On the face of it this company are a successful local business. They turn over about a millions pounds, and their accountant gives them what they think are management accounts. This is just a one page Sage profit and loss account. I’m sure you know by now that’s definitely not what I’d call management accounts, but we’ll let that one go for now. It’s only a minor transgression in this case!
This accountant has taken an all too common view that the client “doesn’t need” to understand, and anyway it’s far too complicated. And they’ve taken some arbitrary decisions about things on their balance sheet that have really shocked my client and I. Far worse than that, they’ve taken their profit making business and turned it into a loss making one.
Shocking isn’t it? But you’d be amazed to know how often this happens.
So what did they do that was so wrong?
- Dividends / directors loanThe accountant decided that they’d dump the director’s dividends into the directors loan account and “see how the year panned out” and so these costs didn’t go through the profit and loss. My client was absolutely certain that she needed to account for these in some way when looking at her profitability; after all it’s the director’s monthly pay whatever you call it. She was shouted down and told that it was “on the balance sheet, so don’t worry about it”.The result is that on a cash basis they are actually loss making and didn’t know until we met today – 5 weeks after their year -end. Not useful.
- Random balances This is a common danger when you don’t know what’s going on with your balance sheet. We identified a mysteriously called “other balances” code. Investigation showed that they’d dumped a vat reconciliation difference in there at last year-end, giving them a significant liability they knew nothing about.
- Vat not balancedA quick look showed us that the vat was not being correctly reconciled each quarter, and their vat liability account was on the wrong side of the balance sheet. Without needing to understand double entry, if one balance is wrong, then something else is wrong too.I could go on, but I suspect I’ve crossed the line of ‘too technical’ already, so I won’t!The crunch of all this is that my client had been asking for help, didn’t think things looked right but was made to believe it was nothing for her to worry about, and worse, not for her to get involved with. When she challenged them she was met with accounting jargon and technical explanations to the point where she lost the will to live.I see this SO often, companies end up abdicating responsibility for their balance sheet, very often because it’s just been made too inaccessible by their accountant.
I’d really like to spell out what I think every business owner needs to do about this:
- Ask to see your current Trial Balance.This is a list of every financial balance in your business.As the director you’re responsible for every balance on there, and that starts with understanding it. You need to keep asking until you get a sensible explanation you understand and feel comfortable with.Are there any balances that just don’t make sense? Any Other Creditors, director’s loans or other accounts you’re not familiar with? Does the value of your fixed assets look correct?
- It’s ok not to understand at first. It’s your accountant’s job to explain it to you so that you do understand.
- If your accountant can’t explain in a way you get, or doesn’t want to explain, seriously think about getting a new accountant.
You might think this sounds like a proper accountant bashing, and to be fair, for those that give small firms a shoddy service, damn right. Business survival rates are nowhere near where they ought to be and accountants are in a prime position of trust; companies look to them for guidance.
To balance this up, there are some awesome accountants out there as well, but please do be really aware that your year-end accountant may not geared up to support you through the year. Don’t be afraid to spell out what you want from them, and don’t be fobbed off by jargon and complicated explanations. A really great accountant should be able to make it sound simple. That’s really why we do what we do, helping business owners to take control of their own finances.