Study tips: What’s the difference between ROCE & RONA?

Posted by & filed under Professional Diploma, Students.

Accounting is full of acronyms. ROCE & RONA for example. To dispel any confusion between these two ratios for measuring an organisation’s performance, let’s examine the differences.

Let’s start with what they stand for. 

  • ROCE is Return on Capital Employed
  • RONA is Return on Net Assets

They’re both indicators used to measure efficiency and profitability. Both use the profit from operations figure in their calculation, because both give an indication of how well an organisation’s resources are being used to generate profit.

So, what’s the difference?

Well the honest answer is that it’s subtle but significant. 

It’s how the organisation’s resources are calculated.  If we look at the calculations, we can see both the similarities and the difference:

  • Profit from operations ÷ capital employed x 100 = ROCE

and

  • Profit from operations ÷ net assets x 100 = RONA

Therefore, we need to think about the preliminary calculations of capital employed and of net assets, because they’re the source of the distinction.

Capital employed and net asset figures

Capital employed is the money used to run an organisation. It not only includes owners’ capital and retained earnings, but also any money available as a result of borrowing.

It can be calculated as:*

  • Total equity (owners’ capital) + non-current liabilities (loans etc)

In contrast, an organisation’s net assets are everything it owns, less everything it owes, in both the short and long term:

  • Total assets – total liabilities = net assets (total equity)

Net assets are the same as total equity, in other words, the amount the organisation owes its owners’. 

It’s the accounting equation that we learnt back at Foundation level and the reason why the net assets figure on the statement of financial position (SoFP) reconciles with the total of the ‘financed by’ section. 

It’s also the key to understanding the difference between ROCE and RONA, which is that the ROCE calculation includes non-current liabilities.

ROCE includes non-current liabilities

Let’s see how it works and what it means. 

Below is some key data taken from the financial statements of two organisations, which both operate in the construction industry, for the year ending November 2019:

If we analyse the information at face value, then B Limited is a more profitable company than A Limited, judged on both sales revenue and operating profit. But is that right? 

The data suggests so, but it’s not quite that simple because B Limited also has significantly more assets than A Limited, and substantially more long term borrowing as well. 

The raw data isn’t easily comparable, so ROCE and RONA can be used to help as they’re calculated as percentages. 

Comparing via RONA

Let’s first see how well both companies are using their assets to their economic advantage, in other words, how much they earnt from every pound invested in assets. 

This is assessed by RONA and the higher the ratio the better:

Whilst B Limited is arguably the more valuable organisation as it has the most net assets, the Return on Net Assets show that A Limited is the more efficient one. This is because it’s generating 70p of profit for every £1 it has invested in assets, whereas B Limited is only returning 23p.

However, this is not the full story either, because the reality is that both organisations have more resources at their disposal than the net assets that they own. 

They both have long term borrowing or loans which is evidenced by the non-current liabilities figures.

Comparing via ROCE

As the capital employed includes borrowing, the ROCE’s provide a similar comparison of how well each organisation is generating profit but this time the calculation is based on the amount of capital used:

B Limited has more capital to employ than A Limited. 

This is because it has more assets, which is the same equity, than A Ltd as we have already noted, plus it has higher borrowing.

However, the ROCE’s confirm the same findings as the RONA’s, which is that A Limited is the more efficient company when it comes to generating profits through the deployment of its resources. 

It uses it’s £8.7 million capital to generate a 44% return, which is 28% more than B Limited generates from the £90 million it has at its disposal. 

In summary

Now we have a clearer, more comparable, picture of these two organisations’ performance, if I were to ask you which is the most profitable, would you be able to give me an answer?

I hope so. But I also hope it wouldn’t be a simple case of one or the other, because the truth is that a range of indicators are required to give a comprehensive view of any organisation’s performance. 

From what we know in this case though, I think it would be fair to say that whilst B Limited generated more operating profit than A Limited, and had more assets and capital at its disposal, A Limited used its resources more profitably.

*  Capital employed can also be calculated as Working capital (current assets – current liabilities) + non-current assets and it can be useful to be familiar with both calculations so that the figure can be double checked. However, when ROCE is being compared to RONA, the calculation given is easier to understand.

Further reading:

Browse the full range of AAT study support resources here

Study tips: principles versus rules in professional ethics

Posted by & filed under Advanced Diploma, Students.

Accounting incorporates a degree of theory in order to understand why and how to perform calculations. 

Ethics is an integral part of accounting, embedded in each decision we make that forms the basis of day-to-day practices and behaviour. Therefore effort is required in order to understand ethical concepts whilst we are studying as their application in the workplace is wide reaching and significant.

Three fundamental areas 

Firstly, AAT’s Code of Professional Ethics is a principles-based code rather than a rules-based one. In other words it adopts an integrity centred approach which expects its members to want to do the right thing rather than just follow rules.

Some rules are clear cut, we can all agree on the rules in sports. However, rules can sometimes be arbitrary and lack the flexibility to deal with situations in an ethical way. Even a straightforward situation such as how a batsman gets out in cricket, is complicated by the possibility of them being given out ‘leg before wicket’ if the batsman blocks the stumps with their legs.

The laws of cricket are written in great detail, covering every foreseeable scenario. These are enforced by the umpire. But this is more difficult for businesses and organisations.

They can write rules-based codes but as we all have different thoughts and views about moral issues and fairness, if we disagree with the rules there can be a temptation to break them or find a way of bending them.

