How to track the “Critical Numbers” in your business
I read an article recently from Inc Magazine -“How to Track Your Company’s Critical Numbers” – which a useful piece on how to watch the key numbers in your business. The article emphasises the need to achieve a balance between having a good accountant, and not being too reliant on them at the same time. You don’t need to be an accountant yourself to keep a track on key figures and ratios in your business.
A quick check on new customers
In most businesses, you’ll have to sell on credit to increase sales. Larger businesses normally have plenty of resources to check out new customers before granting any credit. For example, they might use credit rating agencies or even have credit insurance in the event of non-payment. But, for a small or growing business such things can be a bit more awkward, time-consuming and costly. So here are a few ideas which any business can do quickly and free of charge on the web. These are not fool proof, but at least verify that the most basic information given by prospective customers is correct. So if you smell a rat, try these out. It’s better than loosing money.
- Ask for and verify the VAT number of the customer. This can be done for any European VAT registered person or company at this website http://ec.europa.eu/taxation_customs/vies/ . Just fill in the details and you get the address back to you. This can be quickly checked against the address provided.
- If the business is a company, go to the website of the company registration authority or local chamber of commerce to verify the company name. Most such websites e.g. the UK Companies House (http://www.companieshouse.gov.uk/) or the Irish Companies Registration Office (www.cro.ie) allow you to search by company name and number and view basic data free.
- Taking the previous point a step further, you can usually buy a copy of the most recent accounts of any company from the relevant authority. These can give you great information at a relatively low cost (£1 per set of accounts in the UK or €2.50 in Ireland.
- Don’t forget about social sites like Facebook and Twitter. It’s amazing how many business set up pages. While you’re unlikely to get detailed information on finances, a thriving and active site with lots of followers and fans might tell you something.
Of course, as your business grows you may be able to delegate some of this or pay for a more sophisticated service. Meanwhile, take care and try to get the right balance between increasing sales and granting credit to the wrong people.
Settling your tax debts
As the old saying goes, “only two things in life are certain, death and taxes”. In the current economic climate, many businesses are dying off, but the taxes associated with them don’t necessarily “die” so quick. Getting into debt with the tax authorities is never a good idea, but if your business is failing this may be inevitable. Over the years I have had some experience with tax authorities (mainly the Irish Revenue Commissioners), so here are some tips:
1. Contact the tax authorities as soon as possible. Informing them not only buys some time, but it may also begin a negotiation process.
2. Assess the taxes owed. Once you know what is owed, you’re in a better position to see how bad the problem is.
3. Assess all assets and liabilities of your business. If you are a sole trader or part of a partnership, assess all personal assets, liabilities and living expenses. Undoubtedly the tax authority will do this exercise so you might as well be one step ahead.
4. From 2 & 3, you should be able to start a negotiation process. As I said in 1 above, by contacting the tax authority early, you have a much better chance of doing some kind of deal.
5. If you can make a deal to pay a lower amount than you owe, or to pay by instalments, be sure to stick to the arrangement or inform the tax authority if you have problems.
While dealing with tax debts is not the nicest thing in the world, try to be honest and do a realistic deal where possible. Ignoring the problem makes it worse. And, particularly if you are a sole trader, ignoring a tax debt can affect any future business prospects.
Are you afraid of numbers?
Numerophobia is the fear of numbers. We all know that some numbers might be “unlucky”, like 13 or 666. As a trained accountant I’d be in serious bother if I had such a phobia. Thankfully, I don’t and I have actually stayed in a room number 666 in a hotel in Cologne, Germany some years ago and had an enjoyable stay. I often hear people saying they hate accounting and tax because there are too many numbers. Is this a phobia or just putting things on the long finger? Well, the latter might be the more common reason, particularly when the numbers look bad. In a NY Times article (21/11/2009), Jacob Soll says that anxiety about accounting and taxation often increases to the point of denial. He quotes a 2005 study by Lloyds TSB (UK) which reported that accounting anxiety has led to “balance denial syndrome,” in which bank customers so fear being in the red that they systematically ignore their bank statements. Not really a good idea! Let’s think back to what accounting is about. Its purpose is collect, collate and communicate information (usually of a financial nature). As an example, let’s assume a small business keeps poor records or worse, none at all. In such a case, a bank statement might be the only indicator of how a business is performing. So to ignore it is to cut-off the only source of communicated accounting information a business has. In practice, letting records fall behind is more common than none at all. And, we may let things fall behind because we can’t face the bad story the records tell – especially in the current economic climate. However, this is big mistake. Having the courage to face the books and realise they don’t tell a good story is the first step to solving the problem. As Soll says, “It might be that the first step to balancing the books is finding the courage to face keeping them”. So hands up, admit it and get down to solving your problems. If you’re too busy putting out other fires, call your accountant and ask them to help.
Breaking even in your business
It’s always a good to know the costs of your business. But how can you be sure you sell enough to cover costs. The answer is relatively simple, using the notion of breakeven.
First, you need to know the fixed costs of your business. These are the one you incur even if you business is not selling e.g. rent. Then, you need to know the cost of one of your products or one delivery of your service. This might not be as easy as it sounds, but try you best. Now you can deduct these costs from you selling price and work out a profit per unit. You can then work out the sales level at this profit which is needed to cover the fixed costs. Anything beyond this and you’re making a profit. You can apply this same principle to new products too. Being a relatively simple technique, been able to calculate a breakeven point is a very useful tool for any entrepreneur.
Taking stock – some tips for stock-taking
If your business involves the sale of products then you may be familiar with the concept of stock-taking (or doing an inventory count). Most of the time, businesses have computerised stock control systems which keep track of every product movement in and out. Well, in theory at least. No matter how accurate the stock control system, manual periodic stock counts are a must for any business. These stock checks verify what the system says should be in stock. Any differences can then be investigated and corrected.
The frequency and detail of a stock check depends on a number of factors. The value of items held in stock is probably the most important driver of the frequency of stock takes. Normally, high value items receive a lot of regular verification simply due to the financial loss which might be suffered by the business. Small items like pens and pencils, or nuts and screws, might be ignored in stock checks. A second factor is what I call ‘walkability’. For example, a high street newsagent might sell items like lottery scratch cards, pre-paid bus tickets or packs of cigarettes. All these are small, easy to conceal and readily saleable for cash. One high street retailer I know actually checks stock of lottery cards and bus tickets every night. It only takes a few minutes.
When deciding how often to do stock checks and what to check, try to keep these two factors in mind. You don’t need to count everything every time. It’s much smarter to be focused – it saves you time and, potentially, money.
Martin's accounting blog 