Education & Trainin
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• • . a CM seminar
ficcainting for the small haulier.... 2
Introduction NHILE evaluating the past erformance of a company through the analysis of annual financial accounts is useful in giving a picture Nhich may indicate areas of eveakness, it is also iomewhat limited as a means yf day-to-day control.
This is because the annual iccounts are historical and we ire not looking at what is lappening now but at ;omething that happened six, 12, maybe 18 months ago. It is ilso common for a large number )f companies to receive their innual accounts as many as 12/18 months after the year rid to which they relate, herefore worsening the proplem of historical information.
Nhat is the alternative?
First, we need accurate, .egular, up-to-date knowledge )f what is happening in the )usiness. So, we must produce )rofit and loss statements on a .egular basis, ideally monthly, )ut three-monthly may be :onsidered satisfactory by some :ompanies. These statements ire usually called management iccounts and, unlike the annual inancial accounts produced )rimarily for tax reasons, manejement accounts are intended o assist managers in the lay-to-day running of the Dusiness.
Nhat's involved?
First, we need to decide the orrnat and detail in which the nonthly profit and loss account s presented as in Figure 1. Ihen, let's consider how it is :ompleted by looking at the )ooks which provide the source nformation.
Figure 1.
What's next?
Having decided on the final presentation format, the next requirement involves arranging the books of account to give the information in an easily extractable form. The following books are the source for most of the information: 0 Sales Ledger, 0 Purchases Ledger, 0 Wages Book, Cash Book; E Petty Cash Book
The main consideration when producing management accounts is the accurate business analysis of sales, purchases and costs. Absolute accuracy, however, provided they are accu
rate enough to be relied on, can be sacrificed in the interests of speedy, prompt information.
• Sales Ledger There are proprietary systems available, often referred to as 3-in-1 systems because they are capable of producing a customer's statement, ledger account and day book (a running summary of monthly sales) in one writing.
An alternative method, equally effective, can be produced by using loose-leaf ledger sheets. This involves the use of a separate sales day-book in addition to the sales ledger. Statements also have to be produced independently. The sales invoices are first entered into the sales day book in customer order, the totals for each customer are then entered into the ledger. An example of the sales day book format is shown at Figure 2.
• Purchase Ledger The same considerations with regard to proprietary systems apply as to the sales ledger, except that it records the purchases made during the month. The need to provide an accurate business analysis of all purchases is common to whichever system is adopted. An example of the purchase day book layout, including sample business analysis, is shown at Figure 3.
The example shown in Figure 3 illustrates some of the more common items of expenditure.
• Wages Book
This item accounts for a high percentage of costs and requires careful control. Almost all companies are using a proprietary system for wages, so extracting the information is not too difficult. It is necessary, however, to arrange the wages book so that we obtain a summarised total for each category of wage expenditure required by the management accounts analysis. This can be easily achieved by allocating a separate page in the wages book to each category of employee which obviates analysis of employees' wages at the month end. An additional feature of wages that must not be overlooked is holiday pay. It is desirable to apportion it over each month of the year rather than charge it all in the month in which it is incurred.
• Main Cash Book Examples of a typical layout are shown at Figure 4.
Again, the format can be modified to meet the requirements of individual companies.
Figure 2. Sales day book
Provision is made in the sales ledger receipts' column to record payment of invoices for sales made on credit, usually in previous months. When filling in the management accounts form, we would only need to include cash sales and sundries because the sales ledger items would have been allocated from the 'sales day book' in the month in which the sales were made. The 'private ledger' column is intended to record such items as GIT insurance claims cheques, which are not sales but reimbursements.
The cash book is really a duplicate of a company's bank statement and should be reconciled with bank statements on, at least, a monthly basis.
• Petty Cash Book Most systems are worked on the 'IMPREST' basis which involves establishing a float of, say, £50, then topping it up each week by the amount expended.
What next?
The books we have looked at, together with the few additional items which we shall now consider, will enable a small company to produce its own management accounts.
An adjustment is necessary when calculating the monthly costs for diesel and oil, and :tyres. In the case of diesel and oil, we require to dip the tanks at the end of each month to establish the gallonage in stock. An ongoing record should also be kept of tyre stocks.
Provided this is carried out, we can then apply the following formula to establish the cost for the month
Is there anything else ?
We have, so far, considered those items of cost which occur regularly. There are those, however, such as vehicle depreciation, road fund tax, and overhead expenses, such as rent and rates, for which we receive the bills over longer periods. In these cases, it is a simple matter to raise a separate schedule for specific items and a summary schedule for overhead expenses. Figure 1 shows the source for each item of information. Two examples of those requiring individual attention are vehicle depreciation and road fund tax.
In the case of depreciation, the cost or written down value of each vehicle is required and then the depreciation policy applied so that the annual depreciation figure can be established. It is then evenly divided over each month of the year.
Road fund tax can be calculated in much the same way by dividing the annual o four-monthly figure by 12 o four, depending on the frequen cy with which vehicles ar( licensed, then spreading th( cost over each month, no forgetting to make adjustment: when additional vehicles an introduced or when vehicle de-licensed.
Overheads The costs which constitutt overhead expenses are include( under the headings of adminis tration and financial charges ii Figure 1 and they have to 131 budgeted in advance. The mos practical way to do this is b. means of an 'overhead expense schedule', which should us each item of expenditure. Th, best starting point to obtain thi figures is by reference to th, annual accounts and forecastini any increases which are antic pated in each cost item over th• following year. Serious attempt should then be made to rnonite these figures during the year s. that necessary corrections ca be made to the budget.
Further steps Once a company has becomi accustomed to producing ma nagement accounts, there ar, still further steps to take. II some cases, there may b• several separate activities beini undertaken and, by presenting global picture, we may b concealing weaknesses withi any one department. This ca; be overcome by department. lising the management account so that each activity is seen in it true light.
Alternatively, it may b considered necessary to preser profit and loss statements on a individual vehicle basis. Thi subject will be discussed in th next article in this series o vehicle costing.