There is also the question of how many rules are included. Sports continually change their rules as new situations develop. However, the number of new situations that can develop is limited. Unlike in business where the range of issues is potentially vast; from human resources to advertising and marketing, accounting and environmental concerns and so on.

Often there are too many situations that can arise, each with different circumstances that could influence an ethical outcome. If a rule-based code is thought to be too big, no one will read it anyway. Businesses and organisations therefore need to find other ways of defining and enforcing business ethics.

Adopting a system grounded by values that focus on fundamental principles is the alternative to prescribing rules. By trusting that as individuals we want to be honest, fair and truthful, the principles approach removes the need to lay down rules for every situation and circumstance that businesses encounter. For AAT’s Code of Professional Ethics these are the five fundamental principles:

  1. Professional Behaviour
  2. Professional competence and due care
  3. Confidentiality
  4. Integrity
  5. Objectivity

Using a principle-based code allows more flexibility. In theory it should be simpler than trawling through lots of rules but in practice it requires everyone who is bound by it to understand it and use diligent professional judgement to uphold it.

One way for an organisation to implement a successful principles-based code is to incorporate a conceptual framework, which AAT’s does. This is the second area we need to think about so we are clear about what a conceptual framework is and what impact it has.

What is a conceptual framework?

Let’s start with what it is. A concept is a general notion or idea that is intangible and sometimes hard to define. A conceptual framework pulls together theoretical ideas about a topic, like ethics, and organises them in a way that is easy to remember and apply in practice. Conceptual frameworks are not just used in accountancy, but are written for a variety of purposes in lots of fields such as education, research and development, entertainment and science.

We have already seen that AAT’s Code of Professional Ethics is based on the five fundamental principles listed above. As AAT members do not have a set of rules to follow the conceptual framework requires them to identify and evaluate situations and circumstances that would threaten their ability to comply with the fundamental principles. It also obliges them to respond appropriately to the threats and put suitable safeguards in place to reduce the threats to an acceptable level, or eliminate them entirely.

The final area we are going to consider is what status a code has. AAT’s Code of Professional Ethics is a voluntary code as opposed to a statutory one. The difference is that a voluntary code has no legal status but a statutory one does.

In order for a code to be statutory it must be created under legislation. It will most likely be regulated by an organisation independent of the industry it covers and companies will have no choice but to enforce it as its legal status makes it mandatory.

However, a voluntary code is often written by businesses and organisations that are self-regulated as a way of generating and maintaining high professional standards and reputations. Whilst there may be no legal requirement to have and implement a voluntary code, employees and members of businesses and organisations that do, will be required to uphold them as a condition of their employment or membership.

Read more:

Browse the full range of AAT study support resources here

How to be a better cashflow and budgeting adviser

Posted by & filed under Accountancy resources.

SMEs need good cashflow and budgeting if they want to survive. Accountants have more tools at their disposal to help this happen.

Cashflow problems caused by a lack of funding or late payment can cause immense stress to owners and directors of small and medium-sized enterprises (SMEs). 

Thankfully, accountants have more options to help SMEs ensure their current assets are enough to cover its current liabilities. They can advise on cashflow management to provide a realistic budget for the short-, medium- and long-term, using accounting software that provides a real-time view of all money owed and when it is due.

Making a budgeting plan

When it comes to budgeting in business, accountants can work with an SME to create a plan based around its sales forecasts. It involves looking at its turnover in previous years and analysing competitors and the market. Any plan should help an SME to better understand its projected expenses, including annual and one-off costs. Once this is done, the business can work to a credible budget. 

Andrew Bradley, director of Cantium Accountants in Kent, helps clients prepare formal budgets, cashflows and identify pressure points. 

“We tell them to be aware of, and plan for, times during the year when there will be pressure on cash. They should talk to the bank about an overdraft facility and, if they are considering an investment, think about the impact this will have on cashflow,” he says.  

Understanding financial health

Accountants and in-house finance teams can help SMEs have a better understanding of the financial health of their business. Colin Hewitt, co-founder of the cashflow app Float, says accountants should not be afraid to charge for cashflow forecasting advisory work. 

“A lot of clients would be happy to pay more money if they can see the value,” he says. “There are automated solutions like Practice Ignition, which allow accountants to offer added value services like forecasting and reporting for a clear price.” 

Here are the essential steps you should advise businesses to take when it comes to cashflow and budgeting. 

1. Set up credit control

SMEs must have an effective credit control system in place to oversee cashflow. A credit controller can chase overdue invoices and take enforcement action when required.

When it comes to forecasting, many SMEs use the direct method: looking at upcoming bills and invoices, as well as historical actuals, to predict when cash will move in and out of an organisation.

This approach tends to work best when an SME client is assessing if it can afford to pay staff or other bills, and what might happen if payments are delayed. 

2. Utilise technology

It’s never been easier to get paid quickly and easily by your customers. Encourage SMEs to use instant payment technology if appropriate to their business. Apps such as GoCardless even offer invoicing in instalments.  

SMEs can take advantage of machine learning and API integrations to connect current and historical data. When data is processed manually, it can be very labour intensive to correct errors, says Dermot Murray, general manager at data connection and reporting system Workiva.

“One of the most beneficial things an SME can do is invest in automation to link quantitative or qualitative values across multiple reports,” he says. “This connection minimises misreporting risks, saves money and improves data consistency for the future.” 

