The Need For Understandable Information
Business owners are the bosses that run the show. They have legitimate goals to grow their businesses and maximise their profits. They achieve their goals by being entrepreneurial, by having no fixed working hours, by having a vision and by acting on impulse.
In order to achieve their business goals, they need a reliable way to measure activity and progress. They need to be able to make comparisons of the business performance with previous periods, with industry and with economic yardsticks. Without these measurements and comparisons they wouldn't know how well or how badly their businesses are performing. And of course, they won't be able to steer their businesses towards achievement of their goals.
How can performance of the business be monitored then? With information. Where can they get hold of that valuable commodity then? In the business accounts of course. Or, is it? (If you would like to know more on how you can turn the accounts into a useful practical tool to achieve your business goals, please click here).
Accounts are prepared for two reasons. The first (and disliked by business owners as it is imposed on them) is a compliance one, for submitting accounts to the taxman and for other statutory purposes (e.g. company accounts are required by Companies Act to be filed with the Companies House).
The second and most important is what we just mentioned above: so that accounts are used as a business navigation tool. To provide the business owner with that vital information that he can't do without in order to keep a constant eye on the progress of the business and make decisions to correct errors or take advantage of positive signs.
How is that possible?
We have stated elsewhere that no business is identical to another. Each business has its own characteristics, needs and requirements. Each industry has its own critical, significant and more relevant areas, the development of which determine success to a great extent. And it is also true that very few succesful businesses look anything like their original incarnations - evolutionary change is inevitable.
For example, in the recruitment industry some of the most important areas are the advertising and telephone budgets. In a business that manfactures chemicals for industrial use and has a mobile network of salesmen, the higher the travelling expenditure the higher should be the sales because salesmen travel around to find new customers and keep existing ones happy.
The first step is to carefully identify those critical areas unique to your business, which have a direct impact on growth. Then those should be watched closely on a ongoing basis. The correlation between areas which affect one another should be understood to enable conclusions to be drawn and action to be taken as the success of the business largely depends on them. As an example, you should keep a constant eye on the relationship between your telemarketers' salaries and the number of sales closed to assess their productivity over time. If productivity has been reduced, what are the reasons? You may need to give more incentive to your front line staff or get rid of some weed...
Accounts prepared for the management should be limited to a few pages and include constructive comments focused only on material variances. They may not be as effective at curing insomnia but they are more likely to be the basis for pragmatic business decisions.
How easy is it for a business owner to understand the information in the accounts and thus use it effectively to exercise control in the way outlined above? The problem is that, unfortunately, accountants (being the preparers of those accounts for business owners) tend to speak "technical". This is a common problem with other professionals too like doctors, lawyers etc.
It's a pity accounts do not come in an understandable format. Accounts are a very important and valuable document. They present the financial position and the results of a business. But, as they are prepared in figures and not in plain and understandable narrative text, their value is hidden. Figures are symbols and as such they need to be explained, they need "translation".
But, business owners are not accountants and should not be expected to act like accountants.
Although some of them do, not all business owners have the required foundation and knowledge of accounting to be able to "read" accounts, so that they can use them for the purpose of making easier and faster decisions . Even if they do understand accounting, it would be very doubtful whether they would actually have the time to spend towards "translating" accounts and concentrate on strategy and longer-term business development when they are already so busy being the centre of all business processes and running a busy life!
Business owners sometimes are so buried in detail including generating and retaining new business, actually providing the service, interviewing new staff and dealing with suppliers that it is very unlikely to have the freedom and clarity of thought to focus on the bigger picture!
Regrettably but inevitably, they need some sort of technical support.
And guess who is better positioned to step in and provide that support? No doubt about that. Accountants are not just bean-counters or form-fillers as some people think. Accountants spend many years studying these subjects an acquiring experience with many businesses after they take their professional exams.
So, let's summarise: Information included in the accounts has to be conveyed in an understandable form if it's going to reach home for its intended purpose. Otherwise, it will make no sense and be of no use.
Business owners pay handsomely to have their acounts prepared and their books written up. And in exchange for their money they should be able to get understandable information.
How can the information be given if it is going to be understandable? There are many ways. One of them is to be depicted in graphs. Another is.
It's not enough, though, to get information in an understandable form. Equally important, that information must also be timely. In other words, it must be given in good time to enable the entrepreneur to have more effective financial planning, make better and easier financial decisions and have control over his finances.
It's no good if the business owner waits for 10 months after the end of the accounting year to have financial statements. By that time it will be too late for any problems that developed in the middle of the year to be tackled and for any favourable opportunities to be taken advantage of.
Unfortunately, the fate of the business might well be at risk because of that delay.
For further information on the topic of the importance of the need for timely information you can read the relevant article by clicking here.
Please feel free to use all the information that you will find on the web site.
If you have questions, please feel free to contact me personally at any time. You can call, e-mail, fax or write to me and I will be happy to answer any and all of your questions.
Good luck in your business ventures!
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