What’s the difference between financial accounting and management accounting?

What’s the difference between financial accounting and management accounting?

You’re running a business, so you know the legal requirements around producing accounts and submitting tax returns. But do you truly know WHY you’ve engaged an accountant? And do you understand the value that a good accountant and business adviser can add to your company?

As a business owner, managing director or CEO, there are three main areas of the accounting proposition that you’re probably most interested in:

  1. Compliance work – this is the bookkeeping, financial accounting and tax work that’s legally required for you to be compliant with the law. On the whole, this compliance work looks backwards at your numbers from the past (your ‘actuals’), showing you where you have been, rather than where you are going.
  2. Financial performance work – this is the work that aims to improve the financial health of your business. It includes the cashflow, cost management and funding work that helps you to strengthen your balance sheet, manage your working capital and become a more stable financial proposition. The work is based on your historic actuals but also has an element of forward-looking forecasting and projections.
  3. High-value advisory work – this is the forward-focused, high-level strategic advice that helps you look to the future and plan out your business. This can include helping you to define your personal and business goals, create a 5-year business plan, manage your company strategy and focus on growth, value and an eventual exit strategy etc.

How does a management accountant differ from a financial accountant?

To make a success of your business, and to get the best value from your accountant, you need an adviser who can deliver in all of these three areas. But not all accountants are the same. As we’ll see, it’s important to understand the difference between a financial accountant and a management accountant

At the most basic level, these are the key differences:

  • Financial accountant – in general, a financial accountant focuses on the basic compliance work, with a small amount of financial performance work thrown into the mix. They make sure your bookkeeping is done and dusted, will file your tax returns and use your historic numbers to produce statutory accounts. They’re ‘bean counters’, making sure you have a clear record of all the beans you’ve produced.
  • Management accountant – a management accountant, however, looks forwards rather than backwards and has a greater focus on the future. They will usually provide the compliance work too, but will delve deeper into the financial performance and high-level advisory work. Rather than just ‘counting the beans’ they help you choose the right beans, decide how to plant them and make sure you nurture and grow these beans to bring in a better (and more profitable) harvest.

How does a management accountant deliver more value?

Looking to the future is a far more productive way of managing your finances than just counting what’s in the bank. A management accountant will empower you to understand your business, and will give you the tools and the knowledge to make good, well-considered decisions.

This additional help can be invaluable. With an experienced management accountant working alongside you, your financial thinking can be completely revolutionised.

For example, you will:

  • Stop looking backwards – your focus will be all about looking forwards to what you can change, not just recording your past transactions (the things you can’t now change, even if you wanted to).
  • Know your numbers inside out – you’ll have a far better understanding of your regular finances, thanks to the detail included in your regular monthly management accounts.
  • Get in control of your cashflow – you’ll be able to drill down into your cash inflows and outflows and, by doing so, improve the liquid capital and cashflow in the business.
  • Streamline your financial processes – you’ll refine and improve your internal accounting procedures, so you’re more efficient and more productive.
  • Refine your pricing strategy – by reviewing your pricing model, you’ll be able to enhance your margins, boost revenue and make the whole company more profitable.
  • Stop unnecessary expenditure – you’ll analyse your overheads, expenses and cost base to reduce the money that’s leaking out of the business.
  • Bring more money and investment into the business – with more robust accounts and projections, you’ll have better access to funding and to private investment.
  • Get a firm grip on your business data – with meaningful metrics being tracked and monitored through your cloud accounting platform, you’ll greatly enhance your business intelligence and the evidence behind your decision-making.
  • Improve the quality of your advice – you’ll have an adviser on hand at all times, giving you access to your management accountant’s knowledge, experience and advice.

Talk to us about the benefits of management accounting for your business

If you’re ambitious and keen to grow, switching to the benefits of management accounting could have a huge impact on your future destiny.

A financial accountant looks backwards, while a management accountant looks forwards. And it’s this key difference in focus, ability and oversight that makes partnering with a firm of management accountants so rewarding.

Get in touch to talk about switching to management accounting.

