How effective is your accounting system?

December 1, 2020

How effective is your accounting system?

The accounting systems used in retail and service industries vary in cost and complexity, yet share the same requirements for effectiveness. Basically, the best accounting systems are those that do what’s required by the business in a secure, timely and user-friendly way.

Align your record keeping system with business directives

It can be challenging to select the right record keeping system and integrated business tools. Most decisions are made by the business owners or managers, and it becomes the responsibility of employees to use the system as effectively as possible to achieve the business objectives. So “how we use the system and why” should be clearly communicated to all users.

Compliance with any privacy legislation will also need to be considered with the storage and recording of information in any record keeping system..

It’s a fundamental requirement of record keeping systems to understand and adhere to directives around what data will be stored and how, who has access and how the information can be used for business reporting purposes.

Policies and procedures will need to be prepared to ensure appropriate maintenance and use of the system across the organisation.


Create a budget

Making a budget for your business can help management predict the cycles of ups and downs, but it is often a trial-and-error process. You set revenue goals and try to allocate resources effectively to achieve them. A successful budget depends on good projections of income, cash flow and spending needs. Sometimes you miss the mark. Predicting the future by learning from mistakes is a normal part of budget planning.

These six key spending categories are essential to properly evaluate and monitor:

  1. Labour: Usually the biggest expense and often pegged to a fixed % of sales.
  2. Facilities: Rent, leasehold improvements and plant & equipment spending can be planned for.
  3. Marketing: A change in your marketing strategy may affect this.
  4. Inventory: Review prior years for overspending and understocking to adjust this, and also budget for losses.
  5. Technology: Adding efficiencies to your daily operations free up time to focus on business growth. Consider investing in a new POS and cloud software.
  6. Security: Protecting your goods and customers, and minimising risks to your business, are preventative measures to help contain a budget.

This list is not exhaustive. You’ll also need to factor in other operating costs like taxes, insurance, professional services and credit card processing fees, to name a few. If, after projecting Sales and applying budgeted expenses the result is an overall loss, or if certain strategies could be employed to boost Sales, then look at scenario budget planning .

Make sure you prioritise by your business needs and reflect that in your budget. If you’re eager to make some worthwhile investments now, consider some financing options and tax effective strategies.

Budgeting, forecasting and planning are important exercises to ensure organisational resources can be allocated effectively in order to achieve the business’s mission and objectives. However, an annual budget is only effective if it is being used and updated throughout the year.


Haven’t prepared a budget for 2020-2021 yet? It’s not too late

Contact us to assist you with your overall budget and 3-way forecast at any time during the financial year. During the COVID-19 restrictions in 2020, many business owners were unsure of their sales prospects and could not rely on prior year activity, so the focus was instead of cash flow forecasting. We will review your sales pipeline and the changing restrictions and market conditions for your industry, and consider your current expenditures to help you create a budget for the next 6 to 12 months.


Monitor sales, revenue and expenditure data

When preparing the budget, these key financial documents should be produced for the coming budget period:

  • Balance Sheet
  • Profit and Loss
  • Cash Flow reports

The key financial target areas are cash flow and profitability, and they need to be tested to evaluate whether targets are likely to be met. If results fail to meet targets, they must either change their plans or revise their targets, or both.

Once it appears that the targets will be met, more detailed budgets can be built with plans for running the business, (such as a category buying plan, a marketing plan, and training plan, etc.). When these three reports are used in this way, they are often called Pro-forma Budget Statements. At the end of the budget period, these statements are again prepared, this time comparing actual performance with the budgeted figures for previous periods.

The use of pro-forma budget statements can assist managers in monitoring sales, revenue, and expenditure data throughout the financial period in question. This is important as a frequent comparison of actual performance against budget targets allows managers to have an up to date take on the performance of their store relative to targets and a perspective on business that addresses areas of concern proactively.


Cash Flow

One of the biggest problems facing small to medium sized businesses is the level of liquidity they have, or in other words, their ability to meet their financial obligations when they fall due. Often these businesses will still be trading and may show a profit on paper but find themselves insolvent.

The Cash Flow Statement tells how a business uses and generates its most important asset – cash. Without cash to pay the bills when they are due, a business cannot continue and must go into liquidation. Consequently, cash management is just as important as being able to generate profit.

Some argue that it is more important because it is possible to be profitable and still not have enough cash to continue to operate. However, being profitable does not by itself pay the bills. If cash is squandered (for example, by building a new store that costs a lot, but does not produce an increase in revenue), then the business will have to close if it has insufficient cash to pay its debts and meet its obligations.

As well as the core operations of a business, the Cash Flow Statement considers all other elements of the cash movement within an organisation. These can be grouped into three separate sub-headings:

  • Cash flow from operations (trading or carrying out the core business).
  • Cash flow from investing (buying and selling non-current assets).
  • Cash Flow from financing activities (raising or retiring equity, or long-term debt).


Maintaining financial, personnel and payroll data

The security of personal data is stipulated by legislation, and internal business policies and procedures generally direct that of financial data.

There is no room for error in maintaining data of such sensitivity and importance. There are also Tax Office requirements to report in real-time using Single Touch Payroll (STP) enabled software, which must be carefully configured to restrict access and permissions.

Often personnel and payroll data will be stored in a human resources information system (HRIS) that may interface with the financial record keeping system of the business. For smaller operators, this is less likely, and in those cases, it is essential that additional steps be taken to manage data sensitivity, accuracy, and privacy effectively.

If in doubt about the requirements of your business in the handling of personal and payroll data, please consult with your accountant or HR team. Laws vary from state to state and internal practices vary business to business.


We hope this information was helpful. Please contact us  for accounting and payroll system advice specific to your circumstances. As Xero Gold Partners with hands-on experience with a wide variety of integrated business software and apps, we can assist you with an appropriate selection and implementation of tools to help take your retail or services business to the next level.

The material and contents provided in this publication are general and informative in nature only. This article is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required with your own affairs, professional advice should be obtained.

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