Unfortunately there is nothing to stop anybody calling themselves an accountant. This means that it is worth understanding who is looking after your financial records.
Whilst you would not necessarily think of bookkeepers as accountants they do accounting. Their role is largely to "keep the score" by recording the financial effects of what a company has done. They are usually the best people to do routine accounting work - basically everything from bank reconciliation to inputting supplier bills and invoicing customers. You’d be surprised however at the varying quality of a bookkeepers work – I always am! – and in my experience “saving money” on a cheap bookkeeper or doing it yourself is a false economy. Either you are wasting your time or you are wasting accountancy fees at year end. How do you know if yours is any good? Ask your accountant.
Qualified accountants are experienced professionals who have undergone rigorous training and passed extremely difficult exams. There are a number of leading qualifications - but if you look for the letters ACA, FCA, ACMA, FCMA, ACCA or FCCA after the accountant's name you should not go too far wrong. Qualified accountants are best at dealing with the non-routine aspects of your business eg helping you to increase your profits, produce your statutory accounts and pay less tax.
There are also many unqualified "accountants". Before deciding to use the services of one, I suggest you ask yourself: "Would I put the health of my family in the hands of an unqualified doctor?" If the answer is no, why consider putting the health of your business in the hands of an unqualified accountant? Don't be afraid to ask what qualifications and expertise an accountant has - and if you have any doubts, try somebody else.
Once you have worked out who the best people to look after your books are it should be easy and cost effective to generate good financial information which highlights the successes and failures of your business to assist in making better business decisions.
But what information? Just as there are several different types of accountants, there are also many different types of accounts. They can however be grouped under two main headings. Financial accounts, the annual ones that your accountant produces and management accounts.
Both sets of accounts (financial and management) use the same basic information which they get from the same place - the company's accounting records.
Financial accounts are compulsory for companies, and must be sent every year to the shareholders in your company and Income Tax. In addition, they must follow a standard set of rules and conventions, and show what went on during the financial year; and are mainly used by people outside your business - eg bankers, customers, suppliers and, of course, the taxman.
Sole traders and partnerships must also produce financial accounts but there are not so many rules governing how they must be set out and what they must contain.
Management accounts are essential for well-run businesses, but are not strictly required by law. As their name suggests, management accounts are mainly used by management. In fact it is very rare for them to be shown to anybody outside the business - and businesses cannot usually be forced to show their management accounts to anyone other than their auditors and (in exceptional cases) the taxman.
There are no rules that say what management accounts must look like - it is up to each business to decide what format will best help it to understand what is going on, control the business and make better decisions.
Management accounts often predict the future as well as keep track of the past i.e. they usually include forecasts of what is going to happen tomorrow as well as recording what happened yesterday. In contrast, financial accounts only ever record what has already happened in the past.
The type of information that even the smallest business should produce is an annual financial forecast in order to set a realistic goal and understand potential cash flow issues and also management accounts produced on a monthly basis.
These management accounts should monitor actual trading results against those budgeted, have regularly revised cash-flow forecasts covering the next three months, and monitor the cost and profitability of important contracts or business lines.
A proper accounting system is not a luxury that small businesses can do without, it is a necessity that they cannot afford to be without as it will assist in better decision making increasing cash flow and profitability. By picking the right “accountants” and exploiting technology the cost will be far outweighed by the benefits.
In fact, isn’t it obvious that running your business with only annual accounts is like timing the BBQ sausages with a smoke alarm?