All businesses have to prepare regular accounts of some kind. Often these are done a long time after the end of the financial period and are thought of as only of historical interest.
In many cases they are only really used by H M Revenue and Customs or the bank, as business owners sometimes feel they have no real interest in what happened six or nine months ago.
Accounts are prepared, ultimately, from the information which is gathered on a day-to-day, week-by-week and transaction-by-transaction basis, usually in ‘real time’, or at least very nearly.
All this data is then pulled together, perhaps many months afterwards, to produce the final historical financial accounts.
But, don’t forget, what you can measure you can manage.
Since the information is being produced as things happen, instead of waiting many months, packaging it up and sending it off to be turned magically into meaningful historical accounts, it makes sense to try to use it much more quickly. This in turn gives much more timely management information, particularly as the work is all going to have to be done (and paid for) one day anyway!
This is especially true of VAT registered businesses, which usually prepare quarterly VAT returns. With a little organisation and usually a very manageable amount of further work, meaningful figures can be produced quarterly.
Even those perhaps slightly more ‘esoteric’ things the accountants do (like the depreciation, or the accruals) do not have to be a bar to the production of useful figures.
With only a little tweaking of systems and a small amount of training it is often very practical for owner/managers to have access to useful and current figures.
We are often asked to design, or help redesign or adjust, systems. We then provide training where appropriate, to allow this kind of access. There is no need for a learning curve for the owner/manager which looks like the North face of the Eiger.
People are often surprised to find just how useful regular timely information is to them.
KPIs
Whether or not quarterly, or even monthly, management accounts are prepared, the business owner/manager usually has a ‘gut feeling’ for the current state of the business, and how it is running. In some businesses this will simply be a feel for how much cash is in the bank, or how busy the shop has been this week. In others, perhaps, it will involve looking at amounts outstanding from customers or the total number of boxes shipped through the warehouse.
Any regularly produced piece of information that gives an insight into some aspect of, or indeed the whole of, the performance of a business is known as a ‘Key Performance Indicator’, or KPI.
Jargon can sometimes be off-putting, but, as shown by the simple examples above, a KPI does not have to be complicated or take ages to arrive at.
Other examples of KPIs are: a property company might measure the number of deals it does in a month, ensuring each one generates at least a certain level of margin. A delivery business might measure the number of deliveries done, per day, per van, perhaps even per mile driven, to assess the level of activity for each driver.
Producing some simple to generate and simple to use KPIs can revolutionize the way a business is managed and just the process of coming up with them can highlight areas for improvement.
This all sounds like the stuff of big multi-national business and bureaucracy, and not the province of the smaller or medium sized organization at all. However, even the smallest business will find that they have some KPIs they use all the time, even if it is only to keep up to date with the bank balance by writing it in the cheque book each time a cheque is written or an amount paid in.
The Quick Ratio, dividing Current Assets into Current Liabilities is commonly used and can be a useful guide to overall liquidity. What it doesn’t tell you, of course, is how old your debtors are, in other words, how good you are at turning the sales into cash.
DESIGN
Designing a KPI, an easily generated statistic which will tell you something useful on a regular basis, need not be a difficult process. Stand back and, maybe just on the back of an envelope, break the business down into parts which reflect the different aspects of the organization. In a manufacturing business, for example, examining each of the different product lines, noting how you arrive at the actual end product should reveal where key points in the processes are.
Once the main systems have been noted, look at each area to try to assess which bits need measuring. It is quite likely that in any organization the necessary information to allow you to measure a particular process or activity is easily accessible and is being produced anyway.
In short, a business should try to answer two questions; “What is key to the business?”, and “How can it be measured?”
SPIN-OFFS
Preparing and using information regularly has several spin-offs. Not only can decisions be made on real, and nearly real time, information, rather than by the ‘seat of the trousers’, but at the end of the accounting year very often the annual accounts simply drop out with little amendment, because the monthly, quarterly or perhaps (in some cases) weekly information is so good.
This is a really cost-effective approach. Planning is made more timely, tax can be budgeted for and problems are seen coming early, rather than recognized sometime after they have bulldozed their way over you.
SERVICE ORGANISATIONS
It is worth mentioning service based businesses specifically. These have their own problems for measurement, in fact. Most such businesses, in essence, sell time and there are really two main KPIs which will allow useful analysis of the performance of the business.
The first measures how good the business is at selling the available hours, sometimes called the Saleable Hours Efficiency or SHE. This divides, perhaps for each individual, the number of hours sold by the total hours available for sale by that individual. It ignores things like annual and public holidays, which are never available for sale. Some appropriate level for sale of the available time can then be set as a target. The corollary to this, of course, is to try to maximise the available hours. Clearly some can never be sold, e.g. holidays as noted above. There may also be activity which is critical to the business but not chargeable to the customer. Such time should be excluded from KPIs, just as holidays are, as they are not available for sale.
The second KPI is a follow-up, in a sense. It measures the number of hours actually available for sale, and is sometimes known as Potential Saleable Hours. By maximising both these KPIs the business will maximise its turnover and profit from the current team.