3. It’s all in the data – and how you read it

Many businesses still report financials manually, and this can lead to fragmented databases, invoicing errors and reputational damage. 

Rebecca Freeman runs Lagom Finance, a digital accounting practice for SMEs. She is also head of user experience research at Receipt Bank, which has a machine learning pre-accounting tool for finance professionals.

She agrees that automating data entry is crucial. “Many SMEs are still looking at data retrospectively, meaning any cashflow or financial budget is more than likely already out of date as it is created,” she says. “When you add to this the time taken to input and sort financial data, the lag is increased dramatically”

“With real-time data, you have to understand how up-to-date it really is,” says its head of operations, Jo Sutton. “Accountants are used to viewing the data from last month part-way through the current month. So, it requires a different mindset to work with data that is up-to-date as of close of play yesterday but does not include monthly adjustments,” she explains.

Case study: The cashflow-conscious SME – Zeal Creative

The nature of Zeal Creative’s business means it must manage its cashflow effectively and budget carefully. 

As a shopper marketing agency based in London and Manchester, it runs retail promotions and competitions for high profile brands such as Nestlé, Kellogg’s, Pringle and McCain. Its work includes having to fund travel costs upfront for winners’ holidays and other prizes. 

The agency uses the accounting and job details system Paprika, which integrates contact management, job costing, estimating, resource planning, time and expense entry, client billing, forecasting, accounting and budgeting. Finance manager Boaler says the whole company uses the system, which provides one point to input data and view it in real time. 

Boaler adds: “We also use historical data so we can see similarities between clients and learn from any budgeting issues that might have happened before. It could be around the time and costs allocated to particular projects so we can improve our budgeting and cashflow in future.” 

Case study: The Cashflow adviser – Aidan Smyth

At chartered accountants Peter Hodgson and Co, partner Aidan Smyth is eager to help his SME clients manage their cashflow and budgeting. “Businesses need cash, otherwise they fail very quickly,” he says.

Smyth’s advisory service for an SME starts by helping a client prepare a business plan for the next financial year while also looking longer-term. “Once we know what the business’s plans are, we convert them into financial plans and budgets and assess them for viability and reasonableness. We then do a sensitivity analysis to ensure that even in the worst-case scenario, the business can continue.”  

He says it is essential this process happens early so an SME can identify its cash needs well in advance, recognise funding requirements and work with lenders and investors. “It is also important the business monitors actual performance against planned performance on a timely basis and reassesses the viability of its plans. We have relationships with banks, specialist lenders and investors who are invariably willing to help, provided the business case can be justified, and the numbers make sense.” 

8 tools to maximise cashflow and boost budgeting 

  1. Paprika  –Integrated job costing and accounting   system, paprika-software.com 
  2. Float – Real-time view of a business’ cashflow, floatapp.com
  3. VT Transaction+ A fully-featured accounting and bookkeeping package, vtsoftware.co.uk/tranplus 
  4. Futrli -AI-powered cashflow software, futrli.com 
  5. Fathom – Turns accounting data into business intelligence, fathomhq.com
  6. Receipt Bank – Productivity tool for accountants and bookkeepers, receipt-bank.com/uk
  7. Workiva – Cloud platform for connected reporting across accounting and finance, workiva.com/uk 
  8. Practice Ignition  – Smart proposal system incorporating payment facilities, practiceignition.com 

Further reading:

AAT research shows accounting technicians can take pole position in the digital age

Posted by & filed under Future Finance, Future of accounting.

We’ve been talking about the future of accountancy for a while. Little by little, that future is creeping into the present.

Much of the discussion has been about the big picture – how the services, team structure, and practices will change. But new AAT research looks at specifically at whether accounting technicians are still relevant. 

The Impact of Technology on Accounting Technicians and Bookkeepers was conducted by Nottingham Business School and Warwick Economics and Development. It specifically looks at the future prospects for accounting technicians and draws on the thoughts and opinions of accountants at all levels and specialisms across the world. 

Five things about the future 

The study reveals a bright outlook for accounting technicians. 

  1. Practical people with accounting qualifications are likely to be in demand.
  2. Knowledge of basic accounting and bookkeeping will remain the number one skill.
  3. Academic qualifications, such as degrees, are expected to be far less popular. 
  4. Work will change and tasks will be replaced. But automation and digitisation will transform jobs, not replace them.  
  5. Other skills seen as extremely important include (in order) communication skills, ethics and governance, IT skills and data analysis.  

The route to success is paved with CPD 

The report authors suggest the recipe for remaining relevant is spelled, C-P-D.  They state: “Continuous professional development is extremely important in a fast-changing working environment”. Change is happening now, driven by factors such as regulation and technology. 

Interviews with accountants and finance professionals of all sizes and from all sectors found a common theme “the need for upskilling and more effective and extensive continuous professional development (CPD) to adapt to new technologies.

It is expected that in the future basic accounting tasks will be assisted by technology and this will free up time for bookkeepers and accounting technicians. They should utilise this time by keeping their CPD up to date on legislation changes, reporting to clients’ real-time information and help client manage cash flow better and assist with business planning.

Accountant in construction sector.

Actively keeping up with CPD is extremely important for future accountants in the context of the future accounting profession.

Accountant, advising technical sector.

But are other actions that accounting professionals can take alongside honing finance-related skills.  The report says that taking a short course on key skills, such as IT, could provide the second most important qualification – and prove more valuable than a degree.  

