Your annual financial statements have their uses, but by their very nature, they are far too historical to be of any use in managing or improving your business.
The most valuable financial accounts you can get your hands on are interim accounts prepared periodically — monthly for larger businesses or quarterly or bi-monthly for smaller businesses in line with your GST return periods. There is a strong correlation between the availability of interim accounts and business survival.
Having interim accounts to hand means:
- You get early notice of impending problems in your business. Yes, you might have a suspicion that not all is well, but seeing the figures in black and white enables you to pinpoint the problem area. Once you know what the problem is, you can take early corrective action to prevent its recurrence.
- You can compare current trading results with previous years or budgeted trading and/or projected cash flow forecasts.
- You can update your breakeven point and make sure your current turnover is sufficient to cover all your outgoings, including drawings and tax.
- You can ensure you are paying sufficient Provisional Tax and avoid being penalised by the IRD for penalties and interest.
So how do you get your business in a position to prepare periodic accounts at an economic cost?
Here are a few pointers:
- Make sure you are using online accounting software like MYOB and that the bank accounts are reconciled regularly.
- As well as using the sales invoicing facility on your software, it is also necessary to post supplier invoices onto your software. Alternatively, adjust for accounts payable at the start and end of the interim accounting period; otherwise, you will not get the true picture of costs incurred.
- If you are not using the inventory facility on your online accounting software and hold substantial amounts of inventory (the value of which fluctuates significantly), you will also need to adjust for inventory at cost at the start and end of the interim accounting period.
- You may also need to adjust for bank loan or asset finance repayments to ensure that your interim profit and loss account reflects the true cost of interest or finance charges.
The easiest way is to get your accountant to make the necessary adjustments for you. Not only will your accountant be able to make the adjustments quickly and correctly, but they will also be able to highlight any problem areas as well as point out any improvements required in your bookkeeping. The small cost involved will be a real investment in the future of your business.