreadsheets, financial statements provided by the accused(he/she will try to deflect your attention from the problem at hand. · Verify bank statements thoroughly · Reconcile receipts to cash banked · Add up all the totals of petty cash expenses, and compare to petty cash deposits advanced. · Most thefts/frauds occur at the cash management level of finances. So scrutinize cash payments carefully. · Establish if paid invoices are legitimate. Check the suppliers registration and address details, give them a call. Many fraudulent invoices appear valid, and are paid, but could be a “dummy company invoice”. · An invoice could look real, the payment made, but were goods delivered.? Common areas are quantities of inventory or stationery ordered, but far less than the original order could have been delivered. Check your inventories. · If findings lead to definite proof of theft or fraud, reporting the crime to the police should be your last resort.

Confront the alleged perpetrator in a diplomatic fashion. I am in no way condoning the serious crimes of fraud and theft, but believe demanding a repayment of the stolen funds, plus interest, could be a better option. The frightened accused, would invariably be prepared to cooperate. Disciplinary steps should follow. Only if he refuses to cooperate, should legal steps be considered.

I concede, victims of a fraud or theft would feel hurt and betrayed, but my advice is borne out by numerous experiences where fraud cases have dragged on forever in courts, only to be thrown out after years by a judge, for “lack of evidence”.

Of course the approach would be different where millions are involved, but for frauds and thefts of a few thousand dollars, engaging an auditor or an attorney, is just not worth it.

 

 

 

 

 

Contact the Author
Sean Goss
sgafc@mweb.co.za

Preparing Financial Statements From Incomplete Accounting Records

For many small businesses, record keeping can be a nightmare. Worse still, can be when financial statements are required and limited information is available. Small businesses are compelled by tax and banking laws to furnish financial statements on request. So there is no getting away from financial statement preparation.

Financial statements are hundred percent reliant on accurate records. So a bookkeeping and accounting system is imperative. Full advantage is not taken, of bookkeepers and accountants offering their services, it has been proven that up to 25 percent to 30 percent of small businesses still don’t engage the available accounting services on the market.

Invariably records would be incomplete in such a business. Creative methods, such as those used in forensic accounting or internal auditing will have to be enforced to reconstruct the records of a business. It is an arduous task but can turn out to be very fulfilling, when a clear picture emerges of the true state of the business.

Steps 1. Locate all the information of the businesses. Documentary proof of sales, purchases, bank statements, contracts, notes and correspondence. 2. Determine if a system of recording transactions is in place. 3. Verify if a computerized or manual system is being used for the recording of data.

Now the fun begins. Opening and closing debtors, creditors and bank balances will be extracted. Should not be too difficult, since every small business owner knows exactly how much money he/she is owed (debtors), and how many outstanding bills he/she has (creditors), and off course how much money is in the bank.

By adding the debtors closing balance, and the verified debtors deposits and payments, and deducting the opening debtors balance (payments+ closing debtors-opening debtors) the periods credit sales are determined.

Similarly the creditors balances are used to determine credit purchases.

The bank statement is then evaluated to determine cash sales and cash purchases. Cash invoices and bills are also checked and added to sales and purchases.

All expenses are then verified by tabulating bills. Salaries are checked. If time is lacking, one-month verification on salaries, rent and other recurring items are sufficient. Just double check if no increment or escalation occurred during the period. The one-month verification multiplied by the amount of months would equate to the full expenses for the year. The income statement can now be concluded.

The balance sheet items can be verified by separating cash asset purchases from normal expenses. All assets purchased on lease can be split between the liability and asset portion. Debtor’s creditors, and cash/bank balances (from balancesabove) are added, and we will have an asset and liability statement. Asset less liabilities will produce an equity figure, and voila, the balance sheet can now be finalized.
Check again how equity (capital funds-less profits), tie up to income statement profits. Source third party opinions to verify the integrity of figures, i.e. creditors for balances due, deeds and motor vehicle registration offices for value of assets etc.

It is no easy task, and figures will not be 100 percent accurate, but a fair picture will emerge of the financial position of the business. This article is not conclusive, but can give the business owner some insight to the kind of procedures his accountant will follow. After preparing the first set of financial statements from incomplete accounting records, the business owner should be strongly advised, to invest in the services of a bookkeeper or an accountant.