 

The low-value asset threshold (of $5,000) for depreciation ends on March 16th

The low-value asset threshold (of $5,000) for depreciation ends on March 16th

The temporary increase to $5,000 for the low-value asset threshold for depreciation ends March 16th. For assets purchased on or after 17 March 2021, the new threshold will be permanently set at $1,000. Talk to us for more information.

The temporary increase to $5,000 for the low-value asset threshold for depreciation ends March 16th

This means if you buy something now, you could write off the whole amount against your taxable income this year.

Depreciation spreads the cost of assets that you buy for your business, by claiming a deduction from the IRD in your tax return.

In March 2020, the NZ Government introduced legislation to temporarily raise the threshold for depreciation on low-value assets from $500 to $5,000. The aim of this change was to stimulate the economy during the Covid pandemic by encouraging people to invest in their businesses.

The change to the $5,000 threshold ends 16 March 2021

What does this mean for you?

  • Businesses (including landlords) can deduct the entire cost of an item (under $5,000) in the year it was purchased, instead of spreading the cost over the life of the asset.
  • The distinct asset must be bought between 17th March 2020 and 16th March 2021.

The raised threshold change is only available until March 16th 2021. For assets purchased on or after 17 March 2021, the new threshold will be permanently set at $1,000.

In order to claim you will need a proof of purchase to support your records. Note that there are some terms and conditions in the rule which apply to the threshold:

  • If you bought multiple assets at the same time from the same supplier and it cost $5,000.00 (noting that it has the same depreciation rate), the threshold applies across all the assets acquired.
  • The “cost” pertains to GST exclusive for a GST registered and GST inclusive for a non GST registered.
  • If the asset is being acquired in the form or part of another asset, the deduction is immediately not applicable.

Contact us for further information.

Is your business ready for hybrid working?

Is your business ready for hybrid working?

The Covid pandemic has changed the way we work and ushered in a new era of hybrid working – but is your business ready and able to offer this mix of on-site, off-site and remote working?

When businesses were forced to close down their physical offices and workspaces, this brought technology to the fore. We’ve seen an increased use of remote working, video technologies and cloud-based business solutions – and people have got used to this ‘working from home’ ethic.

Hybrid working aims to take the best elements of remote working, and to mix these up with the undeniable advantages of working together as an in-person team. If your business is going to embrace this approach then it’s likely that employees will be spending some time in the office, some time at home and some time out and about, or at client’s worksite – but to do this, your company is going to need to provide the right environment for a hybrid approach.

The key question, then, is whether your business is ready to embrace hybrid working…

Setting the foundations for hybrid working

Any change in work patterns requires a certain amount of innovation from your business, plus the basic requirements of being able to deliver both remote and in-person working.

To get your business ready for hybrid working, it’s crucial to set the right foundations, and this means planning ahead, and keeping an open mind to the benefits of this new approach.

To prepare for a hybrid approach, your business must:

  • Have the necessary cloud infrastructure – if your employees are going to work from home, or while out on the road, you need your key systems to be in the cloud. Old-school applications on an office-based server are just not going to cut it for hybrid working. Cloud-based accounting, project management, CRM and workflow tools give you the flexibility to work from any location, with one ‘point of truth’ in the cloud for all your customer information and business data.
  • Have clear systems and processes – when people are working in different locations, at different times, it’s important to have some consistency around how the work is done. To achieve this you need well-defined operational systems, where each task has a pre-agreed process – so the whole team knows when, how and where to carry out their day-to-day work, record notes or raise expenses and bills etc.
  • Trust your employees to self-manage – when employees are no longer based in the office five days per week, it becomes more difficult to have management oversight. With some people home-working and some out at other locations, you need to place more trust in their ability to self-manage and work to a high standard. Increasing trust and reducing micro-management is key to making a hybrid approach work for the team.
  • Have performance reporting in place – trusting people to work hard is a given, but you do also need to know if the business is remaining productive. Having some form of performance reporting in place is a good idea, so you can review areas like productivity, staff attendance, sales targets and revenues generated etc.
  • Empower people to get their jobs done – when you can’t all be in the office for the traditional ‘stand up team meeting’ it can be hard to build team spirit and keep your employees motivated. Try having regular Zoom/Microsoft Teams huddles, where teams come together to talk through the work for the week, and can raise any issues. And also think about distance or in-person social events too, so people can let their hair down and enjoy being part of your business family.

