Client Journey — How to get your accounting processes back on track

Sound bookkeeping and accounting practices are crucial to the success of a business, but too often are neglected by small business owners. The company’s financial records are the ultimate scorecard for any business. 

Why is accurate financial information so important?

Regular insolvency statistics from the Australian Securities & Investments Commission (ASIC) indicate that “poor financial controls, including lack of records” is the third most common cause of corporate insolvency in Australia. But this actually understates the problem: The number 1 cause of insolvency is inadequate cashflow and the number 2 cause is poor strategic management of the business. It is pretty clear that without sound accounting practices, cash flow problems are likely to arise and its likely to be impossible to manage the business strategically. 

The consequences of poor accounting practices can be summarised as: 

• An impaired understanding of the business’s true financial position and performance. The owner may not even be aware that there is no money in the bank until they can’t pay a bill — “If you can’t measure it, you can’t manage it”. 
• Lack of ‘real time’ financial information. Often small businesses only wait until their taxes are due to forward their financial information to their accountant. And even where that information is accurate, it is inherently historical and it may be too late to make the changes that accounting records reveal to be necessary. 
• The inability to properly implement a business strategy. There need to be KPIs in place for the business, indicating what the business needs to do in order to succeed over the long-term. And some of these KPIs need to be financial in nature, such as KPIs relating to cashflow (e.g., quick and current ratios) and debt servicing (e.g., debt-to-equity ratio).  These financial KPIs become ‘guardrails’ to track progress of the business.
• Tax or compliance penalties. Poor financial recordkeeping runs the risk of not meeting tax and employee contribution obligations (E.g., PAYG, payroll tax, and employee superannuation payments). Furthermore, if the business does ever go into a formal insolvency process, the first thing the liquidator/voluntary administrator/restructuring practitioner will do is ask for the books. Today this means taking over the company Xero account. If the books are not in order, it is far less likely the insolvency practitioner can achieve a good outcome for the company. From the director point of view poor books will be likely to prolong an already painful process (of liquidation). 

What causes poor financial recordkeeping in businesses?

While poor financial recordkeeping and accounting practices should not (as such) be recognized as a cause of financial distress in businesses, we need to know why this is such a contributor (or at least a symptom of insolvency). In our experience, poor financial recordkeeping has various different causes, including:

• Limited time/money. Many business owners want to focus their scarce time on activities that they perceive as revenue-generating. This means that accounting processes can go on the backburner indefinitely. Similarly, the business may lack the resources to have dedicated accounting staff (this lack of crucial resources is the key reason why running a small business can be much harder than running a large enterprise). 
• Lack of interest. Unsurprisingly, business owners tend to be more passionate about their core business activity than back-office functions like financial recordkeeping. Small business owners are usually technical experts and entrepreneurs by nature — not bean counters. Accounting can feel like a chore, and easy to sacrifice in favour of more exciting business activities. 
• The ‘compliance perception’. Accounting is perceived by some as something that just has to be done, not a value-add for the business. This means it tends to get de-prioritised. This perception isn’t helped by most tax accountants, who tend to be more reactive rather than proactive.
• Lack of knowledge/complexity. Some business owners don’t realise how easy it can be these days to keep excellent financial records with accounting software.  Or at least can be observed that using online software (like Xero) is much more efficient today than server based software of the past or even manual spreadsheets of yesteryear. 

What steps should businesses take to improve their accounting practices?

While many small businesses can feel intimidated by the task, it is actually relatively easy to stay on top of financial recordkeeping. The key tasks need to be:

• Investing in the right accounting software. Xero, Quickbooks, Freshbooks and other accounting packages each have different services and pros and cons (e.g., Xero allows multi-currency invoicing but the others do not). It is important to choose the software that is right for your business. 
• Get professional support (and not just with taxes). It may be worth having a dedicated bookkeeper to enter data and reconcile accounts (consider a sub-contractor to save on the cost of an extra employee). Similarly, if you are producing products you may wish to go beyond purely financial accounting and have cost accounting in place to keep track of the true cost of products. 
• Prioritise periodic ‘self-audits’ of accounts. Even where you have dedicated staff to take care of record-keeping, it is worth setting aside specific time on a periodic basis (e.g., weekly or monthly) to review the books and see all that is in order. 
• Set a budget with financial KPIs — these will be the ‘guardrails’ to help keep the company on track. Read more about setting up a budget for your business in our Three Factor Budget Guide. One key rule is that even if your cash flow projections change over the course of the financial year the budget will not change. This allows you to measure your KPI actuals against targets. This is a very useful scorecard for any business. 

The journey forward with books in order

Handling small business accounting properly is easier than you might think, with the assistance of software and the right prioritisation of financial information within the business. Beyond keeping tidy financials, you need regular monitoring of financial KPIs, linked to your work pipeline to see that everything is on track. These financial KPIs need not be set in stone, and can be altered over time to best reflect the operating situation for your business. One key rule of any business is that once it sets its annual budget this will not change – that gives the equity owners a general framework to measure against.