Businessman In Front Of Modern Computer With Colorful Pie And Ba
Credit: Businessman in front of modern computer with colorful pie and bar graphs analysing business performance accounting data
There are three common mistakes I see regularly
when I’m reviewing the set up of accounting systems. If you who want useful
management reports, follow these three tips.
Tip #1. Don’t use generic headings (or account codes in accounting-speak)
Is your accounting system set up with an
alphabetical list of overhead expenses? Whilst that is fine for annual reports,
it isn’t providing useful information for the business owner.
Think of the different types of advertising costs. For example, Google Adwords, Facebook ads, boosted Facebook posts, sponsorship of events, promotional giveaways and so on. Whilst the total advertising expenditure is correct, it’s not providing information in a useful format.
To calculate the return on advertising spend across different platforms, it’s necessary to have the figures separated. Then it’s easier to evaluate how each advertising platform is performing and make informed decisions about future advertising spend.
Similarly, costs like subscriptions, consulting fees and training costs are worth considering splitting out separately.
Tip # 2. Use cost of sales allocations
The cost of sales figure for a product-based
business is the purchase price of the products. Cost of sales will also include
freight, duty and packaging materials.
But if you are in a service-based business, you are
selling time. Time that costs the business in the form of wages,
superannuation, contractor or consulting fees. I believe the cost of sales
figure in a service-based business should reflect the cost of the time being
The most accurate way to record this is for the team to keep time records. Those costs can be allocated between time spent on delivering the services and time spent on non-deliverable work.
Tip # 3. Allocate income and expenses across different divisions or products
Most accounting systems have a feature that will
allow you to track income and expenses across different types of income. It may
be tracking categories, projects, jobs or something along those lines.
Once you’ve decided how you want to track your
income, set them up in the system and start using them when processing income
and expenses. For example, if you’re a hairdresser, you might track product
sales, hair cuts, hair colouring, perms, men’s cuts and so on.
At the end of the month, you will be able to print
a report of the income and expenses for each tracking item which will allow you
to see not only what percentage of revenue is from each source, but how much
gross profit you’re making in each.
Armed with that level of detailed information, you
can make informed decisions for the future.
Accounting records should be set up to provide you
with useful information to help manage the business and make decisions for the
future. If it’s not, I highly recommend reviewing the setup and making the