Looking Forward, Not Just Backwards. How accounting can support better business decisions.
Accounts are often described as a record of what has already happened.
They show the income received, the costs incurred and the profit or loss made during a particular period.
That historical information is important, but it is only one part of the picture.
Good accounting support should also help a business owner look forward.
The decisions behind the numbers
Business owners regularly face decisions that involve uncertainty.
Should they recruit another employee?
Can they afford new premises?
Should they purchase or lease a vehicle?
Is it the right time to invest in equipment?
Will an investment increase turnover sufficiently to justify the cost?
There may not be one guaranteed answer, but financial modelling can make the options much clearer.
Rather than relying entirely on instinct, the owner can see the likely impact of each decision on profit and, just as importantly, cash.
Equipment or additional staff?
The first option was to purchase a state-of-the-art machine. This would allow the business to offer services at the cutting edge of its industry and potentially create an advantage over its competitors.
The second option was to employ additional staff. This would increase capacity and allow the business to serve more customers.
Both options offered genuine opportunities, but they involved different costs and risks.
The machine required a substantial financial commitment. New staff would create regular employment costs, regardless of whether the expected additional work arrived immediately.
Looking only at the purchase price or monthly salary would not have provided the full answer.
Modelling the wider impact
I reviewed the likely costs associated with each option, but we also considered the potential effect on the wider business.
That included:
the additional services the machine could generate;
the number of extra customers the business might serve;
the expected increase in turnover;
the ongoing running and maintenance costs;
employment costs associated with recruiting staff;
the time needed for each option to become productive; and
the effect on the business’s cash position.
We were then able to consider different scenarios.
What would happen if the additional turnover took longer to materialise?
How much working capital would the business need?
Could the business pursue both options, either immediately or in stages?
The purpose was not to pretend that we could predict every outcome. It was to give the client a clearer view of the possible financial consequences.
Profit does not always mean available cash
Cash flow is a particularly important part of investment decisions.
An investment may be profitable over several years but still create immediate pressure on the bank account.
The business may need to make a deposit, pay for installation or training, or cover the employee’s wages before the additional income is received.
This is why I place so much emphasis on the overall cash position.
The question is not only, “Will this make a profit?”
It is also, “Can the business fund the journey to that profit?”
Better information, better decisions
In this case, the client was able to see a path that reflected both the growth opportunity and the financial realities of the business.
They were still responsible for making the final decision. My role was to give them the information needed to make it with greater confidence.
That is where an accountant can add real value.
Accounting should not only tell you where your business has been.
It should help you decide where it goes next.
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