Blockchain is the next big disrupter 

Blockchain is set to be a game-changer for accountancy, with the potential to both  simplify and enhance some of the tasks that you undertake.

Transaction records can be automated and stored ultra-securely. Every record is accurate, cannot be tampered with, and won’t need to be double-checked. 

“By enabling the introduction and adoption of fully automated electronic ways without the need for an intermediary or a trusted party (i.e. done online). “Blockchain would lead to significant changes in employment and the type of skills needed in the accounting profession,” says the report.

Your job won’t disappear – but it will be different 

Despite losing elements of your role to technology, there is still a place for you in the organisations you work within. While machines will do some of the work you do now, they will also provide you with the tools to do more with the rest of your skills. 

“It won’t be the case that there will no longer be accounting technicians,” says Jonathan Millet, CEO of Block3, a blockchain technology company. “The same way we oppose the view that in medicine we don’t need doctors because we’re using AI. Whatever profession you are… you are the last line of defence and you use this technology as a mechanic could. So, you are there to tweak it and to iterate and improve on where it’s allocated.” 

This is already happening in other parts of the world. A CPA operating out of the US told the researchers: “In the US and Middle East, where I work, the focus is more on how you analyse and interpret the numbers and less about the debit and credits. It is more about the future forecasting and business analytics with the help of the systems.”

43% of your current role will be automated

Of those surveyed, eight out of ten said that AI and automation will impact on your role. Almost half of that number said that the impact would be significant. 

A finance manager for Boots UK told researchers: “As more suppliers sign up to electronic invoicing and the core systems become more established and uniform within companies, there should be a need for fewer junior ledger staff. A number of roles would become redundant, but some new roles are created.”  

Regulation will force through change 

56% of respondents to the research survey think regulation will have a significant impact on the role of the accountant.  

Making Tax Digital has already pushed things forward in terms of digital accountancy and cloud accounting adoption. MTD for VAT has already caused large numbers of companies to switch to cloud platforms.  

We are expecting announcements from Government – possibly soon – about the next stage, which will drive even more change.  

In summary

The practical knowledge of Accounting Technicians is a key strength that will keep them relevant.

Solid knowledge of accounting processes is seen as highly desirable alongside cloud accounting.

However, accounting technicians must keep themseleves relevant by adding additional skills, such as presenting, negotiating and problem solving, along with ones with a more technical ‘edge’, such as data analytics.

A set of soft skills like adaptability and excellent human interaction coupled with technical knowledge, like key data analytics, form the necessary combination of skills for the success of accounting technicians in the future.

Khaled Ghalayin, global business development executive, Temenos

Further reading:

Modern Finance Roles – Business Transformation Manager

Posted by & filed under Career.

As the industry changes, traditional accounting roles are transforming alongside it. We asked some recruitment experts about the types of roles you can find in the modern accounting industry.

In the second of our series on modern finance roles, here we look at what it takes to become a business transformation manager.

What does a business transformation manager do?

“Business transformation managers are largely responsible for recognising areas for improvement within a company and implementing necessary changes to enable a business to perform to its optimum ability,” says Kathryn Heeler, consultant at Sellick Partnership.

“Working closely with the managing director or CEO, they are often responsible for overseeing all areas of a business and delivering sustainable improvements. The role is largely defined by an employer and can cover everything from business strategy to IT.” 

A business transformation manager has a much wider remit, though some of the skills and duties involved are similar. Influencing skills are important for both, for example, as is an ability to think strategically. 

What is a business transformation manager responsible for?

A business transformation manager’s duties include, but are not limited to: 

  1. Acting as a point of contact between different departments within the company and relevant third parties.
  2. Communicating strategies and objectives with relevant departments and colleagues.
  3. Identifying any risks or business changes and developing strategies to overcome or address these.
  4. Implementing changes without causing disruption to the business.
  5. Creating a system of evaluation to determine the success of the changes.
  6. Manage HR and IT issues, depending on the business changes involved.

Who would suit a business transformation manager role?

Heeler says a business transformation manager should have the ability to influence day-to-day decisions and work collaboratively with senior stakeholders across the business. “They are a translator between finance and operations and should be able to relay this information in a clear and concise way,” she explains.

“They should have strong business skills, including stakeholder management and presentation skills. They need to be commercially aware and able to understand and anticipate the needs of operations and management.” 

A business transformation manager will be able to implement any changes sensitively and with minimal disruption to the rest of the business. In addition, they will be able to create or implement systems to evaluate the success of any adjustments made within the organisation (and present any findings). 

“In some cases, they will manage HR issues including recruitment, staff training and appraisals,” says Heeler. “Also where necessary, oversee any IT issues.” 

How much would a business transformation manager earn?

Business transformation managers potentially earn £65,000. According to Heeler, depending on the size of an organisation and where it is based, the salary range of a business transformation manager can be from £55,000 to £65,000.

Where can you find a business transformation manager role?

“They can work in large or small, public and private organisations, as well as specialist management consultancies,” says Heeler. “In some cases, they will manage HR issues including recruitment, staff training and appraisals.”

Further reading on careers:

AAT: closing the gender pay gap

Posted by & filed under Women in finance.

With AAT celebrating its 40th birthday this year, we’re naturally focusing on what makes us proud as an organisation helping people of all ages, and from all backgrounds, make it in the accountancy sector.