Preparing for hybrid working

The companies that fully grasp the hybrid working opportunity will be more flexible, more scalable and ready to react to new challenges and changing environments. So, there’s real value in forging ahead with this new approach.

Understanding your revenue drivers

Understanding your revenue drivers  

For your business to make money, you need to generate revenue.

You produce revenue through your usual business activity, by making sales, getting your invoices paid, or taking cash from paying customers. So, the better you are at selling your products/services and bringing money into the business, the higher your revenue levels will be.

But what actually drives these revenue levels? And how do you get in control of these drivers?

Knowing where your cash is coming from is more crucial than ever

As a trading company, you face the multiple challenges of a global recession, an increase in online consumer buying and a ‘new normal’ when it comes to trading, markets and buying expectations. The better you can understand the nature of your revenue and its drivers, the more you can flex, manage and control your ability to generate this income.

This helps your medium to long-term strategic thinking, and your decision-making, allowing you to be confident that you’re focusing on the business areas that deliver maximum revenue.

Import areas to consider will include:

  • Revenue channels – where does your revenue actually come from? Do you create income from online sales and ecommerce, through retail sales in bricks and mortar stores, or through wholesales to other businesses? You may focus on just one of these channels, or it could be that you use a mixture of two, three or more.
  • Revenue streams – your total revenue will be made up of a number of different ‘streams’ So, you might be a coffee shop, whose revenue streams include coffee sales, cake and pastry sales and lunch sales. Knowing which revenue streams you rely on, which are most productive and what return they are delivering allows you to make decisions. If 80% of your income comes from 20% of your products, perhaps you need to tighten up your product range and ditch some of the poor sellers. If you’re selling more services to one particular industry, perhaps you should focus more marketing in this specific niche, or downscale your sales activity in less profitable niches.
  • Product/service split – Do you know which products/services are the most profitable in the business? Which products/services have been resilient to market changes (giving you some revenue stability) and which have adapted well to change? The more you can dive into your metrics and find the most productive and adaptable products and services, the greater your ability is to provide constant and evolving revenue for the business.
  • Value vs volume – Is your revenue based on selling a high volume of products/services at low margin, or low volume at a high margin? Based on this, can you move your margin down to create a more attractive price point (and more value for customers)? Or are their ways to push volume up, shifting more units and boosting total revenue? By diversifying into new channels, new streams or new products/services you can aim to balance value and volume to create brand new sales – and higher revenue levels.

Talk to us about exploring your revenue drivers

If you want to boost revenue and increase your overall profitability, come and talk to us. We’ll review the numbers in your business, help you to understand your revenue drivers and will give you proactive advice on enhancing your total revenue as a company.

Get in touch to kickstart your revenue generation.

How healthy is your working capital?

How healthy is your working capital?  

We all know that cash is king when it comes to business success, but what exactly is ‘working capital’ and how does this financial metric help measure the health of your business?

Working capital is made up of the cash and assets that are available in the business to fund your operations and keep you trading. It’s worked out by taking your current assets (the things you own) away from your current liabilities (the things you owe to other people).

So, why is working capital such a critical metric?

Having the liquid capital needed to trade

It’s possible for your business to be busy, successful and profitable, but for your cash position to still be in poor health – and that can have a serious impact.

If you can’t readily convert your assets into liquid cash, it’s a struggle to meet your cashflow goals, pay your bills and fund your day-to-day operations. But with the optimum level of working capital, you strengthen your balance sheet and put the company in a solid financial position.

