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Banish One Step Thinking – The key to better understanding (Part 3)

April 23, 2009

man in warehouseThis series is about discussing how one step thinking can cause incorrect profits to be reported in a business. I want to deal with areas where incorrect recording of purchases can cause incorrect profit to be reported in a business.

1. Beating the Tax Man
There is a well known pastime by most business owners of trying to beat the tax man. This means that people try and write off items as fast as they can and therefore mis-match costs to revenue. Bringing costs forward happens subliminally and causes the Jekyell and Hyde which goes on a business owners mind.

2. Failure to keep up to date with book work
Business owners fail to keep their book work up to date and only records items when they PAY for them which can bear no resemblance to when they were purchased ( refer to part 1 of this series).

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Categories: business finance

Is My Business A Going Concern?

February 24, 2009

builderIs my business a going concern and if so what items should I be accumulating?

Are you hoping that your business stops completely at the end of this month? If the financial crisis is affecting you, the answer may well be YES. However, most of us are in business for the foreseeable future. We’re working with a “going concern” paradigm. What that means is that at the end of every month we’re likely to have unfinished tasks which are commonly known as ‘works in progress.’

So what would I have in Work In Progress? What would be accumulating in my books relating to that?

If you’re a manufacturing business the answer is simple. All the work left in your factory which is part-finished.

But what about a service company, a law firm or an accounting firm?

Again, there will be assignments and ongoing work which have been done but have not progressed far enough to bill clients. These should be accumulated in work in progress.

What about a project management business?

This is quite easy. It’s all the amounts spent on jobs which can not yet be invoiced to customers.

While all this sounds logical, when it comes to the book keeping everything gets a little haywire! Many book keeping systems work on a cash basis, so whenever a purchase is made it goes in the COST OF SALES. That is code for ‘written off’! No wonder people have difficulty working out their profit. It’s a mis-match of revenue and cost items which bear no resemblance to each other. What a great fruit salad!!

Every business has work in progress of some sort. If you are not accumulating any in your books then they are not a true reflection of what’s really happening in your business.