And few things make us prouder then the fact that around two in three AAT members and AAT student members are female. We’ve also had ten female Presidents to date.

Closing the gender pay gap

Our latest gender pay gap report, published ahead of this Sunday’s 110th annual International Women’s Day, shows a difference between the median hourly rate of pay that male and female colleagues receive of just 4% – down from 13.7% the previous year.

While we know that we still have some work to do in this area, what’s even more pleasing for us as a company is that under the terms of the Women in Finance Charter, which we were the first accountancy body to sign back in November 2016, AAT committed to having 40% females in senior management positions by March 2022.

As our latest report focuses on our submission made in September 2019, we’re absolutely thrilled to have met that 40% target three years early. In addition, we now have a 50/50 gender split on our executive team.

Challenging traditional stereotypes

But although our own gender gap figures are showing great signs of moving in the right direction, and more broadly AAT membership challenges traditional stereotypes of male dominance in accountancy, this doesn’t necessarily translate into female leadership in the sector. And if women feel they are able to enter accountancy, but not progress through the ranks, then the gender pay gap problem won’t go away.

A 2017 survey found that 87% of workers at the top 50 accountancy firms said their business leaders were male, with only one firm having under 60% male partners, and 19% of firms having no female partners whatsoever. That suggests that there remain equality and diversity issues within the wider profession.

As a company that is passionate about equal opportunity for all, we call on all our members – whether they are heads of their own business or not – to consider these issues within their own firm and call for change if progress in these areas appears to be lacking.

Some practical steps for accounting firms

  • Following in AAT’s footsteps by signing up to the Women in Finance Charter. This constitutes a pledge for gender balance across financial services, through progressing women into senior positions in the finance industry: Women in Finance Charter.
  • Getting the right systems in place to analyse pay information and representation. Ensure your firm obtains a clear picture of current experiences and attitudes – which can help to pinpoint the barriers, conscious and unconscious, that may be blocking female progression.
  • Even if your company isn’t required to report on your gender pay gap by law, this is no reason not to set targets to improve gender diversity. This needs to be underpinned by a commitment to reviewing and reporting at regular intervals.
  • Include training to deal with discrimination issues. AAT has successfully done this with unconscious bias training for recruiting managers.
  • Get flexible. More than 50% of AAT staff now benefit from flexible working options, which help to change the traditional ways of working and ensure more equal opportunities, regardless of responsibilities outside of the workplace. For example, some of our male staff now take the opportunity to work reduced or compressed hours in order to help more with childcare, allowing their partner to go back into the workplace.
  • Celebrate your successes! AAT regularly looks to tell the stories of our female members rising towards the top of the accounting profession. For example, last year we interviewed five successful career women about their experiences in accountancy.
  • More broadly, we’re always keen on widening the pool to accountancy – and part of the responsibility here lies with schools. Girls should receive more encouragement to pursue careers in high-paying jobs; and also offer careers advice that show university isn’t for everyone. Someone taking an AAT apprenticeship straight after leaving school can become a chartered accountant a year earlier than a peer who has gone to university – and without the mountain of student debt (and with more career experience to match).

In summary

Overall change in this area will only truly be realised when senior employees come together to review business practice and ensure it offers equal opportunities for all, where progression is on merit rather than taking factors such as maternity leave, childcare or flexible working into account. We hope that all our members will be prepared to tackle poor practice in this area, if necessary.  

Further reading:

Line managers: How to mentor and manage an apprentice

Posted by & filed under Apprentices, Career-boost.

Mentoring can have many benefits for you and your practice and offer a great opportunity for the young person you support to develop important personal and professional skills.

In order for it to be most effective, line managers need to set up a proper system and set goals and objectives with the mentored person.

An appetite for mentoring

A recent survey by AAT found that despite the current lack of opportunity, many AAT members would relish the chance to meet with someone more senior and develop their skills.

The AAT survey carried out in April 2019 found 37% of accountancy professionals could like the organisation where they currently work to implement a mentoring programme.

The report Mentoring and Accountancy: Why be a mentor? , questioned over 200 members and found there was a huge appetite for mentoring. However, only 45% of respondents said they had received mentoring support, compared with 81% working in advertising and marketing. Levels of mentoring in accountancy are low compared to other industries.

Line managers leading by example

Emily Coltman FCA is Chief Accountant at FreeAgent, an award winning accounting software for small businesses. She says learning by example is key.

“Managers and seniors must lead by example as junior members of staff can learn a lot by observing other experienced accountants at their work,” she says. “This is something that I have personally benefited from, especially during my first practice role.

Interpersonal skills will become increasingly important as the accountancy industry changes. Effective communication with clients is what will add value and differentiate your practice.

“The accountancy profession has definitely always been about more than the numbers,” she says. “It’s an important part of the job, but a good accountant also possesses good interpersonal skills to be able to explain financial concepts in plain English to non-finance professionals. Junior members of staff should therefore be taught these skills during training.”

Making time to mentor

“Being a manager, you have so much going on day-to-day and need to rely on experienced staff, so taking on juniors or inexperienced workers can be challenging, says Lee Frame, director and co-Founder of The Audit Lab.

“I do feel it’s important and hugely beneficial to be able to train up those who are willing to learn and with plenty of ambition.”

He says the key to successful mentoring is an open communication channel with your trainee and having the resources to hand prepared in advance.

