November 2


How to Use Accounting to Grow a Successful SMB

By Patrick Millerd

November 2, 2019

accounting, accounting concepts, accounting definition, accounting meaning, accounting principles

Accounting is recording the past, it’s confusing to non-accountants and the results are open to interpretation. In addition it is driven by concepts and technical rules, which vary country by country.

Sometimes called “the language of business” but to many SMB owners it’s an unintelligible “foreign language”.

So with these drawbacks how can a business owner rely on accounting to manage all the important parts of their business finance?

The Bookkeeping Accounting System

At best, SMB’s have a bookkeeper who records the day to day business transactions. Then at the end of a month, or a quarter, or a year the books get sent off to the accountant. 

At worst, the business loads all the source documents into boxes and sends these off to the accountant. Who then has to sort them out and produce a set of financial statements. An eventful process that at best takes a few weeks … or more likely months.

With the financial statements in hand and assuming that the bookkeeper or accountant doesn’t mention anything disastrous the owner assumes that their business is fine.

From experience this is not a good assumption!

The Definition of Accounting

Cambridge Dictionary defines an accountant as “someone who keeps or examines the records of money received, paid, and owed by a company or person”

That’s what accountants do. They record prescribed business transactions. Then providing they meet their accounting objectives — bank account reconciled, receipts and payments processed, books balanced, basic controls in place and statutory reports produced — they have done their job.

Why is Accounting Limited for the Small Business Owner?

1. Accounting records history. All transactions are recorded after the events take place. For a business owner to use this past information for future decisions is like looking through the rear-view mirror when driving their car forward!

2. Accountants are experts in accounting and technical stuff like tax and legislation. Their priorities and focus are about statutory compliance and tax... and history. Whereas the SMB owner’s is about running the business ... the today and the future.

3. Business owners think that accounting is a science. Not aware that hidden away there is the “art” element which makes accounting reports open to interpretation... or misinterpretation. A classic example of this is the Enron scandal. Up until the day that Enron went out of business they were “profitable”.

Regularly there are stories about major accounting frauds. A case of overstepping the fine line between right and wrong and taking the creative “art” element just a bit too far.

4. The way that accounts are created and presented is confusing to non-accountants. Some transactions reported in the profit and loss statement, others reported in the balance sheet and then others distilled into a cash flow statement. Debits, credits, assets, liabilities, income and expenditure all with their own rules.

5. Not only are the accounts historical but most small and medium business accounts take far too long to put together to be of any use. If you are lucky, days after the period end, often weeks, in many cases months and sometimes only annually for the tax man.

6. Financial accounts are based on the accrual accounting principle. While this is a clever method for matching events and making the profit more meaningful it can easily create a false impression of the real health of the business.

And we all know that businesses fail because they run out of cash… not profits.

7. When producing a set of accounts, the accountant is subject to many rules and regulations. Are the accounts compliant with GAAP (Generally Accepted Accounting Principles) which vary by country, IFRIS (International Financial Reporting Standards) or are they Pro Forma accounts? Then how else have they been further massaged to meet local tax regulations?

8. Finally, there is a vastly different perception the SMB client has of their importance to the accountant. Traditionally external accountants take on many of low fee paying clients. Who, based on their size and limited fee potential, usually languish at the bottom of a large heap.

The Solution

So, if regular bookkeeping and periodic accounting isn’t the solution, then what is?

Firstly, it’s accepting the limits of accounting as a management tool. Then looking at the options.

Traditionally bookkeepers and accountants do not look at the business as a whole but as a set of books. This is a narrow, low-level view.

To complement their accounting records the SMB owner needs the input of a skilled financial executive who understands the requirements of the business. They need a financial partner who can analyse and interpret the results. 

Someone at a higher level who assists the owner in looking forward. Asking questions, challenging, mentoring, coaching and developing tools for planning and managing the business. Ensuring that all the parts of the business are being optimised.Creating non-financial indicators that track the different aspects of the operation.

SMB's do not need, and anyway cannot afford, a full time high level financial executive. 

To carry out this critical role the business needs someone part-time who fulfils the role of a financial director (FD) or chief financial officer (CFO). A function beyond the bookkeeping, financial statements and tax scope of the accountant. 

An external position similar to that of a non-executive director. Does your business have one?

Patrick Millerd

About the author

I support small and medium-sized business (SMB) owners to drive profitability and cash flow, managing the financial health of their business through understanding and using their numbers.
Helping them build a complete management system that puts them in control.

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