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Volume 2: The Chart of Accounts

Business leadership, where an individual has the ability to impact the strength of the Balance Sheet and Income Statement of any business, requires an understanding of accounting, the General Ledger and how to read and interpret financial reports.

Like most things in life, the eventual outcome lies in getting the detail right.  Think of baking, assembling a piece of machinery, passing a driver’s test etc., there is either a recipe, an instruction manual or a list of requirements that have to be satisfied before success will be reached.  It is the same with business success.  It is one thing knowing how success will be measured and another knowing how to change these measurements for the good.

It all sounds very complicated and it can become so if you let it.  I believe accounting needn’t be something scary and therefore can be embraced rather easily.

In our last blog we tackled the issue of a blockage.  A personal blockage you have preventing you from forming a relationship with business financial reporting.  Hope you successfully navigated through that step.

So now the practice of linking business reality with what the reports are going to look like and how you would like the reports to look with required business activity.  You know how to do this already, we simply have to get you open to forming the links:

  1. How are you treating your body currently?
    If you were to go for a full medical what would your health report contain? And, what would you like to read in such a medical report and therefore how should you be treating your body to achieve such a report?
  2. With the way you are currently spending money, how much money will you have left at the end of the month and should you wish to have a certain amount left at the end of the month how should your current spending patterns be altered?
  3. Water restrictions in the Western Cape are topical at present – if we carry on using water at the rate of current daily consumption, how much water will be left in the dams by the end of our rainy season and if we would like a specific amount of water in the dams, taking into account projected rainfall figures, to what degree should our daily usage be curbed?

It’s all about the interplay – current reality and a likely outcome and a desired outcome and current behaviour changes.

This month’s exercise is then as follows:

Obtain a copy of the latest Trial Balance (TB)

The Trial Balance is like the post boxes at a Post Office.  Everyone collecting mail from a particular Post Office is allocated a specific box.  Our PO Box number as an example is 685. All our mail is placed in this box and mail for other people allocated to the appropriate box (mostlyJ). When planning the boxes thought is given to what types of boxes and how many are going to be needed to meet the community’s need.  The Trial Balance is no different.  It is a list of accounts (boxes) that will be used to allocate specific business transactions into e.g. Rent Paid, Printing, Fuel, Salaries etc. All the required boxes for the appropriate posting of transactions in those areas.

In business planning, thought should be given to what boxes will be needed.  Rather than having to sort again and again, it is better to have a specific box for every type of transaction otherwise important details will be lost.  When we go to box 685, all the mail is intended for us, we do not still have to sort through it before ending up with our mail.  What does your business run on?  Where is money spent to keep it ticking and how is revenue earned?  Avoid lumping things together – the more dedicated each “box”, the better.

Example – if the same type of revenue is derived from various regions, I would rather have a “box” per region as opposed to lumping all the region’s together.

So by studying the TB, you are gaining an understanding of the current boxes that have been opened.  Then by studying the business to gain an understanding of how money needs to be spent to keep things running and how revenue needs to be earned to keep things sustainable, you start the process of marrying the two realms – reality and reporting and desired reporting and required behaviour.

The more the merrier – detail is your friend here.

Have fun.

 

Look out for our next post “Volume 3: The need for detail” coming soon ……

 

By Louis Gerke

Development FacilitatorThe Ripple Effect

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