“Know before you take on any trainees what resources they may need and be willing to invest time and money in those. Create a schedule and stick to it; if anything important does pop up and interfere, be sure to make that time up to not fall behind or let your trainee down.”

Putting in the right structures

Pushfar is a new platform to help students and professionals to go further with opportunities for networking, mentoring and career progression. Its CEO and founder is Ed Johnson, who came up with the idea after struggling to search for a mentor.

The three key elements to a great mentoring experience are matching, management and reporting, he says.

“At the start it is important that all mentors and mentees in a relationship are truly happy with their matches. Then, throughout the mentoring process it is important for both the individuals in mentoring relationships to manage them effectively by scheduling regular meetings, having set goals to work towards and being able to build up a relationship.”

Finally, for those managing mentoring it is important for them to be able to offer insights and report on the successes andchallenges in each mentoring relationship, he says.

Giving effective feedback

Alan Price, workplace wellbeing expert and CEO at HR software firm, BrightHR, says consistency is the key.

“Telling someone they have done a ‘bad job’ or ‘didn’t do too well’ is likely to be too vague and present difficulties for the employee when trying to take these comments on board in the future,” he says.

Many mentors worry about putting too much pressure on mentees, setting unrealistic expectations and adding more pressure to the mentee’s existing day job. “Create SMART (Specific, Measurable, Achievable, Realistic and Time-based) objectives based on the questions in your exploratory session” says Alan.

These objectives could be based around demonstrating the improvement of skills like coding or financial metrics, soft skills through developing personal relationships or conflict management, or even creating a detailed personal development plan.

Making the most of the branch network

Rosie Berridge is director of Accountability, a practice in Edinburgh, and Chair of the Edinburgh branch of the AAT.

“We are considering setting up future scheme to encourage mentoring in our branch network,” she explains. This follows a speech by Sylvia Baldock, team engagement and collaboration specialist, which offered tips on mentoring at the AAT Annual Conference.

“We thought it would be an amazing function of the branch network if we could bring people together in that way and inspire younger accountants in their career.

“As a committee here we are very keen on engaging with students. We have set up a student network and have speakers to come to those events. The next step is to put in place a mentoring scheme that matches people. In the branch network there is scope to enable these personal interactions.”

Key takeaways

  • Mentoring takes time and patience – don’t expect the process to be straightforward all the time
  • It can boost your business and help you grow if you pick bright, ambitious young people who are willing to learn on the job
  • Make sure feedback is delivered with sensitivity and is constructive
  • Allocate appropriate resources for mentoring

Tips

Erica Wolfe-Murray is a leading business growth and innovation expert, having worked with countless fast-growth companies. She has these tips for accountants who want to grow and develop their business and their staff:

  •  Ensure the mentee really is looking for a mentor, and wanting to engage, rather than having one foisted on them.
  • Be clear about what both parties expect from and are prepared to contribute to the relationship, which may last some years.
  • An experienced line manager will be able to brief both the mentee and the mentor clearly ensuring the relationship gets off to a good start but should also be able to step in if needed.
  •  The success of the mentoring should be discussed and can be seen in the employee’s appraisals.

One of the most important aspects is mutual respect, she says.

“The mentor has to see that the mentee is capable and wants to grow their experience, wants to hear, learn, share, understand. But the mentee has to also be prepared to contribute, explore, debate. It is a two-way relationship that both mentee and mentor should value.”

In summary

  • Know before you take on any trainees what resources they may need
  • Be willing to invest time and money
  • Create a schedule and stick to it
  • Set objectives with the mentored person
  • Review goals regularly
  • Make sure you listen to feedback
  • Remember that it is a two-way relationship

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Study tips: Accounting adjustments in an ETB or journals – Part 3

Posted by & filed under Advanced Diploma, Students.

The third article in our three-part series on Accounting adjustments in an ETB or journals.

Study Tips: Accounting adjustments in an ETB or journals

This series looks at one of the most difficult areas of accounts preparation within the AAT Advanced Diploma in Accounting; making corrections and adjustments. 

Hopefully, you are well prepared for this concluding instalment and consequently ‘chance’ will favour your efforts now.  In part one and two we looked at adjustments so now we can turn our attention to correction of errors.

Let’s start by answering a few key questions about suspense accounts.

What is a suspense account?

It’s a temporary account which is opened to make an unbalanced trial balance (TB).

Why would a TB be out of balance?

Any transaction in the accounting system that does not have equal debits and credits will ultimately cause an imbalance in the TB.

Does the suspense account have a debit or credit balance?

It can have either, depending on which column of the TB needs to be increased to make the totals of the debit and credit columns equal.

Is the balance made up of multiple transactions?

Yes it can be, and the effect of individual transactions can both increase and decrease the balance. In other words, there can be both debit and credit postings in the suspense account that comprise the overall balance.

Which financial statement does it go on?

It shouldn’t go on either as it should have a nil balance once it has been cleared.

Do all errors have to be corrected via the suspense account?

No. Only errors that originally unbalanced the TB will have been balanced by the suspense account so only those will need to be cleared via the suspense.

How do you clear it?

The best way is to clear it one transaction at a time, using a consistent and logical thought process to break the overall task down into manageable chunks.

That process is based on a few key thoughts applied to each individual transaction:

  1. What has actually happened?
  2. Are the total debits and credits equal?
    1. Yes – the transaction and therefore TB will balance.
    2. No – the transaction and TB will not balance.  The Suspense account will therefore make the transaction balance.
  3. What should have happened?
  4. What correction(s) are needed?

