The potential pitfall of modern accounting software
It’s easy to prepare financial accounts
It’s not that long ago that accountants sat in massive halls surrounded by enormous books where they would record transactions by hand … in pencil, so as to easily correct any errors!
There were books for sales and expenses, and then control ledgers for debtors and creditors, as well as books for cash and other assets & liabilities. One transaction would always cross over 2 books (as per the Accruals Method of Accounting), and often more.
Accounting was truly for those with an aptitude for logical thinking, those who liked to work by the rules and got excited when they “balanced the books” at the end of the day … and those who loved the challenge of finding where that one silly error was in order to correct it (which could take hours!)
How things have changed
Nowadays a set of accounts is easy to prepare, anybody can do it, you just record all of your day to day sales and expenses into an app and hey-presto the software produces a fantastic looking P&L and Balance Sheet for you to see how well your business is doing.
Well, that’s the theory anyway.
But are you sometimes surprised by the fact that you’ve managed to make a huge profit in a month where you felt you were quiet, or where you’ve made a loss in a month that you’ve been working like a trooper? Or are you surprised when you receive your formal set of accounts from your accountant and they look very different to the results you thought you had achieved in that year?
And here-in lie the problem with our fantastic, and cheap, modern day accounting software programmes.
Don’t get me wrong, they’ve revolutionised the world of accounting in so many ways, making financial information readily available to business owners who otherwise would have to wait months for their accountant to prepare for them. They have also helped accountants prepare reports more quickly as business owners are able to keep up to date with the day to day transactions, so making their job quicker & easier. So it’s not all bad!
So what’s the problem?
The “problem” is ensuring that all transactions are accurately in the right place at the right time. What do I mean by that?
- Do you always get your invoices out to your clients on time?
- And at the end of the month do you ensure all invoices are dated within the month you performed the work, or do you sometimes fall a few days behind and send them the following month?
- Do you hold off invoicing a client until the following month in order to get next month off to a good start?
- This is a classic “sales mentality” mistake … in the world of accounts anyway!
- Are you confident that every single supplier invoice is in for the month?
- It’s okay for them to invoice you late (your cash flow will benefit! But do you account for that cost anyway? (ie. put a journal adjustment through?)
- If you have been invoiced early for something, do you adjust for that, ensuring it is shown at a later date, in the month(s) it is due?
- Are you confident that you know the difference between Revenue and Capital expenditure?
- Are you certain that you are always allocating costs to the correct nominal cost code? This is important as it determines whether a transaction hits the P&L or just the Balance Sheet?
- Do you process your Depreciation adjustment each month?
Why is it so important?
If you’re a business owner making future decisions based on your day to day accounts, then you will only make good decisions if the information you’re relying on is accurate.
What’s the answer?
In an ideal world I might argue that you should always use a professional bookkeeper or accountant, but of course that costs money. In which case I might argue that it’s an investment worth making, to ensure the future of your business. But let’s be realistic.
In conclusion, just be aware of the limitations of the accounting software you are using, if you are not confident that all information is being accurately recorded all of the time.
I completely agree that modern software is fantastic, it puts information at your finger-tips on a daily basis, and can help manage cash-flow and help you to make decisions.
But take advice on what information may be missing, and how you need to consider all information when making decisions for the future of your business. Don’t fall into the trap of thinking everything is perfect because you’re using a clever piece of software. Understanding all the limitations ensures you really are in full control of your business.