We are using KPIs very similar to these and we regularly help businesses identify what to measure and how to use this information to set targets or goals, both at a whole organizational level and for individuals or small teams within the business.
THE LAST WORD
Many commentators believe that many organizations fall between two stools, either generating seemingly endless reams of management information and a whole stack of KPIs which are simply not properly used, or, more likely in a smaller business, that owner/managers rely on gut instinct which, while often useful, is not always accurate enough.
THE VERY LAST WORD
Performance can indeed stand out like a ton of diamonds. Designing and using a small number of carefully prepared KPIs really does focus the mind on areas of inefficiency or provide understandable and useful targets, to help you develop your business.
It is impossible these days to pick up a newspaper or switch on the television without encountering the question of the environment. ‘Green issues’ are almost all-pervading these days. Sir Nicholas Stern’s Government sponsored review on the economics of climate change has been published in the last few days.
From local councils arranging regular recycling of waste paper and garden rubbish to the global discussions about carbon emissions, the whole issue of how we use the resources our world offers has become big news, and it seems unlikely that this will change any time soon. Indeed, it is likely to become more and more important.
The environment has also become big business. The Chartered Institution of Wastes Management alone has a reported 7,000 members.
Despite all this, however, apart from the most peripheral thinking, most businesses have not really addressed the environmental issues of their activities.
The big players in some of the most obvious industries, like aviation and power generation, are only now beginning to look in detail at how they can raise their game and the Government’s (and the Opposition’s) intentions to ‘tax the polluters’ one way or another mean there could be huge costs if they get it wrong.
BUT, WHAT CAN A SMALL BUSINESS DO?
What is less talked about are the ways smaller businesses can react to the increasing demands for the environment to figure in planning or undertaking any activity.
Taking a long hard look at all activity may reveal a number of areas where steps can be taken to positively affect the Carbon Footprint (an assessment of the overall impact on the environment in tons of Carbon Dioxide emitted per annum) of the business or organisation.
There are a number of ‘calculators’ available on the Internet which can give an assessment of the Carbon Footprint of an organisation and it is thought to be important to consider what can be done to reduce the negative impact of an organisation on the environment rather than simply to arrive at a bald figure.
All this may be very laudable, and many business-people may well aspire to be able to do something positive but feel constrained by the simple economics. People may suggest that surely doing something positive for the environment just costs money and that this is simply not commercially practicable, however much they might personally wish it were.
The truth can be somewhat different, however. There may be quite simple (and cost-effective) ways of doing something positive, in fact.
With fuel and power costs rising, it may be that simply switching to long-life low emission light bulbs is something that would be practical. Perhaps reducing the temperature in part, or indeed all, of a workplace by the odd degree or two would not only save costs, but also help to keep team members alert!
Although the paperless office may simply be a pipe dream, the use of e-mail internally and as a means of communication with clients or customers may significantly reduce the need for paper copies, provided a robust system of backup is in place. In fact a reported two four drawer filing cabinets (20,000 A4 sheets) can be replaced with a single CD of data.
We discontinued our own paper security copies as we have multi-layered, reliable (and tested!) electronic back-up systems.
It may become necessary to prove an ‘audit trail’ for a particular decision, for example, but this should not be beyond the average user of a good e-mail system.
Even the smallest organisation will benefit from switching off any unnecessary computer equipment when not in use, perhaps over the weekend or Bank Holidays. Standby modes still gobble up power.
Not only will this save some power costs, but it could protect against power surges or cuts which can often happen over holiday periods when peak demand is present.
It might also allow hard drives and processors which may otherwise be permanently running to have time to cool down, thus reducing wear on the critical parts of a computer system.
HOW ABOUT MOTORING?
Most businesses will need, at some level, motor travel by team members. It may be that this is unavoidable. Perhaps some consideration of suitable alternatives needs to be given. There may be a more fuel-efficient choice of vehicle available.
It could be that the managing director no longer needs a high powered five litre engined car and could easily survive with a smaller engined version.
We have looked at this and although still maintaining cars suitable for longer travel, some of our directors now habitually use small fuel-efficient cars for day-to-day home to office and/or local travel.
Our overall motoring costs, both business and private, have dramatically reduced, the carbon emissions have gone down (as the overall mileage in large engined cars reduces) and, best of all, in one case the car actually qualifies for 100% Capital Allowances in the year of purchase – an almost unbelievable full tax relief – all at the front end - on the whole cost of a motor car!
This may simply not be a viable option for everyone but we could well move to a time when rather than being the status symbols of the past, big expensive cars may even send negative messages.
NEW PLANT AND EQUIPMENT
When replacing a piece of equipment, it is well worth considering the environmental impact and the energy consumption of the new item.
Tax incentives including yet more 100% first year Capital Allowances are available for using more environmentally friendly units. Even the H M Revenue and Customs website at http://www.hmrc.gov.uk and http://www.eca.gov.uk give further details of this, and of qualifying technologies.
