Are you preparing your company accounts for the right reasons?

Business compliance vs business performance

“How often do you prepare your company accounts?”

If you ask this question, many Malaysian businesses today will say they prepare accounts yearly for the purposes of statutory audit and meeting SSM requirements. Or they may say bi-monthly, in order to submit SST returns.

“How fast do you want to see your accounts after the period has ended?”

Many business owners will tell you that they just want their company accounts prepared in time for the filing deadlines to avoid penalties.

It is said that approximately 98% of companies in Malaysia are SMEs, and a large percentage of these businesses run an accounts department for compliance reasons rather than for evaluating their business performance to enhance their decision making. We also hear of business owners asking their accountant why they are always so busy.

Accounting explained

Accounting is important for all businesses as it helps the owner(s) and other stakeholders to evaluate the financial performance of the business. Financial statements provide vital information regarding cost and earnings, profit and loss, cashflow, liabilities and assets for decision making, planning and controlling processes within a business.

If you compare a business to a human body, the financial statements are like a health check-up report. It tells you where you are doing well, where you are not, and using benchmarking to gauge how you are doing compared to the rest of the population (i.e. whether the company’s performance is in line with other companies in the industry).

This is especially important for SMEs with an ambition to scale up. Many global business surveys show that a significant number of businesses fail because of poor financial and cashflow management as the main reason. This is no different in Malaysia. Many companies are managed and run by instinct and monitoring bank balances only.

While we cannot say that ALL companies that do not look at their financial statements will fail, but you owe it to yourself and your employees to give your business the best chance to succeed. You can do that by making business decisions based on analysis of factual data.

Continuing with the analogy of a health check-up, your financial reports are more than just a one-time health check. A good set of financial reports also compare against previous periods/years to identify trends and against your budget and targets to assess whether you are meeting your business goals.

Why timely accounts should matter to you

One of the main weaknesses of using financial statements to assess your business performance is that it is backward looking. It is based on events that has already happened.

With that in mind, if you are relying on accounts that are prepared long after the period has ended, it is likely that you are making decisions based on outdated information, especially in today’s dynamic environment. The current ever-changing Covid-19 pandemic situation makes this even more apparent.

This is the reason why there are increasingly more companies approaching us to ask how they can get access to their accounts in a more timely manner. Financial reports drive business decisions. Timely financial reports drive faster and more accurate business decisions. Timely financial information can actually be a key part of your business’s competitiveness.

Timely accounts do not only benefit internal stakeholders. Updated financial statements are also required if you are applying for a loan, aiming for flotation or when a major (potential) customer requests for it for review.

Although GST has been replaced not too long ago, GST or similar broad-based tax systems may return in the future. Businesses should keep this in mind and not forget the scramble during the last GST implementation. Such tax systems require accounts to be updated and accurate, or you may risk incurring painful penalties.

Don’t just prepare accounts, understand them and make decisions based on them

We have been talking a lot about preparing your accounts. However good financial performance does not just end at preparing timely accounts. Getting a competent accountant is vital to translate this information into advice and recommendations.

While we are not able to conclude that businesses are worse off for not having an accountant, we cannot underestimate the breadth of knowledge and experience a qualified accountant can provide.

Ask yourself whether you will self-assess your health at home, or whether you would service your car yourself. Or would you go to a qualified doctor (after you have checked his qualifications/record) and a professional mechanic.

The same concept applies to your business. Your business needs the same attention from a professional to keep things running smoothly and spot potential issues early. You may be hesitant to let an outsider in on the intimate details of how your business is run. But partnering with an accountant will help you to achieve your goals and set you up for long-term success.

Bookkeeper vs accountant

It is important to know the difference between a bookkeeper and an accountant. Many companies who already employ a bookkeeper do not realize that they lack a qualified accountant for proactive financial advice.

A bookkeeper is responsible for recording financial transactions i.e. data entry. Most of the time, the data entry is restricted to sales and purchases, i.e. recording supplier invoices, recording incoming/outgoing payments, issuing sales invoices and email statements to customers.

An accountant is not only responsible to review these entries, but also to perform the necessary entries and reconciliations to produce a full set of financial statements. These include accruals, fixed asset depreciation, bank reconciliation and so on.

The accountant is also responsible for interpreting these financial statements and providing answers for these types of questions:

  • Do the accounts indicate any potential issues in your business?
  • For the identified issues, are there any long-term impacts? How can the business improve on these areas?
  • Which areas in your business are performing and which areas are not? And why?
  • How can you grow or scale-up the business and what are you missing/lacking to do that?
  • What are the realistic revenue/profit targets you can set as goals?
  • Do your accounts over a period of time reveal any trends or potential upcoming issues?
  • What kind of data are you lacking, or should you dive deeper into to investigate the points above, and how?

At RockAcc, we do recognize that while it is much easier to recruit a bookkeeper or clerk for repetitive data entry, hiring or retaining a qualified accountant in your business for the long term can be challenging. Book us for a free consultation call to talk about how we can help you with our outsourced bookkeeping and accounting service offerings.

How cloud accounting changes everything

It is one thing to recognize the importance of timely accounts, and an entirely different thing to able to execute this vision. In the past, it can be very challenging to produce accounts quickly as documents are passed in hardcopy to accountants which needs to be meticulously sorted and filed.

With the influx of cloud accounting solutions, the whole accounting landscape has changed in many countries. And this change is inevitable for Malaysian companies. With the high broadband and mobile device penetration rate, many Malaysians are digital savvy in their everyday life. This should be applied to running their businesses as well.

Xero is at the forefront of this change. Xero is one of the fastest growing cloud software companies in the world. With cloud accounting, you and your bookkeeper can upload documents and record your sales and purchases anywhere, anytime (as long as there is internet connection).

Best of all, your accountant will be able to view this information right after you have entered it, from wherever he is. You can even snap a photo and attach it in the system on the spot. Document management solutions like Hubdoc (comes free with Xero now) can even self-learn to read supplier invoices over time and save you time from entering the details yourself. No more manual entry or uploading of bank statements will be required as Xero can connect to your internet banking or use direct bank feeds to download bank transactions into your Xero file without manual intervention.

Preparing timely accounts is now a very plausible endeavour. We can even achieve real-time accounting now if the transactions are entered every day, the accountant performing daily bank reconciliation and business owners can now look at updated information on the dashboard at all times.

Beyond accounting: what comes next

As mentioned earlier, the inherent weakness of financial reporting is that it is looking backwards. Once you have gotten your accounting processes in full gear, you can start talking to us about how you can look forward.

There is an increasing number of cloud solutions that can connect to your Xero data and provide 3-way forecasting capabilities that we will explore in future articles.

Conclusion

As a business owner, preparing timely accounts should be one of the first few priorities in your to-do list. We hope that this article has helped you to understand that you should be preparing accounts for yourself, and not because it is a statutory requirement.

We recognize that business owners want to use their limited time to run their business and focus on their core strengths. Our outsourcing services can help you lighten the burden.

We invite you to start talking to us today, tell us about your business and the issues you face and discuss together the action items you need to take and how RockAcc can help. You can see an overview of our Accounting services here.

 

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