Don’t look back!
One of the many quotes bandied around by people is: “don’t look back, you’re not going that way…” Like many clichés, this one contains a grain of truth, and never more so than when understanding the difference between financial and management accountancy.
Financial accountancy is a simple record-keeping exercise that shows you a summary of what has happened in the previous year. It is used mainly by accountants to work out how much tax is due to HMRC. This process, filing your tax return and statutory accounts, and making any necessary payments, are a legal responsibility. Financial accounting is viewed by most business owners as a necessary evil with little upside for them or their company. Looked at in this way, financial accounting is simply paying someone money, for them to tell you how much money you need to pay to an impersonal organisation. There is little gain for you, simply a drain on your cash.
Management accountancy, however, turns the meaning of the word “accountancy” on its head, and will change your views about accounts forever. Management accountancy is the art of looking forward and using the figures from the past to make sense and add structure to the future of a business. Management accountancy is an incredible tool just waiting at your fingertips for you to be able to drive your business forwards.
Before the arrival of Making Tax Digital (MTD) it was possible for businesses to conduct their accounts entirely on spreadsheets or hand-written ledgers. That’s changing. To quote the Government: “HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world.” Due to the somewhat questionable ambitions of our Government we are now being moved towards using cloud-based accounting systems. The Government require us to use cloud-accounting systems that “talk” to their system, so that information relating to our tax and VAT is moved electronically via these internet-based systems rather than allowing a business owner to type a manual entry of their figures into the Government Gateway.
A cloud accounting system is nothing to do with the weather! It means that your information is stored on a large server with other users’ information and can only be accessed by people with correct permissions (passwords), where there is an internet connection. Instead of every small business having to buy and maintain their own individual server, this is done on a communal, commercial basis by large specialist IT companies. The major advantage of this is that you, your bookkeeper and your accountant can all view, edit, and add information to your accounts from anywhere in the world, at any time. No longer will you have to physically move your accounts from your desk, to your bookkeeper to your accountant in physical, paper files or email them a spreadsheet. The information is simply there when they log into your accounts package.
We recommend using Quickbooks Online as a cloud accounting system. Quickbooks software is easy and logical for a new user to work with. You can access relevant reports simply and quickly, and there is an excellent support system should you encounter issues. Quickbooks is compatible with a large number of existing IT systems and offers good packages for different levels as required. Quickbooks is one of HMRC’s recommended providers of cloud accounting packages.
Cloud accounting will cost you more than simply using a spreadsheet. It is a service which you will generally pay for monthly, and it could be tempting to regard this as simply another drain on your already tight profit margins.
But what if you change your attitude towards it? What if, instead of complaining about the Government and their MTD aspirations, we regard cloud accounting as an asset? Suddenly, we have this wealth of information at our fingertips. How many green widgets did we sell to small firms in Swansea in the past month? How many times last year did Jones and Sons pay their invoices late? Did our sales into the golfing sector increase after we ran that advert in Golfers R Us? How many suppliers’ names start with “R”?
The sheer volume of information that you find out from your cloud-based accounts package is extraordinary. The problem is that it can be overwhelming; you can find yourself lost under endless reports showing you endless figures, and it can be hard to choose what to focus on. As a basic starting point, you should have on your dashboard the following figures:
- Total sales
- Direct costs
- Gross profit
- Profit and loss
- Cash in the bank
- Net assets
- Debtors and creditors
A management accountant will help you in translating those figures into actionable information. If you can see the correlation between your advertising and your increased sales, you know whether to continue your advertising plan. If you can see increased sales in certain locations, you can assess the ability of your sales team and act accordingly.
Whether you have embraced cloud-accounting willingly or reluctantly, don’t forget to take the final step. A management accountant is like an interpreter, taking your figures and turning them into useful information. Imagine having a person who interpreted your teenager’s text-speak into real English. Use a management accountant to turn your cloud accounting figures into real and pertinent business details.