 

 Contact the Author
Sean Goss
sgafc@mweb.co.za

 

 

 

Is Your Business Loan for Expansion or Consumption?

The biggest concern with most budding entrepreneurs, is the availability of start up capital. A wide array of organizations, are availing funds to small business. Business loans  however, are becoming more difficult to secure. Many determined entrepreneurs have managed to scrape the necessary funds together, and build their businesses without any outside loans or funding. They however, are in the minority. Other small businesses, on the other hand, still failed despite the injection of loans into their businesses.

Many businesses, successfully securing loans have squandered their loans on irrelevant luxury items and assets not useful to the business. Lending institutions are continuously tightening the lending criteria, to avoid problems of this nature.

This article will not focus on loans failure statistics or debate whether a business loan is indeed necessary. Here I will attempt to address the proper utilization of a business loan for the growth of the business.

Funding of a business can come in various forms, i.e. loans from government, loans from a bank, second mortgage over property, equity/venture capital, loans from family or savings or investments.

When business owners calculate their requirements, they invariably add in their inventory and overhead costs to their capital requirements, such as machinery and equipment, and arrive at a total loan requirement, comprising capital and working capital requirements.

If more than 40 percent of the loan requirement is for working capital, the loan would basically fund consumption and not expansion of the business. A build-in working capital requirement in a loan is understandable. But a high working capital component reveals nervousness, on the part of the business owner, in dealing with future uncertainties. Business is all about risk, so a loan cannot cover dangers that the business will inevitably face!

Working capital and day-to-day expenses should preferably be funded from current revenues, not loans. This is a contributing factor to loans being rejected. Since lenders are averse to funding operational costs, from loans. In the same way as loans and credits cards are dangerous to funding living expenses, so are loans used for the operational costs of a business.

Apart from the danger of utilizing loans for consumption, there is a basic reason why lenders prefer to finance capital equipment, as opposed to overheads. The reason is quite simply, SECURITY! A business that goes belly-up, can either return financed assets, or the lender can attach these assets to defray any costs incurred, by the lender. No recourse is available to the lender, if the bulk of the loan was applied to overheads.

When writing a business plan, for a loan, the business owner should clearly list assets required, its value, and importantly the projected return on that investment. The focus of the loan requirement should always be on capital needs. Many institutions will gladly provided a 10 percent working capital component inthe total loan, if the business plan is convincing. Another advantage would be the “own contribution”, by the entrepreneur. The higher the own contribution, the better the prospects of securing the loan.

It is advisable that any business owner should engage the support of financial consultants and accountants, not only prior to the loan application, but after securing the loan as well. A frugal plan, and budget should be drawn up to guide the business, as well as monitor the utilization of the loan. The budgets should also be split between normal income and expenses, and capital budgets. This will ensure that the business derives maximum benefit from the loan, boost revenues, so as to ensure that the loan commitment is settled speedily, hopefully before expiry date.

 

 

Contact the Author
Sean Goss
 
sgafc@mweb.co.za

How to reconstruct a Bank Statement

A challenging part of accounting can be the bank reconciliation. To some bookkeepers recons are fun, to others, it is nothing but a tedious bore. Whatever way we look at it, it is a function of accounting that must be done. Checks that are processed late, can bounce, if ample provision for it has not been done in the books of the business. But recons, or “check book balancing”, is equally important to none business people.

The bank recon is simply the “marrying” of a balance on a bank statement, on a given date , with the balance in your cash book.

Bank charges are added to cashbook payments, outstanding check are deducted, and outstanding deposits are added. Standing or debit orders are added to payments and hopefully the balances will agree. Business should budget for payments from cash book balances, not bank statement balances.

Many numerate people have a grasp of bank reconciliations to some degree. There are occasions that bank reconciliations cannot balance. And this could be ascribed more to missing information, than the skills of the person performing the recon. In such instances the banks statements have to be reconstructed.

A bank statement for a particular period could consist out of several pages depending on the size of the entity concerned. If one page is missing, the reconciliation will not balance. Transactions on the missing page obviously impacts on the outcome of the bank recon.

What if you aware a page is missing, and is in no position to contact the bank for fresh statements. Banks normally archive, statements older than 6 months, and it could cause delays, when copies are requested.