Once we’ve worked through this thought process, we can apply the overall steps for making year-end adjustments.

In part one, we said you need to have a substantial depth of theoretical knowledge as well as practical expertise to correctly write journals and make adjustments. So, now we’ve answered questions about the underlying theory, let’s see how it can be applied in practice.

Writing journals and making adjustments

Let’s say office expenses of £540 have been posted to the Office Equipment account but the other side of the entry was correct.

We’re going to use ‘T’ accounts to help us see what actually happened rather than just visualising it in our heads.

Step 1 – What happened?

1

Step 2 – It is now easy to see whether the total debits and credits are equal.  In this case they are, so there’s nothing for the suspense account do to.

Step 3 – What should have happened?

Step 4 – By comparing what was actually posted with what should have been posted we can see the correction required. In this case we’ll need to remove the incorrect posting in Office Equipment and make the correct posting in Office Expenses. ‘The other side of the entry was correct’ so no correction to the payment is needed.

3

Let’s try another one. Suppose a £100 invoice for printing was paid for with cash but only the debit side of the posting was recorded.

4

To show our corrections as journals we can simply take the information from our ‘T’ account workings.

5

Always ensure the journals balance and that the total debits match the total credits.

In summary

If you know the opening suspense account balance, then once you’ve dealt with all the individual transactions, check that those posted to the suspense actually clear the balance to zero.

Making year-end adjustments and correcting errors are challenging areas of accounting. The key to success is being fully prepared for the range and depth of knowledge required to be competent in them.

Hopefully this series of articles has helped deepen your understanding and given you practical methods to apply when practicing at work, home or in College.

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10 ways finance is changing

Posted by & filed under Future Finance, Future of accounting.

The accountancy profession is undergoing disruption like never before. Here we look at some of the ways that the profession will change in years to come.

While core accountancy knowledge and skills – such as budgeting, reporting and advising clients – remain important, the rising tide of data and new tech also means accountants of the future will need new skills to advance their careers.

1. Future accountants will need social intelligence – not just technical skills

With robots and artificial intelligence predicted to take over half of all workplace tasks by 2025 those accountants who will thrive will be those who can do all the things software can’t. Machines might be able to craft a purchase order in two seconds flat. However, they’re pretty useless at nurturing new client relationships, inspiring a team or translating dense financial language into words that non-financial people will understand.

2. Carbon emissions will enter the balance sheet

Last year outgoing Bank of England governor Mark Carney warned those companies that ignored environmental issues would “go bankrupt”. At the same time, the Financial Reporting Council recently launched a review into whether auditors should reflect the financial risks of the climate crisis in their accounts. With the UK aiming to bring all greenhouse gas emissions to net-zero by 2050 (and businesses making similar pledges), expect to see the environment enter the balance sheet. It’ll provide opportunities for accountants too: by 2030, it’s predicted ‘green-collar jobs’ will increase to 2m.

3. Understanding and analysing data will become crucial for accountants

It’s not difficult to see why businesses love data: it allows them to forecast sales, bolster internal audit and target consumers with laser-like precision. While many firms might be drowning in data, there’s a shortage of data scientists who can understand and interpret what these figures mean. All good news for accountants, who are in an excellent position to train up and plug that gap.

4. Freelance accountants will be everywhere

Today, 4.8m people in the UK are self-employed, around 15 per cent of the workforce. These aren’t just Deliveroo cyclists or people flogging craft doilies on eBay, but an increasing army of freelance accountants too, many working from home or co-working spaces. Being your own boss comes with a substantial caveat though: its feast-or-famine nature means work (and pay-cheques) can be irregular. Those gig economy accountants who are successful share one trait: they have commercial acumen in spades, whether it’s sniffing out new clients or savvy Instagram marketing. A

5. Time to get your head in the cloud

The UK is fast becoming a cashless society: UK businesses look set to process 11bn contactless transactions a year by 2026, four times as much as ten years previously. Along with the need to make clients tech-ready for Making Tax Digital, it doesn’t take Nostradamus to predict that any Luddite accountant who resists cloud-bookkeeping will be at a severe disadvantage.

6. Disruption will create new accountancy roles

It’s not all doom-and-gloom when it comes to the robot revolution: the World Economic Forum predicts automation will create more jobs than those it will eradicate. Tech such as driverless cars will require new taxing solutions, while the likes of blockchain, cryptocurrencies and smart payments will all need to be regulated. The result? New roles for accountants everywhere.

7. A big health check for auditing

Carillion, BHS, Thomas Cook, Patisserie Valerie – auditing scandals have been behind some of the biggest company collapses in recent years. The Brydon Report, published in December, urged for a radical shake-up of the entire auditing sector. Its recommendations included the creation of a standalone audit profession, shareholders/investors becoming more involved in the audit process and auditors undergoing training in forensic accounting so they can spot fraud better.

8. The rise of the holistic accountant

For years, the careers mantra went something like this: to be employable, you needed to develop a niche; a unique specialism allowing you to stand out from the crowd. Yet, in last year’s <Range: Why Generalists Triumph in a Specialized World> writer David Epstein argues that those who think broadly and embrace diverse experiences tend to do better than specialists who manage to silo themselves thanks to their narrow expertise. The increasing trend for finance business partners – who work across different departments – backs up the theory that jack-of-all-trade accountants with a 360° approach will be much sought-after.

