Money Talk: Heads in the cloud over the cost of accounting

There’s a scenario that often plays out when we first meet a prospective new retail operator: after the usual exchange of pleasantries we listen to their plans for their new business; funding it, staffing and operating it. Eventually the conversation touches on their ’accounting’ expectations. Nine times out of 10 their most immediate concern is VAT returns. Most are also sensible enough to realise that they’ll need some form of management accounts; they know that trying to manage any business relying solely on annual financial accounts is a nonsensical proposition.

We get to talking about any external or third-party requirements that they might have to work under. That could mean a franchisor, or the network owners, or even their bank manager. Any of these can impose particular conditions that have a direct impact on the accounting. For example, most franchisees and the majority of commission-operated businesses today are required to operate as limited companies. Often the third-party will require some form of financial information from the operator at the very least sales figures, but in many cases including profit and loss results at regular intervals. Sometimes those requirements can be very specific for example, accounts in a particular format or including lines not found in a standard set of management accounts so any standard accounting software has to be customised to produce that information.

So far, so good. Time to look at their business plan in detail. Occasionally they’ll have a comprehensive set of spreadsheets covering all projected costs and revenues, perhaps even with cash-flow forecast for the first year and a projected balance sheet for the end of Year one. Very rarely it might be a set of projections covering maybe three, five or even more years. Much more common for petrol-retailing is a single sheet showing expected volumes, resulting fuel commission, shop sales and margins, and any business expenses the network principal is willing to consider as part of the deal to achieve the expected bottom-line income figure.

A depressing turn

This is where the conversation can take a depressing turn. Naturally the largest cost is wages; our prospective operator will almost invariably say that the hourly rates and/or staffing numbers aren’t particularly realistic. The only way around that is that he or she will have to work longer hours on the till than expected. Of course, that takes a chunk out of the time that they’ll have left to spend on things like ordering, stock control etc.

We then turn to other projected costs for a commission-operated forecourt expenses like bank charges, loan interest, and eventually, accounting costs.

Here’s the rub: it’s commonly £1,000 or £1,200 for the year. That’s to cover everything: monthly payroll preparation for a dozen or more staff; bookkeeping and management accounting to produce quarterly management accounts and prepare VAT returns, and, of course, the annual financial accounts and tax computations for a limited company, to boot.

We ask how these costs have been calculated; the common response is that someone has seen a cloud-based accounting service advertised for £65 a month. Okay. That doesn’t include payroll processing, but let’s ignore that for today. So how does your raw data get into the cloud because it won’t jump there by itself? Sales, purchases, overhead invoices, cash paid in/out, bank transfers etc. Much of it from old-fashioned paper which every business handles, even in 2015. What is quaintly known as bookkeeping.

Once upon a time (way back in the 1990s) the aim in petrol retailing was to build completely integrated IT systems that wouldn’t require any bookkeeping. From POS and scanners to BOS and electronic invoicing and banking, everything would be automatic. All that was left for the accountant to do was to import the files from the accounting software that sat on the BOS, check/correct anything and hey-presto, the accounting reports would be produced at the touch of a button. No need for any manual input at site, no time required for bookkeeping or administration.

Somewhere along the line that idea has been replaced by the notion that accounting software can sit in the cloud, to be accessed at any time and from anywhere via a laptop, tablet or even a smart-phone. Isn’t technology wonderful? In very particular cases some of these accounting systems can import some data from a POS or even from a few suppliers; unfortunately most don’t. Most are completely standalone in that they require the user to input virtually all of the on-site data, through a keyboard or touch-screen. That’s bookkeeping; the question is who will be doing that book-keeping, how long will it take and how much will it cost?

Specialised role

Book-keeping, despite faintly Victorian associations, is actually a specialised role. An experienced bookkeeper can be worth their weight in gold often spotting ’odd’ (and potentially costly) financial problems long before an accountant gets to see the figures. And you don’t get a good one on minimum wage. Twenty years ago we all thought that the role would be obsolete by now, but the direction technology has taken means that the use of cloud accounting relies on bookkeepers transferring data between separate standalone systems.

When preparing your business plan, don’t be misled by headline cloud accounting fees. They won’t cover essential bookkeeping and administration at site level. If you don’t have the time (or, let’s be honest, the knowledge) to identify, sort and enter transactions into the cloud accurately, then someone else will have to do it. Most accountants will offer it as a separate service, but don’t underestimate the value or expect it to be free!