Do Financial Accounts Add Value

Accountant's Minute 206

Do Financial Accounts “Add Value”?

Have you ever had a critical look at the Financial Accounts that your firm is preparing?

Do your clients get value from the Financial Accounts that your firm is preparing?

Does the Profit and Loss Account look something like the following:

Income

 

$3,200,000

Less

   

Opening Stock

$70,000

 

Purchases

$1,300,000

 

Freight

$45,000

 

Subtotal

 

$1,415,000

Less

   

Closing Stock

$72,000

 

Subtotal

 

$1,343,000

Gross Profit

 

$1,857,000

Overhead Expenses

$1,900,000

 

Details were shown of the overhead expenses which included labour but no labour on costs

   

Net loss

 

$43,000

This is very similar to a Profit and Loss Account that I was recently asked to review by the owner of the business.  The owner of the business was very interested in obtaining my comments on “how is my business going?”

I asked the client if he had any “Management Accounts” and he asked me “What are they?”

Do you think that this format of the Financial Accounts Report was “adding value” to the client’s business?

Incidentally the client had been charged accountancy fees of $14,000 for the year.

When I enquired from the owner what did he do you in this business I found that there were at least eight quite distinct business operations being conducted within the business and that he really had no idea how each individual business unit was performing.

I asked the client what advice he had received from his accountant and the client indicated that his accountant’s advice was “to sell more”.  I asked the client, “sell more of what?”  He said he did not know because he really did not know how each individual unit was performing but there obviously was a problem.

The client was not receiving any Key Performance Indicators nor was there any attempt to benchmark or to even talk about the benefits of benchmarking to the client.  If these discussions had been held it would have been obvious to the client that he did not have enough information to be able to compare his business’ performance to his peers.

I indicated to the client that for me to undertake an analysis of the business’ financial performance I would require the Profit and Loss Account to be presented in a completely different format so that we were able to discuss the individual business unit performance.

For example:

Individual business unit Profit and Loss Account to show:

  • Income
  • Sales of labour
  • Sales of materials
  • Total sales for this business unit
  • Less cost of sales
  • Opening work in progress
  • Opening stock
  • Purchases of stock
  • Labour cost
  • Labour on cost
  • Freight

Subtotal

Less

  • Closing work in progress
  • Closing stock
  • Cost of goods sold
  • Gross profit for this business unit
  • Gross profit percentage for this business unit
  • Labour percentage of total income for this business unit

If this sort of analysis was prepared on each of the eight business units that comprise this business would not that have given this business owner far more information to make critical decisions about the business operations?

If you were employed full time as the accountant in this client’s business wouldn’t this be the approach that you would use to prepare meaningful management accounts to assist your client and the client’s management team to better run their business?

If you agree with me about the approach to the preparation of “Management Accounts” shouldn’t the same approach be taken when you are performing an external accounting role for the client?

In Accountants Minute 205 “Supply Value Adding Services” I commented on the “Accountant’s Daily” article “Is $5,000 Reasonable to Pay Accountants Annually?” as follows:

  • There is a resistance for some business operators to playing premium fees for “compliance work”.
  • Most clients do not perceive that there is any “value add” to them from the supply of compliance services!

This particular client was paying substantially more than $5,000 for the supply of services that in my opinion did not include “value added services”.

The client wanted to know a fundamental question for business operators – “how are each of my business operations performing?”

I have indicated to the client that he should be indicating to his current accountant or the new accountant if he goes ahead and appoints another accountant, that what he needs on a monthly basis is a Profit and Loss Account down to gross profit level for each of the eight business operations within his business with labour and labour on cost having been included as a direct cost in the gross profit calculation for each activity.

A set Of Key Performance Indicators for each of those individual business operations should be agreed with the manager/supervisor of the individual business unit and an attempt should be made to benchmark as many of the business operations as possible against reputable benchmarking reports.

Each month a comparison to Budget should also be prepared (yes, my recommendation to the client is that he ask his accountant to prepare a Budget for each individual business operation so that he can track actual performance compared to the Budget).

If you are interested in viewing the types of services that ESS BIZTOOLS provides for our accounting subscribers who are located all over Australia, please visit our website www.essbiztools.com.au.

If you would like to participate in a free webinar “Do Financial Accounts Add Value?” why not register for our webinar on Wednesday, 11 September 2019 at 12:30pm AEST – to register click here

If you have any questions about any aspect of the services provided by ESS BIZTOOLS or ESS BIZGRANTS please do not hesitate to contact us:

Email:  peter@essbiztools.com.au

Telephone:   1800 232 088

Have a great day!

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