Do you find yourself dithering for lack of information when making the money side of decisions?

Whether it’s a business or personal issue the key is to focus on what matters – future cash-flows. And by simply adopting a routine method to summarise these over time a small business owner can improve the quality of important decisions. Use it consistently across all options, including personal spending.

Here’s how to put one together.

Two different types of information

First consider that there are at least 2 categories to consider for each revenue and cost:

1 Actual

What really matters is the dollar estimate of future streams arising as a result of decisions taken now. Ignore past events which are relevant only in that further cash-flows might “follow-on” from them.

2 Opportunity

Opportunity costs are revenues lost, and opportunity benefits are costs avoided, which are associated with the next best choice among mutually exclusive options.

When taking a vacation for example, consider the opportunity cost of interest on investments which you will not be making if the planned holiday goes ahead.

List specific cash-flows

Future cash-flows and opportunity costs should be collected in 5 buckets:

1. Revenues – here focus on the collection and timing of receipts

2. Costs – dig them all out with estimated payment dates

3. Interest – what would happen if interest rates hit 18% within 5 years?

4. Taxes – the attractiveness of any opportunity may be tinged, positively or negatively, by taxes but tax should usually not be the principle reason for going ahead with a deal

5. Inflation – not so much these days but always be conscious of escalating costs and your ability to raise prices

Time the in-goings and out-goings

Although it’s all crystal ball gazing, consider that events in the medium term are less certain than those in the near term. This is closely tied to the idea of payback – how long will you have to wait to get the benefits. The further out the event, the higher the risk.

When reviewing and deciding, put additional weight on the early periods.

Consider a range of values

Most of the elements in your decisions will be subject to estimation in both amount and timing. Unless contractual, all items are very uncertain. If nothing else this will be brought home as a result of the analysis.

Sensitivity is the key. How is the financial outcome affected by changes to critical inputs? Make decisions based on a range rather than single values.

Identify all risks

In any decision risk is inherent, but more so in business.

As an example in July 2013 a high-profile company in Australia worth $1.1 billion lost 40% of its value overnight on a change in government policy.

The idea here is that raw cash-flows may be misleading, so they could be improved by adjusting them for perceived risk. We can do this by applying a discount rate.

A discount rate has a number of elements which are built up to a final rate to use in the summary table. (Using the rate is outside the scope of this article, but the idea is that future revenues and costs are reduced, and the further out, the greater the reduction). All inputs are a matter of judgement and they should reflect the risk you attach to a cash-flow – the higher the discount, the higher the risk and the lower the value of the cash-flow. Build a rate with these elements:

· A risk free opportunity cost (for example US treasury bond rates), say 2%; then add

· A General economic environment risk (example – Europe) plus

· A Sector / industry risk (example – mining in Australia) plus

· The specific company or deal risk

The final rate, anything up to 40% or even more, is applied directly to the numbers so the impact is significant.

Develop a format

This by itself can improve the quality of important decisions taken as you will have a platform to compare the outcomes of various options. Summarise the results by constructing a table.

Tabulating numbers remove confusion. If the numbers cannot be tabulated, there is a problem. The information is summarised in grid format on a spread-sheet and while the format is complex, the assumptions underlying each number need to be thought out carefully:

Take a new spread-sheet and insert:

o Years or months (top)

o Relevant cash-flows (side)

o Totals (bottom)

A further line can be added to discount the net cashflow in each year before summing it all up to arrive at a final net cash flow.

Assign weighting to non-financial considerations

Separately assign qualitative ranking and weighting to the various other factors influencing your decision.

Decide

The result is an easy to read summary of the next 3 to 5 years’ financial outcome affected by the decision on the table plus a list of qualitative factors in the decision.

If the net of all the future estimated streams is positive at a point in time, subject to any overriding non-financial input, go ahead and write the cheques

Bookkeeping is very useful. Really? You have accurate records. So what, what can you do with them? Here are a few boilerplate suggestions why the effort is worthwhile.

INVESTMENT DECISIONS
Plans need to be documented to be reviewed by partners and staff, bankers and advisers. And while words and attractive images speak volumes, at the end of the day, any investment is defined by the financial results.
Producing realistic forecasts for anything except greenfield startups requires some historical data to begin with, to establish trends and estimate costs.
So QED – without good enough records, the task becomes guesswork.

