When you first envisaged working for yourself, it’s pretty unlikely (unless you’re an accountant) that this vision included late nights compiling end of period financials. Or sitting hunched over a part-completed profit and loss statement with furrowed brows. There’s no doubt accountancy, for most, is not the most glamorous part of the job. But it is essential to making well formed business decisions, weak accounting is a fatal flaw, and if you remember nothing else from this article, remember this, your company’s finances are YOUR responsibility not your accountant’s!
Liability for decisions rests ultimately with you as the business manager. Not with your accountant. But even with the best accountant in the world, if you haven’t taken the time to understand the function of the accountant and the accounts, you can’t expect to make well informed decisions, nor can you expect your company’s financials to be anywhere near as accurate as they might be, if you took the time to get involved.
Consider the following example, two companies (let’s call them CompanyA and CompanyB) buy exactly the same piece of machinery, their 5 year predicted valuations for the item are as follows…
Year 1 $10,000 $10,000
Year 2 $8,000 $8,000
Year 3 $6,400 $6,000
Year 4 $5.120 $4,000
Year 5 $4,096 $2,000
So who has made the mistake? They can’t both be correct?
If you’re answer goes something like “well, it depends on the market price for the item in the given year”. Then sure that’s correct. But how could your accountant possibly know this five years in advance?
The answer is of course he can’t! In reality the accountant has had to make an educated guess, CompanyA’s accountant chose the “reducing balance” depreciation model while CompanyB’s accountant chose “straight line” depreciation. Let’s leave depreciation models for another article, suffice it to say that more than one model exists.
Ok, so the accountant can’t be expected to make a reliable prediction of depreciation rates for every item you might need to run your business, but you certainly should be able to provide an educated guess. You just spent $10,000 on a new piece of kit right? So presumably you know a bit about this stuff? With that in mind, wouldn’t it be a good idea to get involved?
Of course, getting involved in assisting your accountant model depreciation for major pieces of equipment means that you first have to be aware that this is an issue faced by those compiling financial reports.
Let’s look at another area where the accountant needs your help to make prudent judgements. A friend of mine found himself in the unfortunate situation of hearing through the grapevine that the overdue balance owed by his biggest client was unlikely to ever be paid. His debtor had been doing a great job of keeping news of their imminent demise quiet, but the cracks were beginning to show! The next stop for many in this situation would be the nearest bar to drown their sorrows. Fortunately he had the good sense to head straight for his accountant! With only a few days until the publication of the financial statement they were able to write off the bad debt. Without this adjustment, profit would have been massively overstated, that means tax liability would have been far higher, and that would have meant the company was insolvent! Disaster averted, the company managed to recover and move on to far greater things, but only because he had a sufficient understanding of the accounting process to understand that there was a danger.
Accountancy, contrary to popular belief, is not simply glorified arithmetic. A great deal of good judgement is required to run a tight ship, your accountant simply can’t be expected to know as much financial detail about your industry, associated equipment and trading environment as you do. But if you can warn the accountant of impending disaster he/she can execute all the technical aspects involved in taking preventative action.