Your company is like your child. It is the best what you could have created, something which comes from your dreams and skill, something which reflects what is best in you. You tie your future to it and feel responsible for it. You want it to succeed, because its achievements will always be seen as yours. How to tell if people involved in the company take good care of it? What should you oversee and to what degree?

The child has grown up. It does many things on its own and performs more and more difficult tasks. You need better experts, especially those who handle financial issues. A good and responsible CEO has essential knowledge about everything their company deals with. A manager who does not have basic experience and awareness of the processes in each department is an easy target for conmen, and their competitors will soon take advantage of them.
If you do not want to be seen as a week player who may be easily tricked or misled, but rather as a respected and conscious businessman, you should be able to gain knowledge about and oversee at least these two accounting issues:

1. Basic financial ratios, which show the relation between important balance sheet items and income statement:

Gross and net profitability determines the share of sales income and net income in revenue.

Debtors Days (DD) monitoring of this indicator helps detect possible payment gridlocks. You should compare it with Creditors Days (CD). A major discrepancy between the two may suggest that the deadlines for receivables and payables are not matched. If, on average, CD is much longer than DD, liquidity may be impaired in the future.

Liquidity ratios. A safe level of current and quick ratios (relation between current assets and current liabilities) is between 1.0 and 2.0.

Effective tax rate. The relation between income tax in income statement and gross profit (in most cases it is a negative value).

2. Accounting estimates (allowances for inventory or receivables, provisions for payables, and accrued liabilities) Lowering these estimates distorts the indicators mentioned above. How do you know if the indicators are correct?

To calculate inventory or receivable allowances, you will need aging reports and any other information gathered in the past 12 months. If an inventory allowance does not diverge from the value of inventory aged over 1 year plus the inventory stocked within the last 12 months, then the provision is considered correct. Similar procedure is used to calculate receivables provision.

The value of the provisions and accrued liabilities must be compared at the end of a current accounting period with the values from the previous period. If the difference is considerable, you should consult your accountant and have them explain where the numbers came from. In order to make informed financial decisions, you may also look at the financial reports of your competitors (items related to provisions and liabilities).

You should control and check what you can and what your time and skill allows for. In order to build mutual trust and ensure good communication with your accountant, you should meet them regularly. To increase safety even further, it is advisable to use accounting software, which will help you understand and verify the calculations (tax, receivables, inventory allowance and provisions).

One of such programs is 24iValue. It comes in handy when you must quickly verify an accounting calculation. This revolutionary application is available online along with professional instructional videos. Its unquestionable advantage is the ease of use. You may use it at work with your accountant, but also yourself to check their calculations. An extensive help module will guide even an inexperienced user step by step. All is done swiftly, professionally and safely. Don't hesitate and see how you can improve your and your accountant's work.

Ewelina Kroll and Sławomir Ekman
24iValue

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