BUDGETTING
After investment decisions have been taken, the more humdrum requirement is to construct annual / monthly / weekly / daily budgets to compare with actual financial events and make control corrections in the business to keep it on track.

FINANCIAL RESULTS
When people talk about bookkeeping they usually refer to financial books and records in the back office.
As used to be referred to in the North of England , scorekeepers provide the useful knowledge of how his business is doing to the owner.
Well designed systems to record transactions in a timely and accurate manner facilitate this.

OPERATIONAL SCOREKEEPING
Business records are lets face it primarily financial. But there is more – the operational metrics that give substance to the day to day business also generate a vast amount of data which, if deemed important enough, needs to be recorded and reported just as the dollars and cents. The principle is the same.

FINANCIAL / OPERATIONAL CONTROL
With the vision in place, and a practical budget compiled, the next step in realising the dream is to compare actual revenues, costs, returns and operations. The final essential is to take action if the variances which result are detrimental to goals. The most obvious is cost cutting, but this can backfire if done without deliberation on the consequences.

COMPLIANCE COSTS
Costs of compliance with government regulation are notorious and with good reason. If you are to avoid costly hours *wasted* finding / recreating the necessary records and reports, start with well kept books.

FUNDAMENTALS DONT CHANGE OVER TIME
To a degree accurate records are just that, and the principal is timeless, whether the counter is a piece of string with knots, an abacus, or a spreadsheet. Computers have however enlarged the volume or data kept and the speed of retrieval to levels undreampt of before.

THE IMPACT OF COMPUTERS
Simple machines
The micochip enabled production of handheld electronic calculators, a very significant improvement on pencil, paper and mental arithmetic. Accuracy and speed improved.

Semi automation – programs
With the advent of programmable calculators, a new world of “macro” driven calculations was possible achieving even more speed and efficiency in repetitive calculation. At approximately the same time the Pc was introduced and the first “apps” or bookkeeping programs/systems appeared which ended the era of the paper bound double entry ledger and quill pen. There was no turning back, but the bookkeeper merely had a new set of tools, not a new world.

Full automation – AI + self learning programs
Industrial scale databases and the programs that run them enabled businesses to control ever more aspects of their books, integrating the operations of each area of business from marketing to production to finance. Collaboration was possible and yet the accountants role just got bigger as a result, rather than disappearing.

However looking to the future with technology moving ever faster, we could easily foresee artificial intelligence finally removing most of the traditional tasks of the bookkeeper for ever. In the futurist dream the central machine could monitor operations and issue requests for the necessary data, record it and report all without much human intervention.

While such a situation would only apply to the largest businsses, there is no doubt it is technically feasible within cost constraints and value – add considerations. But its not here yet!

THE PAST
– BOOKKEEPERS HAVE ALWAYS BEEN THERE

Civilisations have always been obsessed with accurate records – for both legal and accounting purposes. Its nothing new, reflecting the perennial need to prove transactions in all areas, commercial, government and family.
Memorable examples abound – Egypt, Rome, their graneries, and wine cellars, slave holders and traders and the meticulous records kept of their “cargo” on atlantic crossings in ships logs.

THE PRESENT
– NEW DIMENSIONS, NEW TOOLS BUT THE SAME OBSESSION

In the modern era we have new dimensions – the size and scope of society and enterprise has exploded – as witnessed by the size of companies on the world’s stock markets.

This has been enabled by the impact of computers – these new tools of the trade have changed what is possible and the speed of the transaction.

However the same obsession with accurate books and their importance for life and business decisions remains.

FUTURE
Looking forward, the pace of IT change is relentless.

Remarkable things have been achieved so far, and even more will be achieved next 30 years,
Full automation and thinking robots capable of adapting and changing are already here
and may be unleashed within 30 yrs, almost certainly and within 100 yrs.
So the timescale may be 3 to 4 generations for a machine to be able to do all the tasks of a bookkeeper.

BUT even then there will be an effort required of bookkeepers – not to do the recording but still to check the validity or IT output and the direction the self programming machines have taken, and critically, there will always be the scale of an enterprise to consider. Machine automation with robots may or may not be a good thing, but are unlikely to be cost beneficial for small to medium sized enterprises, which still form the vast majority of registered businesses.