As we begin a new tax year and new financial year for some here is a look at what good bookkeeping is and why it is important. Some have made mistakes in the past which may or may not have cost them financially but we need to correct them going forward to ensure we have a good bookkeeping system that is as efficient and appropriate as possible depending on the size of the entity.
What is the bookkeeping? It is the organisation and storage of accounting and financial information by a bookkeeper. It is of great importance that the information is accurately and diligently captured so it can show a true reflection of the entity’s financial performance for a given period. The purpose of bookkeeping is to collate all the financial transactions and business activities for a period and summarise it for various uses. These financial transactions are the true reflection of the entity’s performance and a guide as to whether strategies are working or not or if reviews need to be done. Shareholders will want to know how their investment is performing, Directors will want to know if the strategies in place are working and the list goes on. A bookkeeper will record all these daily financial transactions and this is key to any business.
From the bookkeeper, the information is sent to the Accountant who then is responsible for reporting on the financial position of the entity as well as managing cash flows of the entity. The information or reports from the Accountant are then used to reach decisions on how to manage the business, invest in it or borrow money for future business deals. This information can then be audited if the entity opts for an auditor if it is statutory to get audited financials.
Profit is a fond topic for most business owners, but do you know the difference between gross profit and net profit? Gross profit is the net result of your sales and your cost of sales, in other words, the profit on the sale of your product. Net profit, is the larger gross profit less all other operating and financing costs, usually a fraction of your gross profit!
Gross profit can be calculated for various elements that make up the total sales of your business, such as the gross profit per product or product category. The total gross profit in your financial statements depends on the number of products you sell but doesn’t show you the amount of profit you are making per item sold. Most accounting packages have this information in one of the stock/item reports. It is very helpful to analyse the gross profit per stock item, as you can see which products make you the most money, and therefore what you should focus your sales effort on.
The same principle can be applied to business divisions. By calculating the gross profit per area you are able to see who is pulling their weight and who is not contributing enough towards the running costs of the company. For service businesses, it is also possible to calculate the gross profit per service by including the salaries of the staff, and other costs, into the calculation. Typically service businesses keep some form of timekeeping, where it is possible to see how much of a person’s time (and therefore cost) can be allocated to the various services they perform, even better if individual staff members can be allocated to a specific service. Accounting packages are not set up for this level of analysis, so a spreadsheet is often necessary.
It may be easier to understand the gross profit as a percentage of sales rather than a rand value. Knowing that a product makes an R5 gross profit doesn’t have as much meaning as knowing that the gross profit is 75% of the sales price. Using percentages, you are also able to compare products and the value that they add to the operations of the business.
It may be necessary to dig a little into the accounting information to get a real picture of the gross profit of the business. Should you need a spade or a little help digging, let us know.
GP – service GP, per product, overall, per division – % vs rand
Oh, to be single and have no responsibilities or time barriers. Just think about how much work we could get done without the nagging of family commitments. Sound familiar? Well, let me share with you a secret. If you are single and have not yet started a family, you yearn for the day, and those, like myself, with a house full of noise, yearn for the old days. Not always but there are times that a quiet home with no noise or agenda sounds appealing.
But as a business owner with a family, you need to wear this hat with pride and take on the responsibility that it comes with. We need to be aware to watch the clock and be home on time to spend quality time with loved ones. I am often the envy of wives at school functions when I am the only Dad on the outing to the forest, beach or museum. My son loves having a present parent at functions. I do see more and more parents in casual clothes at pick up time, not sure if this more unemployment or well organised business owners, but the children love to see Dads and Moms at school. And do not forget the extended family. My mother loves to hear about my business as does my Sister who vows one day to out earn me on a month to month basis. To share with people what you are going through both good and bad without the threat of ‘being fixed’ or taken advantage of is a rare and precious thing. Wear the Family hat with pride and walk tall in the community but never forget to also find the time to get the work done.
Part1: A financial revolution?
The rise of the bitcoin has been phenomenal, with one Bitcoin now worth over US$ 11,500 or R220, 000. Bitcoin was first introduced in 2009, but was first valued in 2010. A bitcoin user decided to use 10,000 units of these to buy two pizzas. These units are today worth over US$100 million. This must have been the most expensive pizza!
Bitcoin is a cryptocurrency. Cryptocurrencies are digital assets designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Cryptography is synonymous with encryption; which is the conversion of information from a readable state to apparent nonsense. The sender and intended recipient share the decoding technique needed to recover the information sent, thereby ensuring that unwanted persons cannot decode the information. Cryptocurrencies use decentralised control as opposed to centralised electronic money and central banking systems.
2011 saw the introduction of more alternative cryptocurrencies known as altcoins (alternative coins) which aim to improve on the usability of the bitcoin. In 2014, the largest Bitcoin exchange Mt. Gox went offline, and 850,000 bitcoins disappeared and the owners lost out. At the time, these bitcoins were worth US$450 million and would be worth US$4,4billion today. These are the pitfalls of a currency designed to ensure anonymity and without central control. By last year, a Bitcoin was worth US$10,000; due to the increase in trade and places where the currency is accepted as a unit of exchange.
Regardless of its phenomenal success, Bitcoin is not universally accepted as currency or legal tender. This is because governments, central banks and business have no control over the supply of bitcoins. Traditional financial authorities have not backed it up as legal tender. The way bitcoin is traded has made it difficult for central banks and tax authorities all over the world to trace the trade and hold traders accountable for their gains or short-comings. Governments cannot cease Bitcoins as proceeds from illegal trade or as a forfeiture of assets for non-compliance with particular laws. What then are the tax implications of bitcoin trading? We will discuss this in the next article.
Last week we looked at income and the various types of income as part of our mini-series on the elements of your financial statements. Today we’re looking at a very misunderstood area – the cost of sales.
Many people think that cost of sales is the cost of the goods you have bought (or made) to sell to customers. It is not – the cost of sales is the cost of each product that has actually been sold. This means that if you have paid a supplier for stock, that is not yet sold, the cost won’t be included in the cost of sales.
This is important because of where the cost of sales is reflected in the financial statements. Cost of sales is an expense which reduces your profit, and therefore your tax. Thus it should not be overstated, by reflecting all the purchases during the year. The cost should match the sales, in other words, if you sold 10 items, the sales price for those items shows as income, and the cost of those 10 items shows as an expense. The cost of any unsold items sits on the balance sheet as stock on hand.
What if you don’t sell stock, what if you offer a service? Then according to the accounting definition, you DO NOT have any cost of sales. However, this is where pure accounting and the needs of management differ.
The real cost of making the sale may include any number of expenses depending on your business. For example; a service business may consider their technical staff to be a cost of making sales. What about travel and entertainment? Management reporting could include all of these expenses as the cost of sales to help understand how the business makes money and how well it is doing that. No-one said that the management reports needed to be in the same format as the annual financial statements. The accountants can re-classify the expenses for compliance purposes, as long as management has the necessary information to make decisions.
Next week we’ll look at the net result of sales and cost of sales, gross profit.
If you’re not getting the information you need from your management reports, perhaps they read too much like an accountants report, give us a call to help you re-format them into something useful