9. The fintech explosion means more choice for accountants

Arguably, there’s never been a better time for accountants to follow their passion. The fintech revolution means that accounting talent are considering careers at much smaller firms, rather than sending CVs to the big four as they would have done ten years ago. There are thousands of startups out there who need a quality CFO, in sectors from movies to charities. The all-hands-on-deck nature of smaller firms also means it’s a fantastic way to acquire a broader range of responsibilities too.

10. Accountants will have to think more strategically

The 2008 financial crisis sent shockwaves throughout the business world. Almost overnight, they no longer had the financial clout to invest in new ventures and had to make redundancies. However, some savvy firms started to see the potential of their back-room bookkeepers. By marrying their numerical nous with a knowledge of external factors (share prices, market trends, legislative changes plus whatever competitors are up to), these accountants had a unique join-the-dots insight, helpful for leaders’ decision-making and forcing companies to become leaner. As a result, those accountants who can think and plan strategically will be in heavy demand.

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Study tips: Accruals concept – part 2

Posted by & filed under Advanced Diploma, Students.

This is the second article in our 2-part series on the accruals concept.

Study tips: Accruals concept series

In part one of this two – part series on the accruals concept, we broke down the theory of matching and applied it in practice to an example of a prepaid expense. 

Now we’re going to extend that knowledge and understanding and use it to accrue for expenses as well as to make adjustments for income.

What is an accrual?

We said in part one that a prepayment is an expense or some income that has been paid for or received this financial year, but that belongs (needs to be matched to) next year.

An accrual is simply the opposite – an expense or income that won’t go through the bank account until next year, but which belongs in this year.

Therefore we’ll need to increase the balance of the appropriate account, in order to correctly adjust it for an accrual as the accruals concept states that:

Income generated must be matched with expenses incurred, within a financial period, regardless of when the money is paid or received.

Accrued expenses

Let’s say at year-end, 31st March 2018, we know that an electricity bill is due for £200 and half of it belongs to this financial year.

We would therefore need to increase the balance on this year’s account to accrue £100 and match the expense to the correct financial year. The double entry would also make a provision in the accruals account and will show as a current liability on the statement of financial position (SoFP), as the electricity bill is yet to be paid.

Income accounts

Once we can account for prepaid and accrued expenses, usually called prepayments and accruals, we can transfer our knowledge and skills to prepaid and accrued income.

The process is the same but the effect is the opposite. This is because the balance on an expense account is a debt and on an income account it is a credit so the starting point is different.

How to make adjustments for prepaid and accrued expenses and income

Firstly we have to remember the three elements that we learnt in part one:

  1. Reversal of the previous year’s year-end adjustment
  2. Accounting for this year’s activity i.e. what money has gone through the bank account
  3. This year’s year-end adjustment

On top of that we need to learn what effects accruals and prepayments have on account balances:

  • Prepayments
    • Decrease balances at year-end. Therefore, they must increase balances at the start of the following year.
  • Accruals
    • Increase balances at year-end. Therefore, they must decrease balances at the start of the following year.

Accruals example scenario

At the beginning of the year there is a balance of £900 on the accrued income account that was the result of a year-end adjustment for rent received. The cashbook shows £12,000 has been received for rent during the year. The rent receivable account needs adjusting to reflect that a payment was received for the quarter ending in April for £1,000.

Remember the financial year ends on 2018.

If we break the information down into the three elements, we need to start with the reversal of last year’s year-end adjustment. Often getting this posting right is the most challenging aspect of this type of year-end adjustment so asking a few questions can help ensure we start correctly.

Are we updating an expense or income account?

  • Rent receivable is an income account.

Will it have a debit or credit balance?

  • Income accounts have credit balances.

What was last year’s year-end adjustment for?

  • It was for accrued income.

What effect did that have on last year’s balance?

  • Accruals increase balances at year-end.

Therefore the reversal needs to be entered on which side of the account?

  • On the debit side because accruals decrease balances at the start of the year and this is an income account which will have a credit balance.

The second element is to account for this year’s activity and the information states that, the cashbook shows £12,000 has been received for rent during the year. Therefore the double entry is:

The final element is to make the necessary adjustment at the end of this year. We know that the rent receivable account needs adjusting to reflect the fact that we received a payment for the quarter ending in April for £1,000, and that the financial year ends on 31st March.

It’s especially helpful here to remember the theory we’re basing all our work on; the accrual concept.

We’re matching income, in this case, to the correct period regardless of when the money went through the bank account. It is also useful to ask some more questions:

What time period is covered by the income?

When does this year end and next year start?

Compare when the money goes through the bank with which year it belongs in. You may have to split it between the two years in the right proportions:

This means that this year’s balance needs to be increased and therefore the adjustment is an accrual.

The year-end adjustments

We can use four steps to help us with the year-end adjustments:

1. Calculate the adjustment

  • £1000/3 x 2 = 667

2. Post the double entry

  • SoPL account – Rent Receivable
  • SoPL account – Accrued Income

3. Write off the balance on the SoPL account

4. Balance the SoFP account

In summary

Making adjustments for prepayments and accruals can be challenging as it involves applying theory, proportioning amounts and making adjustments in reverse.

However, if you learn to recognise the three elements involved in the process and think through what effect an adjustment has on an account’s balance at the start and end of the year, then you’re in a great position to master this tricky aspect of preparing year-end accounts.

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