Herewith some guidelines on reformatting your bank statements.

* Check the sequence of the bank statements.

* If a statement is indeed missing, the closing balance, on one page, would differ from the following statements opening balance. Calculate the difference.

* If a difference has been established, scrutinize your check book stubs, to tie that amount to a check number not identified on the statement.

* Verify, recurring payments, such as standing orders, for prior months, and check if that amount cannot be linked to the missing information.

* List all payments, you have the checks stubs, and standing order amounts.Lists all deposits.Add deposits to opening balance. Deduct all payments and compare to final balance. The variance could be unrepresented checks, or bank charges.

* Some bank statements give precise detail on how many checks were processed and the total amounts on the first page. This simplifies the process.

Bank reconciliations can turn out to be challenging, but fun.

 

Author: Sean Goss  sgafc@mweb.co.za

Setting Daily Cash Collection Goals or Targets

Open any book on business, or surf the net, and you will find information on goal setting and its importance. I am 100% in agreement with the setting of goals, but sometimes find fault with the distant or long-term goals. We set goals for the end of the year, or the month. Effectively, deferring the goal.

 

Long-term goals absolve its creator, of any immediate responsibility. So he/she goes into a “dream-like” state, hoping to accomplish the goal at month-end. When the goal is not attained, frustration sets in, leading to no further goal setting, and leaves the business owner in a rudderless state.

 

Most businesses set sales targets for a year or month. The sales will be recorded in accounting books, and substantial amount of those sales could be credit sales. So hitting the monthly sales target is excellent, but sales driven by targets would invariably be “credit sales”, and our old problem rears its ugly head again, CASH FLOW!

 

The conventional accounting for sales should be outsourced. The owner should be more hands-on with “CASH ACCOUNTING”, and set cash collection goals.

Try this cash goal setting strategy. Break down that huge goal of R 50 000 sales for the month, into manageable  “bite-sized chunks”, of say R2500 PER DAY! (That is 20 working days; a month has about 22 to 23 working days).  It prompts you into action immediately. From the moment you wake up, you have to work towards hitting your R2500 target at end of day.

 

And why not shift the focus away from a sales target of R 2500.00 to a Cash Target of R2500! Sometimes your cash and sales target would converge (Cash Sales), but as any good accounting student will tell you, it’s not the same thing.

 

Your cash target now becomes that debtor’s age analysis, not clients,(unless they cash clients off course) with outstanding payments, to your business. Plan your day, with only cash in mind, and embark on shrewd methods to extract cash from your debtors. Opt for a cash sale, rather than a credit one. Insist on a deposit, for a major job. If you have a credit card utility machine, go ahead and swipe that card!

Your deposits, credit card sales settled by bank that day, cash sales and cash collected, constitute your daily cash takings for the day.

 

Follow through by creating a spreadsheet with the following columnar sections

  • Checks Collected
  • Cash Collected
  • Credit Card payments settled
  • Direct transfers to the bank

 Another header in bold on your spreadsheet, should be your daily target. Provide columns for dates, and an important comments section. On the” comments section”, notes are made as to whether the target was attained or not. Be disciplined. You either hit a daily cash target or not. No “ifs” “nearly” or “buts” here.

 

SET YOUR ANNUAL CASH TARGET, and divide your annual target by twelve, and then by 22 to 23 working days, and you arrive at your daily cash target. Working

 

pro-actively on a daily target and attaining it everyday, equates to a monthly and annual target accomplished.

 

If you exceed your daily target by an amount equal to your daily target, you cannot relax the following day, and regard the excess amount as the next day’s target. It is another day, with a new target.

 

Implement this method, and see your cash inflow go through the roof! On a cautionary note, all cash should be banked, and don’t forget to save some of the cash!

 

Author: Sean Goss  sgafc@mweb.co.za

 

 

IFRS and Fair Financial Statement Presentation

Many accountants believe that they are doing an excellent job when preparing financial statements. Many financial statements however, fall far short of the requirements of generally accepted accounting practice, as well as the new International Standards For Financial Reporting (IFRS).

 

Unfortunately, there is no escaping fair presentation, even for small business. All businesses, be it a huge corporation, or a small business is compelled by laws to present proper financial statements.

