Does your data need a wash?

The first thing I do as a CFO when I start working with a business is to check how clean their data is. The reason that I have to do this first is that if the data isn’t clean I have no idea what the financials are actually saying and therefore can’t give any guidance.

When I talk about clear data I mean three things?

1. Are your financials up to date?
2. Do you have clear and consistent coding of information?
3. Are you recording on a cash or accruals basis?

Firstly are your financials up to date?

I still come across businesses where the accountant is only reconciling transactions on a quarterly basis for compliance reporting (BAS returns) and if a business isn’t registered for GST sometimes not even that frequently.

The best practice would be to make sure that your financials were being reconciled on a weekly basis.

The reason why infrequent recording of financial information is a problem is that you are looking at financial information that is incomplete and therefore its very difficult to make decisions. What often happens in these instances is that decisions around spending are made by looking at the day’s bank balance and this can result in big mistakes.

Secondly, do you have clear and consistent coding of information???

Common mistakes that we see as CFOs are one of two things

Inconsistent coding - for example, the same type of transaction is put to marketing one day and then website the second day.??Often which account it’s put to isn’t as important as the business having a clear internal understanding as to what each account code or grouping means so they can later analyse those costs.??Analysis is very difficult when costs are going all over the place!

Associated with this is constantly creating new account codes for minor differences in category.??I’m a big fan of simple format P&Ls.??I see some small businesses with hundreds of expense lines and it's difficult to get clarity with a noisy P&L.

On the flip side, we often see too much simplicity in the recording of sales with all revenue recorded in one line.??If you genuinely only have one type of sale (product or service) with a very consistent cost of sales associated with all revenue then this may well be appropriate.??However, as your business grows some distinction between revenue types is important.

For example, in a professional services firm, you may have one-off project revenue vs ongoing retainer revenue.??If you can clearly see the split of these two revenue streams on the P&L it makes analysis and decision making quicker.

For a product-based business, you may want to see categories of product or wholesale vs retail vs online. Categorisation is an individual decision for a business and a bit of a “Goldilocks” concept - not too detailed, not too simple… But the overriding objective is that these categorisations should provide clarity and speed up decision-making.

Thirdly - are you recording your information on a cash or accrual basis

A cash basis is when you record a sale or expense when it happens - regardless of what period it relates to.

An accruals basis means that you record a sale or expense in the period it is relevant to.

From a revenue perspective, this is usually more relevant for a service-based business. If you’re delivering an advertising campaign over a quarter the revenue gets spread over three months. If you’re selling a 12-month subscription it gets spread over 12 months.

Similarly for costs, if you buy an annual insurance policy the cost gets spread over 12 months.?

If you are going to monitor your margins (gross profit margin, net profit margin), which are two of your key metrics, it’s important that you’re recording transactions in the right time period otherwise your margins will bounce around and you won’t get any clarity on whether they are tracking well or poorly.

I cover more on how to make sure your data is clean in my program, CFO Secrets, you can find out more about that here.

If this resonates with you and you want to explore these steps in more detail, let’s chat, send me a message.

Championing your success,

Michelle Kvello

PS: Know someone who needs this reminder, too? Feel free to share it!