Tuesday 15 January 2013

Finanical Systems: Keeping it Appropriate

A belated Happy New Year to you all. It's been a while since I've written one of these Business of Writing articles. A lot has happened in the meantime, not all of it good, but it's time to stop sulking and move on. In the first few articles of 2013, we're going to look at the systems we need to run our writing business. If we can deal with the stuff we have to simply and easily, then we can spend as much time as possible doing what we want to, namely the writing. We're going to start by taking a look at finanical systems.

Every business needs to keep finanical records and our writing business is no different to any other in that respect. It’s not very creative and, for most people, it’s not much fun — although there are some of us who find numbers fascinating and enjoy playing with columns of figures — but it has to be done. So the trick is to have a good system and keep it up to date. That way it takes minimal time and leaves us free o get on with what we really want to be doing — writing.

For a system to be good, it needs to be appropriate. In other words, it needs to have the right level of complexity and no more. The three main options are a paper system based on hand-written ledgers; a simple electronic system based on a spreadsheet; and a purpose-built system based on commercial software. Let’s look at the pros and cons of each one.

When we started our own company, back in the 1990s, we used the paper system. It had been in use for several centuries by that point, and we hadn’t quite reached the stage where computerisation was the first choice for everything. It was simple to keep but became laborious when the number of transactions increased. The books needed to be completed in ink, as they were legal documents and hence it was impossible to correct mistakes neatly. I recognise this would not be a problem for everyone, but the sight of crossings-out on an otherwise neat page of figures offended the Virgo in me. For anyone with just a small number of transactions and a dislike of computers, a paper system is a perfectly acceptable option. But the chief disadvantage is the necessity to do all the sums manually. Even Apple has yet to invent a physical book that can add and subtract on its own.

At the other end of the scale, there is the system based on commercial software. Once a business reaches any level of complexity, I believe this is a necessity. By complexity, I mean for example, any of the following:
  • VAT registration (and back in October 2012, I talked about why this might be an advantage, even for those of us with low levels of income).
  • PAYE, either for ourselves or an employee (also in October 2012, I discussed the different business structures on offer and the pros and cons of each one)
  • Stock-holding including copies of our books (the costs of printing cannot be claimed against tax until a book is sold)
In my company, we moved to a computerised commercial package towards the end of the 1990s, going with the best known company at the time, which is still one of the major players. They have upgraded their software every year since; we have upgraded ours every few years. There is a huge level of functionality in the latest version that is not relevant to our business, so I just ignore that and use the bits I need. This option is not a low-cost one but it certainly makes a potentially complex life simpler.
I’ve left the mid-range option until last, as this is probably the one most start-up businesses would go with. Anyone with a reasonable knowledge of spreadsheets (whether Excel, Works Spreadsheet, or Open Office) can set up simple records. They are really an extension of the paper system with the advantage that the sums are done for us. For the past couple of years, I have had a couple of additional business activities that have been outside the remit of the main company. I kept a set of spreadsheets for each, recording income and expenses. At the end of the year, I was able to develop a profit and loss statement in preparation for my tax return. At the time, it was a perfectly adequate system for these fledgling activities.
Whichever system is most appropriate, it helps no end to keep it up to date and I would suggest at least a monthly session. Memory is a tricky thing, whatever our age, and trying to remember why we took a taxi on a particular day nine or ten months ago or whether someone paid cash for a copy of our book we sold last year is time-consuming and not always successful. If we fill in the records at the time, it is quicker, easier — and we are then free to forget the details.
Of course, there is a fourth option used by some people: throw everything into a carrier bag or shoe-box and then hand it to the accountant at the end of the year with a winsome smile. But that’s an expensive option (the clue is in the word accountant) and will still involve time spent trying to answer questions and dredge the memory for missing information. It’s not an option I would ever recommend.
Next time, I’ll look at what records need to be kept and the basic financial concepts of profit and loss versus cash-flow. In the meantime, I’d love to hear what systems you use and the pros and cons you’ve experienced with them.