 

Currently, for small and medium sized business, a financial reporting model has been published by IFRS, for discussion, by its affiliate members within the global accounting community. In as much, as this format will be a refined to a less complex guideline, fair presentation will not be done away with.

 

Fair presentation is even more important in the small business environment than in the bigger corporate market. GAAP, as it was always understood was meant to draft financial statements in such a manner that it could be understood and interpreted by lay people on the street.

 

GAAP has further been enhanced by additional prescriptions coming from IFRS, so as to ensure that financial statements are a) reasonable and b) uniform with applicable standards internationally.

 

Ironically GAAP is not enforced at final financial statement preparation, but at initial entries into the books of account. If proper accounting standards are not applied at this level, all subsequent reports will result in an inadequate disclosure in the financial statements. A perfect example would be cash advances received, for work/projects to be completed.

Wrong                                                              Dr                              Cr

Bank                                                              XXXXX                                                                                        

Income                                                                                          XXXXXX

 

Correct

Bank                                                              XXXXXX

Received in Advance (creditor)                                                  XXXXXXX 

 

If the project in question is not finalized at financial statement preparation date, and it was wrongly entered, the GAAP becomes questionable.

 

 

During the entire accounting process, vigilance is necessary, to ensure that entries are written up in a manner, to enable application of GAAP.

 

Another minefield is fixed assets and liabilities.

Fixed assets are depreciated according to useful or economic life, not tax rates. Assets should also be revalued from time to time (which rarely happens in small business), the importance of a fixed assets register, can therefore not be overlooked.

Long term Liabilities should clearly define whether they interest bearing or non-interest bearing. Interest bearing borrowings should be split between interest and capital charges, clearly disclosed on the notes of financial statements.

Yet again, proper bookkeeping is essential, with an amortization schedule throughout, specifically for the interest and capital portions of the loan. 

 

This article barely scrapes the surface of fair presentation and all the amendments being issued, but hopefully some light can be shed on some of the most salient points.

 

Final financial statements, complying with GAAP and IFRS, is very neat in appearance, and makes it much easier for the users (shareholders, owners, banks), to traverse the complicated information presented therein

Finding The Ideal Accounting Firm For Your Business

The services of accountants are becoming more expensive and scarce. Many medium to large accounting firms around the globe have collapsed due to disciplinary procedures and blatant corruption. Innocent businesses lost their accounting firms due to investigations from authorities into malfeasance related to other corporations.

 

The admission to the industry is becoming tighter, with rigid exams, and even harsher requirements for practicing accountants and auditors. The pool of available practicing accountants is becoming smaller as a consequence of   regulation.

 

It is nevertheless, not impossible to find the ideal   firm. I emphasize, firm, not an individual accountant. Respective bodies stringently control an accountants advertising, but most of them are not precluded from advertising in the Yellow Pages or newspapers.  A website for an accountant is the most viable form of advertising. So if you search through your Yellow Pages, newspapers or a search engine on the web, you will find a number of firms offering their services to the public.

 

Follow this guideline when selecting your firm.

  • If you a small to medium business, identify a small to medium firm.
  • Opt for a firm or company that is registered. The number of partners is immaterial.
  • Professional Practice/office. Offices with proper infrastructure, such as modern computer equipment, software, fax machines, telephones, and Internet and e-mail facilities.
  • Library. Does not have to be a huge library, even a bookcase with relevant reading material on tax, GAAP, labor, will suffice. This  indicates that the firm keeps up to date with legal developments.
  • Archiving. Proper storage facilities for your documents and files.
  • Working, permanent and operational files, is a good yardstick to gauge professionalism.
  • Skills. Are the partners indeed skilled and qualified to render the services advertised?
  • Scope of services. Accounting, tax, business advice, valuations, investments, auditing, negotiation and other financial services under one roof.
  • References. Check references with existing or previous clients of the firm.
  • Pricing. Fees   vary, but compare fees to the quality of service  and swiftness in delivery of assignments and projects. If you happy with the service levels be prepared to pay the fees, excellent service, comes at a price. Rather negotiate rates, than to opt for a cheaper firm.

 

A professional firm will prepare an engagement letter(“agreement”). Insist on such an agreement before mandating the firm for work. Such an agreement should clearly stipulate the kind of services offered, the rate and terms. This agreement can also address potential disputes.