by Anne Stubbs | May 15, 2019 | Bookkeeping and Accounting, Business Management
If there’s one question that we get asked more than any other, it is: what’s the difference between bookkeeping and accounting? Many business owners, particularly when they first start out, are unclear about the distinction and what role a bookkeeper can play in the business. There is however, quite a clear difference and the value that both professional services can bring to a growing business shouldn’t be underestimated.
By way of a simple definition, bookkeeping handles the recording and organisation of financial transactions and data. Bookkeepers are primarily focused on the day-to-day management of the financial data in a business including recording purchases, receipts and transactions. Accounting is the analysis and interpretation of that data. Accountants use this data to look at the bigger picture, analyse the overall financial situation and look at the impact on the business.
Traditionally bookkeeping generally takes care of:
- Data entry
- Payroll
- Bank reconciliations
- Invoicing
- Receipts
Accounting is usually responsible for:
- Analysing business performance
- Taxation management
- Budgeting
- Financial statements and reports
Essentially, accountants rely on the quality of data generated by bookkeepers to help business owners make critical decisions about the management of their business. It’s also true to say that the lines between bookkeeping and accounting are becoming a little more blurred. The development of online accounting and bookkeeping software packages means that some of the processes that may have been previously undertaken by an accountant may now be done by a qualified, experienced bookkeeper. This can include things like the generation of financial statements, which many software packages now facilitate.
Many business owners may start out trying to manage the day to day financial data for their businesses and come to realise, as the business grows, that it takes a considerable amount of time and focus to stay on top of this. A good bookkeeper will prove invaluable in taking this pressure off. As the business grows further most business owners recognise that the advice of a good accountant is needed to help them decide what the data is telling them.
At Numera Bookkeeping Services, we provide more than most traditional bookkeepers. With significant experience across a wide range of industry sectors, we are able to support you with all the standard bookkeeping services as well as BAS preparation and lodgment, payroll outsourcing services, advice on the selection of accounting packages and software training. If you need the services of a local accountant, our referral partners, MGI South Queensland are on hand to offer more detailed accounting advice. Work with the Brisbane bookkeepers you can trust. Give us a call today on 07 3002 4880 or email [email protected] to find out how we can help your business.
by gpm | May 16, 2017 | Uncategorized
Fundamentally, there is only one reason that businesses go broke – they run out of cash.
So how do businesses (even listed ones) run out of cash and what can you do to make sure it doesn’t happen in your business?
There are three basic reasons business run out of cash
1. They are not profitable in the first place
They don’t have a cash flow problem; they’ve got a profitability problem. In other words, the lack of cash flow is a symptom of poor profitability (or even losses). If you have a profitability problem, unless you fix your business model and restore profitability, you’ll never get cash flow under control.
2. The second is that they use short-term working capital to fund the acquisition of long term assets
In other words, they use their working capital (short term funding) to purchase plant and equipment or property (long term assets). If your business is growing rapidly, this is a big no, no. You’ll need that working capital to fund your growth, particularly larger inventory holdings.
In most cases this issue can be fixed by sale and lease back of the assets (assuming funding is available). But the key is never to use your working capital to acquire long term assets unless you’re absolutely sure you have significant excess and know that you won’t need it in the near future.
3. The third reason that businesses run out of cash is that they grow too fast
Yes, businesses can grow too fast and it is a situation we see all too often. Make no mistake, a fast growing business is potentially in danger territory, particularly if it doesn’t have access to an endless supply of funds – and which businesses have that luxury?
For many fast growing businesses, this means holding more and more inventory. As the business (and sales) grows, more of the profits are required to be used to invest in more and more inventory to stock more and more stores. If you’re in a business where margins are tight – whammo! – you have lower profits to fund ever increasing inventory. Should inventory turnover slow you could also be in serious trouble.
If you also happen to have a business where you give credit terms to your customers, then not only do you have a build-up of inventory, but you also have a build-up of debtors. These have to be funded from somewhere. Unless the business is highly profitable, the profit alone may not be enough to fund that growth. This invariably means going to your friendly banker but at some point there will be a limit to which banks will be prepared to fund your growth.
How to avoid running into a cash flow problem?
There are three key measures every business should be checking on a regular basis, but particularly fast growing businesses, to make sure that they have a sound cash position. If you don’t currently know these you’re flying blind. Get a new accounts team!
Your Free Cash Flow
Your Free Cash Flow (or available cash) is simply that. It is the amount of cash you have left out of profit after funding the increase in size of your business. If you’re not measuring and monitoring this then you’re flying blind.
Your Working Capital Burn Rate
This is simply the amount of working capital (debtors plus stock less creditors) as a percentage of sales. If this is (say) 25%, then you know that for every additional $1m in sales, you’re going to need $250k in working capital to fund that growth.
Your Sustainable Growth Rate
This is simply the rate of growth the company can sustain without adversely affecting its proportion of debt to equity funding. It’s called “sustainable growth rate” for a reason.
There is a saying that goes ‘turnover is vanity, profit is sanity but cash flow is reality.’ We have worked with countless high growth businesses who have been stunned to learn that their financial position is unsound despite their growing sales.
It might sound crazy but at times it is essential to reign in your growth to ensure a sustainable journey in the long run. It might be painful to turn down opportunities at the time but trust me, you will be thankful when you come out with a sound business in the end.
