Financial disorder is disastrous for business. It does not necessarily lead to ruin, but it always increases the risk of loss. Incorrect and untimely decisions cause losses, and it is only possible to act correctly on the basis of complete and up-to-date information.
Often an entrepreneur will hire an accountant and leave to take care of the core business, only to return later with the question, “How much did we make?” Let’s break down why this model rarely leads to success.
Why an accountant won’t help your business
Sergei has a carpentry shop. Once a month, a visiting accountant brings him a printout with numbers. If you believe them, everything is fine: the balance sheet is summed up, the previous month’s income exceeds expenses, and business is booming. Like many entrepreneurs, Sergei thinks that the accountant solves all financial management issues. You pay a specialist a salary, and he will always tell you what’s what, help you calculate everything, and make decisions.
In reality, accounting was not created according to the standards of business. How does an accountant, if asked to calculate the cost of a new product? He adds up all the expenses, including general workshop expenses, depreciation of the machines, and the building. As a result, it turns out that the production of the chair is unprofitable, and the cost of it exceeds the limit. Refusal to produce a product because of inflated production costs means a loss of money for the business.
The same goes for the degree of detailing of expenditures and revenues. It is enough for government and macrostatistics estimation, but is not suitable for business decision-making.
What can an entrepreneur do to get his finances in order, if he does not have a financial advisor or analyst on staff? It is not as difficult to figure out the basics yourself as it seems, but the effect on business will be significant. And an accountant can be brought in to systematize accounting for money according to the rules your business needs.
How to organize management accounting from scratch
An entrepreneur can independently set up management accounting in a small company better than all hired employees, because he knows his own firm from within. Where to begin with systematization and accounting?
Draw up a scheme of business processes
How exactly does the company work, how does it make money, where do clients come from and what do you need to do to get them to pay – this is all your business model, which you need to break down into individual business processes.
There can be several such chains with different processes. At the same time, a company may have several lines of business. It is important to separate them in order to further assess how effective and profitable they are on their own, how much profit they bring in, and how much resources they require separately. Let’s assume that in our example, Sergey sells not only made in his shop furniture, but also products partners. Then he needs to consider them separately: these are two fundamentally different activities, and they require separate assessment.
If the accounting requires all these processes to be reduced to a single financial result, the management accounting helps to detail and separate them. Then it becomes clear at once how effective a specific direction is, at what stage there are problems and what is really important for the company.
Sergei, tired of the unclear situation with finances, took a paper and pen, outlined the work of the carpentry shop in the scheme, which begins with the search for customers and advertising, and ends with the receipt of payment for custom-made furniture. Simplified it looks like this.
Sort the types of cash flows
The resulting model should cover all receipts and payments related to operating activities. In addition to operating cash flow, the company will have two other cash flows to some extent: investment cash flow and financial cash flow.
Investment activity allows you to work even better, faster, stronger: the purchase of new equipment, repair of premises, replacement and modernization of equipment.
Purchases and repairs of fixed assets are not to be put into operating activities and transferred to the cost of production. These costs are investments.
Financial activity is raising and repayment of borrowed funds, founders’ contributions to statutory activity.
These funds also do not belong to operating activities, because they are not earned by the business, they are simply brought in and given out.
To calculate the efficiency of production it is necessary only on the basis of the indicators of operating activity. Is it profitable to produce these chairs? Yes, because the costs of its production add up to a quite adequate amount and its cost is not inflated.
This separation of flows will allow you to know the real efficiency of operating activities. If initially it is not profitable to make and sell chairs, then no loans and investments will not help the business – it is doomed. If, on the other hand, the company’s core business is effective, then when the investment and financial issues are resolved, it is possible to move on.
Maintain records methodically
Sergey, in our example, does not need to wait for the accountant to come and calculate how much was spent on this or that account. He receives information every day about what is going on in the financial backroom of his carpentry shop. When he wants to “tighten his belt,” he can do so without loss. When he plans to develop, he will know how much money to spend and on what.
Once the accounting is set up and the data are in order, managerial accounting immediately begins to answer the business questions: how much is spent on the A line, how much – on the B line, how they are interconnected, what should be changed to increase income.
Managerial accounting reveals hidden financial problems, helps to find reserves for development or cost reduction, to make balanced decisions, to systematize control and management of business processes.
Of course, management accounting is not a money button, but an important tool for business that generates this money without losing half of it along the way.