FLYING
Aviation, although seemingly ever cheaper to the consumer, is reported to be one of the biggest contributors to the build up of greenhouse gases.
Aviation and shipping emissions are not, in fact, included in the Government targets and are widely reported to have doubled since 1990. We can all blame cheap air-fares and more people wishing to holiday in far flung climes, but business travel contributes as well.
Perhaps fewer flights could be made, perhaps supplemented with video conferencing, or more efficient use made of foreign visits. Flying long-haul is often an expensive business and saving one business-class fare to Asia, for example, might pay for a significant amount of other contact.
DELIVERY COSTS
Increasingly, where goods are shipped to customers, businesses are turning to direct shipment, rather than to shipment into a warehouse and then on to the end customer. This not only often reduces carbon impact (moving goods once rather than twice), but can also reduce the costs as no storage facility may be needed. On top of that, cash flow may actually be enhanced if there is no need to invest in stock.
Every business is different, of course, and what works for one organisation may be terminal for another. If speed of delivery and variety of stock holding at small volumes are the core of the business, then it may be that it is local delivery costs which need to be looked at. Perhaps replacing that old van with a new more fuel-efficient one is the answer.
There are no magic answers to the many environmental challenges we all face, but even small and apparently inconsequential things, done by everyone, can add up to a huge contribution, and save us money as well.
In what was widely expected to be Gordon Brown’s last Budget as Chancellor, but turned out to be much more likely to be his penultimate effort, the Speech itself appeared to be largely composed of political rhetoric and spin.
Gone are the days when listening to the Budget speech was a good guide to upcoming tax changes. All such detail is now relegated to the Press Releases issued as the Chancellor sits down.
This year’s Budget has spawned yet another 500 pages of Finance Bill and, based on recent experience, this is likely to go through largely unamended.
SURPRISES
There were two major surprises.
Firstly, for some two years the Treasury has been engaged in a consultation with a view to some reform and streamlining of both the rules and operation of Trusts.
Mr Brown announced a major change to the Inheritance Tax treatment of Accumulation and Maintenance Trusts and of Interest in Possession Trusts, aligning them with Discretionary Trusts.
This change had neither been anticipated, nor consulted upon.
Existing Trusts should be reviewed, once the legislation is settled. In some cases more tax may be payable than originally anticipated although in many cases it may be that changes can be made (before 2008) to avoid the effects of the legislation. It may have to be accepted, for example, that the beneficiaries will enjoy assets at the age of 18, rather than, say, 25.
The common planning of converting an Accumulation and Maintenance Trust into a Discretionary Trust, just before someone’s 25th birthday, is probably out of the window.
However, as the final legislation emerges some planning opportunities are expected to become more clear.
The ‘nil-rate-band’ Will Trust created on death which provides for the surviving spouse (with or without others) is understood at this point to be largely unaffected although this is still not certain.
Such Trusts fall into the Discretionary category anyway and no change is anticipated to their use. H M Revenue and Customs are understood to be happy with the use of this type of planning which has become widespread in recent years.
The change should not affect in principle existing Interest in Possession Trusts although some may need to be altered and Accumulation and Maintenance Trusts can be brought into line to qualify under the new rules in the period up to 2008.
The second surprise was the abolition of the tax exemption for employees provided with a computer by their employer which is available for private use.
When challenged the Treasury was again unrepentant. In their view this exemption has been abused with employees being given access to what amount to entertainment systems, rather than working tools.
It is also argued that the ‘wrong’ people (whatever that means) have been able to take advantage of the rule.
However, anyone who already has (or arrangements were in place at Budget Day for) an employer-provided computer should not be taxable as they still fall under the pre-existing rule.
This was clearly unexpected elsewhere even in Government as, ironically, the DTI had an employee home computer initiative scheme just commencing when the announcement was made!
Clients will need to examine their own situations. Computers used mainly for work with ‘incidental’ private use should not be taxable but it is unclear what ‘incidental’ means in practice.
DEADLINES
One last point of interest.
Mr Brown has announced the intention to accelerate the filing deadline for Tax Returns from 31st January to 30th November (online) or 30th September in paper form, from 2008.
This should not worry most of our clients whose Returns are filed before 30th November in most years, and to that extent does not worry us either.
However, there has been uproar within the accounting world more generally, much of which still, after nearly ten years of self-assessment, seems to find itself working 24 hours a day, seven days a week each January.
It remains to be seen whether Mr Brown’s successor manages to stick to this intention but it more than likely that filing will be accelerated.
Similar things are in the air for the filing of private company accounts which are likely under the upcoming Companies Act to have to be filed within nine months (rather than the current ten) and for their Corporation Tax Returns whose filing may well accelerate to the same nine month date.
In the relentless drive towards ‘e-filing’, it is also proposed that electronic filing of accounts and tax returns for companies will be mandatory by 2010.
As with personal tax and PAYE systems it is far from clear whether Government will make sufficient investment to ensure the H M Revenue and Customs and Companies House systems are up to the task when the time comes!