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Archive for December, 2011

End of month accounting: Sales analysis

Do you monitor performance of your sales activity?

If you are not selling you are not in business. In business knowing what is sold and to who it’s sold is as important as selling goods and services.

It’s a good idea to be aware of your business’s sales activity and trends on a month-by-month basis. This have many strategic advantages including:

1. Setting prices.

2. Introducing new products or services to the market.

3. Withdrawing products or services from the market.

4. Identifying high and low volume products and services.

5. Identifying areas to invest your marketing dollars.

6. Evaluating the business growth.

What needs to be done?

Make sure your accounting system is producing reports to help your business to monitor it’s sales activity. For your accounting system to produce the right reports you should the following ensure as a part of your end of month tasks:

1. All the goods delivered from your warehouse are invoiced.

2. Ensue all goods returned are processed and credit notes are raised.

3. Time spend on billable hours are recorded and invoiced.

4. Progress claims on work completed is authourised and invoiced.

How do you monitor sales?

In your accounting system set-up reports on sales:

1. By product or service category

2. By customer

3. By sales channels

4. By region

5. By sales person.

Many accounting systems are capable of producing report to help analyse and understand the sales activity. If your accounting system cannot provide you customised reports for you to analyse understand your sales activity, extract data from your accounting system and use Excel pivot tables to produce customised reports.

When analysing the sales activity compare them to the previous periods and to your forecasts and budgets. Also analyse you sales activity to understand the price and the volumes sold and it’s variations to previous periods.

With sound sales analysis and understanding, we hope you do more sales and see your business continue to grow.

Accounting systems – Chart of accounts

What is Chart of accounts?

It is list of the accounts used by a business entity to define and record each class accounting transactions in business’s accounting systems. It is used to organize the finances of the entity and to segregate assets and liabilities, revenue and expenditures.

Each account in the list is typically assigned a name and a unique code (numeric or alpha numeric) by which it can be identified. It is preferable to use numeric codes instead of alpha numeric codes.

An account in the list represent a nature of accounting transactions, for example Salaries & wages, Rent, Electricity etc.

Why chart of accounts is important?

It is critical part of accounting systems of a business entity and the form part of data dictionary of the business. A properly defined chart of accounts will be beneficial to a business in many ways:

1. It defines the flow of information into the general ledger, which is the center part of the business’s accounting systems.

2. It helps preparation of financial statements in order to give interested parties a better understanding of the financial health of the entity.

3. Analysing the business will become very easy. It helps to write reports and automate the analysis more efficiently in the accounting systems.

4. It will help to query information from the accounting systems quickly and efficiently to help decision making.

How to prepare chart of accounts?

It is very easy to prepare one, however maintaining a logical order is very important. It should best represent business entity information and reporting needs. It should also be simple and easy to understand.

You should consider the all the different functions of the business, they way internal management is structured and internal and external reporting requirements.

Generally, start with the 4 broad categories of accounts, Assets, Liabilities, Income and Expenses. And carefully expand to the specific needs of the business.

Many accounting software comes with the char of accounts and modifying them to suite the business needs is essential before implementing one. It’s often a costly exercise to alter as you might loose historical data attached to an account.

By adding dimensions to chart of accounts like cost centers/profit centers or locations information you can improve the efficiency of it depending of the complexity of your business.

Control it…

It is important to have proper control over adding and deleting items from the chart of accounts. Establish internal control system for authorising changes to the chart. It is critical part of your financial management and control.

Review your chart of accounts on a regular basis (at least annually) to ensure it’s relevance, accuracy and completeness. A proper chart will help you monitor the business activities and optimise use of accounting systems monitor and improve performance.

Financial management: Cash flow forecasting – What, why & how?

Cash flow management is critical to a successful business. Cash flow management is a key aspect of financial management of a business planning its future cash requirements to avoid crisis of liquidity.

Even highly profitable businesses fail to succeed in long run because they fail to manage and monitor their cash flow properly as part of their financial management process.

Why cash flow management is critical part of financial management?

Every business requires cash to pay their suppliers of goods and services, it’s employees and to meet the financial liabilities like loan repayments and interest charges from financial institutions. Cash is also required to pay taxes and service the shareholders for their investments.

Failing to meet the payments due timely for suppliers, lenders and others on time will affect the performance of a business. If a business fail to pay it’s suppliers on time it will affect replacing their stocks on time and therefore the business will loose some potential sales.

Cash flow forecasting will help a business to manage it’s cash flow.

What is cash flow forecasting?

Cash flow forecasting is a periodic plan that shows when a business receives and pays cash.

It is different to other financial management tools such as a budget or the financial reports, which main focus is on profit/(loss) of a business and usually based on accrual accounting (accounting for future cash out flows for present activities).

How to prepare a cash flow forecast?

A simple operating cash flow forecasting begins with the the cash balance in the bank at point in time. The next step is to predict the cash inflows, which are the cash receipts from customers and other receipts like interest received on deposits, receipt of dividends etc.

We will add this cash flow to the cash balance in the bank. The next step is to predict the cash out flows. The cash out flows are the payments made to staff, suppliers of goods and services and repayment of loan and interest charges to financial institutions. We subtract this from cash balance in bank.

Net cash flow is the amount of cash business able to generate or loose during a period carrying on a business activity.

Net cash flow = Cash at the beginning of the period + Cash inflow – Cash outflows

Why cash flow forecasting is important?

Cash flow projections will help a business to know the cash flow situations in advance and manage it’s activities accordingly. It will help the business to negotiate with it customers and suppliers and invest its positive cash flows to generate more profits to business or distribute dividends to it’s shareholders.

Monitoring the forecasted net cash flow position at the end of each period is an essential part of the financial management of the business.

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