To achieve this healthy level of working capital you’ll need to:

  • Proactively manage your cashflow – cashflow feeds your working capital by pumping liquid cash into the company and keeping the balance between assets and liabilities in a strong position. But to achieve this, it’s vital to achieve a positive cashflow position, where your cash inflows are greater than your cash outflows. This means getting paid on time, lowering your outgoings and keeping a close eye on your ongoing cash position.
  • Monitor and forecast your financial position – running regular financial reports helps you stay in control of your finances. With careful monitoring and forecasting of your cash position, you can ensure you don’t end up in a negative cashflow position, without the requisite working capital to trade and fund the next stage in your business plan. Cloud accounting software and business intelligence apps have made it easier than ever to create up-to-date, real-time reports and run dashboards that show your key metrics.
  • Use additional finance when required – if working capital is looking thin on the ground, then additional funding may be needed to bolster your balance sheet. Short-term finance options (such as overdraft extensions or invoice finance) and longer-term business loans can be needed to keep working capital on an equilibrium.

Talk to us about optimising your working capital

Working closely with your accountant is vital if you want to promote the ideal level of working capital in the business. We can help manage your cashflow, monitor your financial metrics and provide access to additional finance and funding when your capital needs a boost.

Get in touch to start maximising your working capital.

Understanding Your Statement of Cash Flows

Understanding Your Statement of Cash Flows

The statement of cash flows, (also known as the cash flow statement), shows how your business has generated and used cash (and cash equivalents) within a specific time period.

For each of the reporting categories, receipts and payments are listed (money in and money out), and this is reported as a net increase or decrease in cash held for that category.

The net change in all categories is added to the amount of cash on hand at the start of the reporting period to arrive at the current cash on hand figure at the end of the reporting period.

It is another important financial statement to understand in conjunction with the Profit and Loss statement and the Balance sheet. These three reports provide a good understanding of the financial position of your business.

How Does it Work?

The cash flow statement integrates the information provided by the profit and loss statement and the balance sheet into a current cash position. The cash flow statement is reported on a cash basis, while your other financial statements are usually reported on an accrual basis. Accrual income (from the profit and loss statement) is converted to cash by calculating the changes in the balances of asset and liability accounts.

Report Categories

The statement of cash flows is organised into sections that report on different types of business activity.

  1. Operating activities – all business income, expenses, assets and liabilities (except for those assets and liabilities reported in investing and financing activities).
  2. Investing activities – the purchase and sale of long-term investments, property, plant and equipment as well as security deposits paid to suppliers or received from customers and dividends received.
  3. Financing activities – the changes in balances of equity accounts, for example, issuing and repurchase of stocks and bonds and payment of company dividends if applicable. Loans are also included in financing activities.

Formal financial report packages usually include notes to the financial statements. The notes contain supplemental information that explain significant items or activities that did not involve cash transactions. The notes may also include detailed reporting of categories that may have been reported as summary totals only in the profit and loss, balance sheet and statement of cash flows. Other items such as taxes, employee provisions, risk management or related party transactions may also be detailed in the notes.

Why is it Useful?

The statement of cash flows gives you a valuable measure of cash flow in and out of the business over a given period. It shows the ability of the business to pay its bills and fund its operating activities. This gives you a picture of overall performance.

It also shows the relationships between assets, liabilities, equity and cash accounts. It shows changes and movements over time, whereas the balance sheet and profit and loss reports show account values at a single point in time.

The statement of cash flows gives you vital information on your business.

  • How strong is your cash position?
  • What is the long-term outlook for your business?
  • What activities generate the most cash flow?
  • What is the relationship between your net income and your operating activities?

If you’d like to understand your financial statements, cash position and future outlook in more depth, arrange an advisory session today. We’ll help you identify and appreciate the strengths of your business.

Planning for seasonal dips in income

Planning for seasonal dips in income

Seasonal dips in income can be highly challenging when you’re a small business. But there are proactive ways to predict, plan for and overcome these dips in revenue.

The key to dealing with seasonal dips is to know when they’re most likely to occur, and to have measures in place to spread your income and revenue pipeline over the course of the year.

Understanding seasonality in your sector

If your business is seasonal such as pool supplies, or a ski gear specialist, you’ll be used to the peaks and troughs, but many ‘non-seasonal’ businesses experience times during the financial year where sales and revenue peak – and, on the flipside, where sales and revenue experience a pronounced dip.

