Understanding business accounting in the time it takes to make a toasted sandwich.
In the time that it takes to cut up a tomato and figure out how to re-wrap the deli ham, we’ll dish up the benefits of business accounting, summarise what accountants do and tell you when you should hire one.
We’ll also give you an idea about how to grill a potential accountant when it comes to hiring one.
All that in about four minutes of total reading time.
Business accounting is all about keeping track of all the economic activity that happens in your business. These can be split up into three main tasks: identifying, recording and communicating the financial information.
Benefits of accounting
Unless you come from a financial background, one of the first people you should hire for your business is an accountant.
Accountants won’t just find ways to save your business money; they’ll set up systems to streamline tax and administrative obligations to save you time in the long run.
You’ll also be grateful that you invested in an accountant early in case you’re ever audited.
When should I hire an accountant?
While their role in your business will become more involved once you start generating revenue and growing, it’s a good idea to get an accountant on board as soon as possible.
When you start your business, your accountant can advise which business structure will work best for your business and help set up day-to-day accounting procedures.
While you should consider getting an accountant on board as early as possible, by no means, does this have to be on a full-time basis? Many accountants will charge per hour, so you might only need to do few consultations with them to establish your business.
Once your business grows, you should consider getting someone on board on a more permanent basis.
What do accountants do?
Accountants can provide many services that could be beneficial for your business. They include:
- Assisting with establishing your business
- Tax advice and planning
- Financial reporting
- Business management and analysis
- Superannuation advice
Accountants not only help you find ways to save money, but they can also help you generate more revenue. You can find out more about how they do that here.
We’ve also put together a list of questions that all business owners should ask their accountants, which you can read about here.
What to look for in an accountant
What you need in an account will depend on your business’s needs and how well you can work together.
Here are four things to think about when looking for an accountant:
1. Area of expertise
Most accountants will specialise in one or two finance areas, such as financial analysis or investment management, so many may not be able to perform all the tasks your business needs.
Think about what accounting tasks you need to get done and if your accountant has the skills to do them.
Many accountants and accounting firms charge by the hour, so the more experienced the accountant or, the more complex the job, the higher the price. For example, auditing is a more difficult task than bookkeeping, so it’ll cost more.
Consider how much you can afford to pay your accountant and whether the task justifies the cost.
It’s much easier to work with someone if you get along with them.
Your accountant is no exception – you might be spending a lot of time with them, so you must get on and work well as a team.
It’s worthwhile speaking to your potential accountant’s clients to find out what their work is like, as well as what they’re like to work with.
Ask them about how satisfied they are with the accountant’s services, fees and availability.
Top 3 takeaways
- Accounting is all about recording, analysing and communicating financial information about your business.
- Having sound accounting systems can help save you time, money and grief (when dealing with the government and auditors).
- Consider hiring an accountant as soon as you start a business.
How to become an accounting hero
To be an accounting superhero, you need to make sure you have the basics down. After all, even Superman had to walk before he could fly.
These days, people expect high-quality work, and if they don’t get it from you, they’ll go to the next person who can deliver.
In accounting, the basics expected by customers include:
- Accounts prepared as efficiently and effectively as possible
- All work delivered on or before time
- No errors. An incorrect name or address on your cover letter or accounts has the potential to devalue the work you have done almost as much as an error in the actual charges themselves.
- Work charged at the expected price with essential helpful advice you are qualified to give
- No surprises — for example, if instead of a tax refund, they get a bill for $4,000
That’s just the basics.
However, to become an accounting superhero, you’ll need to start going above and beyond.
To start on your path to becoming a trusted advisor or accounting superhero, consider these points:
Use technology to simplify your workflow.
Get your foundation right by looking at the full range of accounting products to simplify your life and that of your client.
Streamlining manual or complex accounting processes for you and your clients will become the bedrock of your heroism.
Speak their language, not yours
Don’t just speak to your clients; listen to them. Learn about their business and industry.
As you listen, assess their financial understanding level, and use language at that level – but don’t underestimate or patronise them.
Do they know the difference between cash flow and profitability? If not, can you explain it to them in a way they will understand and never forget?
You might become their hero because you are the only accountant they can understand and relate to.
Solve cash flow issues
Profitable businesses often live on the brink without enough reserves or financial facilities to weather the storm.
- Don’t just do the books; work with clients, so they understand cash flow.
- Drill down into any cash flow issues and help solve them
- Implement cash flow management tools and systems
If your client no longer worries about when the next dollar is coming in, they can focus on improving their business, innovating and growing.
As you talk with clients, use insights gained from other industries and businesses to uncover hidden efficiencies.
- Use industry or sector statistics to identify areas of opportunity
- Stock holdings can consume a lot of cash. Too much stock drains the business of money and costs more to store. Not enough inventory causes more orders, increases shipping costs and risks disappointing customers with delays
- Do they need an overdraft facility or more extended funding?
- Look at debtors and the invoicing system. MYOB’s electronic invoicing can improve collection efficiency and speed of payment
Discover where is the profit made — and where losses are incurred
Ask your clients where they make their money and where they lose it. Help them find the answers.
- When was the last time they reviewed their product range?
- Perform a product profitability review
- Recommend dropping a product, or ramp-up efforts on the most profitable products and services
- Talk through how unproductive times can be used. In some businesses, January is a make or break month. Every other month is profitable, but a bad January may swing the whole year.
Meet with clients more often.
Ask your clients to meet you more often to review business performance.
Add some non-financial measures into your reports. Structure the meeting, and call it a quarterly business review.
Discuss, inquire and plan out their next quarter or further.
Step outside your comfort zone
At first, it can be uncomfortable moving from an accountant to having hero status. However, most accountants I have worked with a desire to create more value.
