In a previous article, we explored the fact that accountancy is at the centre of any business.
As accounting professionals we need to be able to communicate financial information clearly and appropriately to a range of others, including those who have little or no accounting training or experience. Good written communication skills are essential when we start working in the sector and become more so as we progress. In fact, as we learn more complicated accounting skills and techniques, the ability to communicate them to others becomes a bigger challenge as the gap between their understanding and ours widens. Therefore the effort we put into developing our communication skills has to match the work we do to increase our accountancy expertise.
In part one of this series on active verbs we covered the most common command verbs at foundation level; identify, describe and explain. These are still fundamental at advanced level but are now supplemented by; analyse, compare, discuss and recommend. So, let’s look at what exactly these mean:
Analyse – Separate information into separate parts and identify their characteristics
You may be asked to analyse a statement of profit or loss. Your answer could be:
A statement of profit or loss (SoPL) shows a business’s income less its expenses, for a given period, and calculates either a profit or a loss. It is separated into two sections. The top part, or trading profit or loss, shows the net sales revenue plus any other income, less the cost of sales and calculates the business’s gross profit. The cost of sales is a sub-calculation within the trading section that calculates the cost of generating the sales income in accordance with the accruals concepts. It adds the value of any opening inventory to the net purchases and then deducts any closing inventory, as this is yet to be sold. The bottom part of a SoPL lists and totals the value of all the business’s allowable expenses, such as rent, wages, stationery and depreciation. The total expenses are then deducted from the gross profit in order to calculate the business’s net profit, if more income has been generated than expenses incurred, or net loss if expenses exceed income.
Compare – Identify similarities and differences between at least two given things (items/sets of results/situations)
You could be asked to compare the statement of profit or loss with the statement of financial position. In this case, your answer could be:
The statement of profit or loss (SoPL) and the statement of financial position (SoFP) are both financial statements that are produced in line with financial report standards. They are a mandatory requirement for limited companies but are also often produced for sole traders as a matter of best practice. Both statements are produced from a trial balance with all the ledger balances being included on one statement or the other. The statements in effect come as a pair but the purpose of each is quite different. The SoPL incorporates all the income and expense accounts for a given period of time in the past and calculates the profit or loss for the period. On the other hand the SoFP is a snapshot in time that shows an organisation’s worth on the day it was produced, by deducting assets from liabilities. The two statements are linked by the profit or loss that is calculated on the SoPL as it is also the balancing figure in the financed by section of the SoFP.
Discuss – Give an account or response that considers a range of ideas or arguments (for and against) to come to a conclusion, showing a balance of thinking
You might be required to discuss the benefits of payback periods as a long-term investment appraisal technique. Be aware that even though the question only refers to the benefits, in order to ‘discuss’, you need to include a range of ideas or arguments and therefore would also have to consider the disadvantages. Your answer could be:
Calculating the payback period of a long-term investment is a straightforward way of seeing how long it will take for its initial capital cost to be recouped. The calculation is based on the estimated cost of the investment less the expected yearly net cash flows. The shorter the payback period the better. The main advantages of calculating the payback period are firstly that it is simple, and secondly, easy for those without any accounting knowledge to understand. However, the fact that it is simple is also a disadvantage as it does not take the time value of money into consideration and it also excludes any cash flows after the payback point. Therefore, payback periods are suitable to be used as an initial step in an investment’s appraisal and if the period is acceptable to the organisation, then more sophisticated techniques, such as discounting the cash flows and calculating the net present value and internal rate of return, can be performed.
Recommend – Suggest or put forward a preferred option/solution/course of action with reasons why
You might be asked to recommend which, out of a choice of long-term investments, should be selected from a financial point of view. You will have to imagine the options and appraisal results but your answer might be along the lines of:
Having appraised all of the long-term investments under consideration, option B should be selected from a financial point of view. This is because it meets the organisation’s criteria for payback periods, a positive net present value (NPV) and internal rate of return (IRR). A couple of the other options also fulfilled these requirements but option B’s payback period is the shortest, its NPV is the highest and its IRR is the most in excess of the organisation’s required minimum.
Create good communication
We said in the first article that being clear about what we are being asked to do is the first step to good communication. We also used BUG to help ensure we include everything in our written communication that is required. Now we need to consider who we are communicating with and what structure our words should take.
Over the course of this week I have communicated with clients, colleagues, suppliers, managers and customers. I have written formally and informally using a range of structures from scribbled notes on a pad next to my computer, to emails, social media posts, a report, lots of texts and this blog. Sometimes the words flow easily and you know the person who is going to read them will understand not only the actual words but the essence and feeling behind them (emojis help obviously but are reserved for personal rather than professional communication only!) On other occasions trying to find the right words or correct turn of phrase is really hard and you end up reading and re-reading your sentences, changing a word here and there so that you refine what you are saying to ensure that what is read is understood as you meant it to be.
Communicating your understanding of accounting knowledge and concepts is challenging, therefore:
- Be clear about what actives verbs mean.
- Use BUG to ensure your answer is complete.
- Think about who you are communicating with:
- is it appropriate to be informal or formal?
- should you be using technical words? How much will your reader understand and how much should you explain?
- Use the right structure. Have you been asked for a report, email or notes?
- Re-read and if appropriate change your words.
Following the steps above will help ensure that what the recipient of your written work reads is actually what you are wanting to communicate with them. This is because it will be accurate, well thought out and easy for them to read, although it probably will have been hard for you to compose as good writing often is!
Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.