When income is low at certain times of the year, it makes for challenging times.

So, what are the key ways to plan for this kind of seasonality?

  • Forecast your seasonality – it’s vital to know WHEN you’re most likely to experience any seasonal dips. Looking at benchmarking reports for your industry is one way to predict the seasonality in your niche or sector. But you can also use your own accounting data to great effect. Look back through your profit & loss reports and spot where the peaks and troughs have occurred over preceding years.
  • Charge a premium in peak time – one straightforward approach is to apply premium pricing for your products/services during the busy season. By increasing your pricing, you boost your overall revenue, giving you more working capital to see you through the leaner months when sales and income are at their lowest.
  • Offer additional peak-time services – offering added extras and other additional service lines during peak time is another way to maximise the season. In the months where customers are most engaged, look to upsell these premium services and offer more value. Satisfied clients will be more inclined to pay for added extras, giving you an increased revenue stream from the same number of customers.
  • Target other markets – exploring other related markets is another useful tactic. When you’re experiencing downtime, look for other ways to monetise your existing assets, products or services. For example, if you’re a hotel where sales peak in summertime, offer discounted conference space in the winter months to boost revenue.
  • Diversify your products/services – if one product/service has a known seasonal dip, look at adding an additional product or service to offset this downtime. For example, a a ski resort could promote bike-riding or hiking breaks during the warmer summer months to keep revenue constant. Likewise a pool maintenance firm could establish an outdoor fireplace business for the colder months.
  • Have a regional e-commerce strategy – If you’re dependent on a small local market, broadening your marketing and e-commerce strategies can help to attract a wider customer base – and bolster sales. Paid advertising through Facebook, LinkedIn or Twitter can easily target new geographical markets, bringing in new customers and giving your revenue a much-needed uplift during seasonal troughs.

Talk to us about planning for seasonality

If your business is struggling with seasonal dips, and the resulting impact on cashflow, come and talk to us. We’ll help you identify the timing of your seasonal downtime, and come up with a clear strategy for stabilising your income across the year.

Get in touch to start beating those seasonal dips.

Keeping on top of small business cash flow

Keeping on top of small business cash flow  

Money in, money out. Cash flow is one of the most important measures of your business’s health, but how do you monitor it? It sounds simple to track sales on the one hand and expenses on the other – then compare the two.

But a massive 65% of failed businesses say they closed down because of financial mismanagement, including issues such as lack of cash flow visibility. In other words, they didn’t know if they were making more than they were spending.

Why are people losing sight of cash flow?

Everyone knows a business needs to stay in the black. It is not a new idea. So it can be hard to imagine why a business would lose sight of cash flow. Until you are in business yourself and you realise tracking small business cash flow is not as easy as it seems.

For small businesses, this can involve:

  • Keeping track of all your expense receipts – which gets really tricky if there are multiple people making purchases
  • Recording all your sales revenue – making sure to account for discounts you might have given
  • Entering everything into your cash flow Excel spreadsheet or Google Sheet- including double and triple checks to make sure everything is entered correctly.

You may have to rely on employees or business partners to supply a lot of this information. Their paperwork will sometimes have scribbled notes in the margins, requiring a follow-up phone call. It takes a lot of time, patience and energy before you are even ready to punch the numbers into a spreadsheet.

But even if you are vigilant, there is a lag between when a sale or expenditure happens and when it’s entered into your spreadsheet. You are taking a series of snapshots of your cash flow, and there can be big blind spots in between.

As business picks up, with more sales and more expenditure happening all the time, those blind spots become more significant. More things happen in between each cash flow snapshot. And cash flow snapshots get further apart because you’re too busy to update spreadsheets.

Consider using cloud accounting software

Because money in and money out is the ultimate measure of business health and sustainability, you know you must watch it carefully. Cloud accounting software can automate the process for you. In fact, 98% of users of accounting software recommend it to others.

Here’s how it works:

Cloud accounting software is generally sold on a flat monthly subscription. You do not need to download anything and you can run it easily off your existing laptop, desktop or smartphone.