They want to be more engaged in driving a business to success than just reporting on it after the fact.
Accountants are ideally suited but too often unprepared. It will take a transformation on your part, but it’s well worth the effort.
Like anything, to be an accounting hero, you have to plan and prepare. Find your niche.
You may be the hero who can teach clients to see the whole financial picture for the first time.
You may be an analytical hero, able to see anomalies in numbers and ratios to expose hidden issues. You may be the catalyst that spurs growth.
Whatever type of accounting hero you are, go for it.
You have nothing to lose, and your clients will notice the change in you.
Six secrets to thinking like an accountant – and
First of all, let me get a confession out of the way — I am an accountant. I am a Chartered Accountant. I know. We’re (supposedly) a boring bunch who wear bowler hats and carry briefcases everywhere. John Cleese has a lot to answer for!
I no longer do any day-to-day accounting work — instead, for the past 16 years, I have worked with accountants in public practice to help them improve their firms and offer business advisory services that help their clients. When strangers ask them, I routinely advise accountants, “What do you do?” to avoid the response, “I’m an accountant”, for these very reasons.
In reality, however, I am proud of my profession, and there are some excellent reasons why business owners should think like an accountant — not all the time, but certainly from time to time. Here are six of those reasons.
1. Ask questions like an auditor
Many accountants trained as auditors, and I am one of them. My wife sometimes reprimands me for auditing her when asking too many probing questions about her reasoning for something. (It is a helpful reminder not to take your work home.)
Now, ‘auditor’ sounds even worse than ‘accountant’, I am sure, but all auditors are trained to ask lots and lots of questions, never take anything at face value and get to the root of the issue at hand. Why is this important? Well, if something doesn’t smell right, there is usually a reason for it. Analytical thinking and digging deeper can help prevent you from going down blind alleys.
Running the numbers and considering worst-case scenarios can prevent costly mistakes in your business. (Incidentally, I sing in our local singer’s group in a tenor line comprising an actuary, an airline pilot, an engineer and myself. I am confident you will not find a more analytical tenor line on the planet!)
2. Weigh up the risk in every potential new project or strategy
When a senior person in a business comes up with a new idea, what typically happens around the Boardroom table is everyone gets excited about the upside. People see dollar signs, unique opportunity and interesting new projects. Everyone wants to jump on the bandwagon. But who is weighing up the risk?
Risk, or potential downside, is too often overlooked in favour of the new idea’s potential. An accountant mindset would contribute more thought and analysis. What is the worst-case scenario? What are we potentially giving up to explore this new opportunity? What is the breakeven cost of doing this? If we reallocate resource over here, what happens over there? This sort of approach can encourage a well-rounded argument and prevent you from jumping on a new opportunity and potentially wasting a lot of time, energy and money on something that has more downside than upside.
A word of warning: do not go overboard on this. It is essential to weigh up the risk, but you do not want to stifle innovation.
3. Practice double-entry bookkeeping
In 1494, the Franciscan friar and mathematician Luca Pacioli documented the double-entry accounting system. It is written that he warned Venetian traders not to sleep at night until the debits equalled the credits. What on Earth does this mean, and what relevance does it have to your business? Well, no doubt you have heard the expression ‘revenue is vanity, profit is sanity, but cash is King.’ Driving growth for growth’s sake is fraught with danger, especially if you don’t understand double entry.
Many business owners ask their accountants why they made a profit on paper, but there is no bank cash. It is clear as day to the accountant, and they should make a point of educating their clients in the basics of double-entry.
For example, you can sell me something for $100,000. It will show on your profit and loss account, but if I don’t pay you for six months and you’ve had to pay your suppliers and employees before that time, you could conceivably run out of money before you can celebrate the profit on the sale.
4. Understand your critical numbers
It’s one thing to notice that sales are down year on year or below target. But it’s yet another thing to understand why.
A good accountant will get you very focused on the critical drivers of revenue, cash flow and profitability in your business. If your sales are down, you need to be able to pinpoint the cause. Did you lose too many customers? Or not acquire enough new ones? Or perhaps you simply didn’t have the volume of transactions that you were forecasting. Or maybe the book was OK, but the average transaction value fell for some reason. No cash? What’s happening? Are your customers taking longer to pay you? Is your inventory management out of control? Or have the business owners pulled out more money than they should have done?
By getting very focused on your critical numbers, you can avoid these surprises and take remedial action before it’s too late.
5. Budget for everything — and forecast your cash flow
I have my wife well trained. Before she buys anything of significance, she asks me, ‘do I have a budget to do that?’ I keep telling her she doesn’t need to ask me, but secretly I am proud of her thinking like an accountant.
It’s my view that most small businesses would benefit from life, working, cash flow and budget, and that accountants should be recommending that service to their clients. (If your accountant is not, why not think like an accountant and ask them what might be involved?)
It’s essential to understand the timing differences between sales revenue and cash inflows, expenses and cash outflows. If you need to buy a new machine, how will you finance it, and what’s the impact on your cash position?
6. Look at the return on investment on everything that you do
Most businesses could eliminate five to 10 per cent — sometimes more — in costs by focusing on this question: are we getting the very best return on investment for this cost or expense? View all of your business expenses as an investment. If they do not contribute in some way to revenue generation, protection or growth, why do you have them?
A good example is advertising. Most small businesses advertise in two or three places. But few understand the return on investment on each campaign. Because of this, they simply renew the advertising each year instead of questioning which of the three campaigns got the best result, then doing more of that one and cutting out one that loses money. You can apply this thought process to all of your expenses.
I hope you’ll take two or three of these ideas and apply them to your business. Give it a go — it’s not too scary thinking like an accountant!