It can link to your business bank account (and point-of-sale system) to track sales and expenses as they happen, with no data entry from you. Because the data comes straight from the bank, it’s clean and accurate. Smart accounting software will also send out your invoices, so it shows what you’re owed. Next, the system pools all the data to create a dashboard of your financial situation, which is automatically updated every day.

Accounting software probably only needs to save you one or two hours a month to pay for itself. In reality, because it will save you time that you can spend on other areas of your business, it will do that many times over.

Talk to us about accounting software for the health of your business.

Getting more meaningful data for your business

Getting more meaningful data for your business

Data is only powerful with context, it needs to be accurate and organised and you need to be clear on the necessities vs the niceties.

Three steps to ensuring data is meaningful for your business

Raw data describes the facts and figures that a business processes every day. Over time, every business hoards a certain amount of data and it only becomes meaningful to a business after it has been processed to add context, relevance and purpose.

For example, in a restaurant, every order will be recorded. However, a restaurant won’t learn much by looking at each one in isolation. Analysis of the orders will reveal trends and patterns, such as peak dining days or biggest-selling menu or bar items. Knowledge of the business comes from the relationship between the singular pieces of information. That restaurant owner may know to do their biggest stock order on a Wednesday by analysing their covers and establishing that sales increase by 38% on Thursdays.

The pace of business in today’s technological times requires businesses to be able to react quickly to changing demands from customers and environmental conditions. The ability to be able to compile, analyse and act on data is increasingly important. In some instances, a high volume of data may need to be accumulated and analysed before trends and patterns emerge, like a particular season’s most popular dish.

When you aren’t compiling accurate business data, you can only rely on gut feel and assumptions about past performance to inform your future business decisions.

If your business is already using cloud software for accountancy, project management system or CRM, it’s likely that you’re sitting on a goldmine of data. If properly utilised, this data can greatly aid running a successful business. You’ll have valuable insight into your sales, expenses, profit and staff efficiencies that can help you answer critical questions and drive smart business decisions.

Every business is unique, but here are three quick tips to help you drive data in your business.

1. Data is only powerful if there is context – can you stop to answer these questions?

  • What is your primary objective (business or personal)?
  • What is happening in the business?
  • What isn’t happening?
  • How can you influence what happens?

Figure out what you’re currently trying to achieve before anything else. It’s important to periodically go back and ask yourself these questions and what goals develop from the answers, as answers evolve over time. You may have started out with your primary objective as running the best restaurant in your area. However as time has passed, your primary objective might now be to take time away from the business to spend more time with your children.

2. The only way your data can help you drive your business is if it’s accurate and organised appropriately – ask yourself:

  • Are your financials up-to-date?
  • Do you have any unreconciled transactions?
  • Are you tax compliant?
  • Are your staff trained on what systems and processes to use for different parts of your business?
  • Are your cloud systems being correctly utilised?

The worst thing you can do is to attempt to analyse incorrect data and attempt to make decisions for the business based on it! Tools like Spotlight Reporting can help you with the reports you need for business decisions.

3. Understand what the data necessities are and what the niceties are.

  • What would you most like to understand about your business?
  • What figures pinpoint success for you?
  • What are your objectives over the next six to twelve months, and two to five years?

Remember, to focus on what truly matters and build from there. If you want help with the process, we can accumulate, analyse, report and advise on your data; or show you the tools to use.

What does an Accountant really do?

What does an Accountant really do?  

Not sure what an Accountant can do for your business? Well, the right accountant will do a lot more than just help with your tax returns! Your Accountant should be a trusted business advisor, helping you lead with more confidence.

The best Accountants can do much more than just tax and compliance work for your business. They are troubleshooters and strategic advisors for small business. Basically, having an Accountant means that you can operate your business with more clarity and confidence.

Whether you are working to get a startup off the ground, or taking the reins of an established business, you will see value from making an accountant part of your team. When you have the right Accountant and a good relationship, you will see their influence impacting all the moving parts that make up your business.

Accountants can support you from startup to business exit. Read more on what accountants do to support your business and help you achieve your goals.