"You cannot be serious!” John McEnroe’s exclamation years ago on Wimbledon’s Centre Court sums up my response to a letting agent who, when asked what kind of accounting methods he used, replied, “My accountant tells me how much money I made when he wants the cheque for the Inland Revenue to pay my tax.” On reflection I shouldn’t have been surprised. Financial controllers and accountants rarely feature in the job ads in the trade press. I cannot recall seeing “Accounting for Profit” or related subjects in the list of training courses offered by the trade bodies. Yet there are a number of agencies of all shapes and sizes that extend best practice to the art of making profits and who use accounting techniques as one of their vital management tools.

I selected three firms, of different sizes, with different histories, widely different locations and markets as suitable subjects for study and set about obtaining interview opportunities. Although I am quite well known in the agency world, with a decent reputation in the business convincing these subjects to take part in this analysis wasn’t easy, but after some gentle cajoling, I had my three respondents.

Mr A.

• Age 42.
• Married, wife is a legal secretary with a local firm of solicitors.
• 2 adult children, one at university, the other working as a teaching assistant

Business background:

“Career in estate agency, final post, Regional Manager with a national firm of estate agents, made redundant in 2008.”

New role:

“Sole trader.”

Staff:

“Negotiator, assistant negotiator/secretary, property manager deals with inventories, check outs, and a part time assistant who works at weekends.”

Business history:

“Considered franchise, but decided down payment of £20,000+ too high and thought franchise fee equal to nine per cent of income would absorb all of the profit in first few years. Found A2 user premises in secondary position, negotiated flexible lease, fitted out with decent second hand furniture and bought a small letting portfolio from the liquidator of a failed estate agency.”

Financing:

“Scraped up every penny we had. Redundancy money, savings, loan from parents-in-law and finally, bank overdraft secured on our home.”

Accounting technique:

“Although a regional director for several years, I saw only the sales income figures, was not privy to costs or profit so could not contribute in any meaningful way and ended up in mid life plumb ignorant.

“During the gap between being made redundant and opening the door to my own business for the first time, I tried to read several books on management accounting – all of them over my head – and eventually went to evening classes. From there I bought a basic software package and learned to use it. Like Alan Collett of Allsop & Co, now chairman of ARIM, used to say – “I can forecast our costs with absolute accuracy but in a transactional business, income is the great unknown.”

“So I have an expense forecast by month for the next three years. I update it every quarter because costs change all too often. There are two unknowns – the income I will generate and how much I will spend on advertising and promotion – most of it on my web site (written by a friend) and on e-marketing.

“The days are too short so I enter all of our receipts and payments into the cash book every evening because I am too frightened to get behind and I update the accounting spread sheets every weekend.

“I am making a tiny profit but cannot yet draw a salary or expenses – we are living on my wife’s income and watching every penny. But I am winning; our property base of landlords is growing by between five and ten every month because of the personal service I can offer. You cannot call what I do an accounting technique, but I know where I am, and where I intend to go.”

Mr B.

• Age 33.
• Unmarried, partner is Carla, a young solicitor.
• No children.
• Attended public school, began to read economics at university but dropped out at end of second year to travel and “sort myself out”.

Business background:

“I have never had one, although I learned a lot of common sense and a self protection mechanism wandering around the world on my own. On return to UK joined high profile London residential agency noted for aggressive sales oriented style. The climate suited me – I found it easy to earn significant money, cope with the company generated pressures and found willing bed fellows with my colleagues and customers. Learned to be ruthless and unkind.”

Business history:

“Carla grounded me, we grew into an almost stable lifestyle. A move into a career that would match hers seemed the thing to do. Eventually I found a post as salaried partner in an agency with ambition, in a city far enough away from London to be independent while still enjoying the benefits of commuter traffic and some high profile residents.”

Role:

“The firm has a long stable history in sales and lettings based on a three branch network with each branch being the responsibility of one of the three partners. That simple system fell into disarray when the firm acquired another business with three branches, but headless, as the owners of the acquired business retired on completion and left to live abroad.

“The three original branches kept their individual client accounts, relying on a small central admin office for basic functions of paying wages, accounts due, VAT etc. A high level of profitability kept the firm out of trouble but the partners wanted to move on to develop the firm by making further acquisitions.”

Accounting technique:

“I soon realised that dealing with client accounting in sales and letting agency and setting up a central accounts function for the business as a whole were two completely different things and that I was ill equipped to do either.

“It seemed sensible to tackle client accounting first so that customer money was protected, and customer service could be guaranteed.

“Selecting one of the best of the branch personnel, I developed the central unit that dealt with this function in the newly acquired business. This will soon provide a client accounting service for the firm as a whole using a well known proprietary software system, relieving branch partners to concentrate on their business development plans.

“Since I was expected to use my sales experience to develop the three new branches, I had to sort out and delegate their office accounting side to someone more competent than myself or end up running blind and letting down my new more senior partners.

“My solution was simple, but was at first difficult to sell to my partners – hire a qualified Financial Controller. James, the new guy, came from a reputable firm of chartered accountants after realising that reaching partnership status within that firm was many years away. During his first three months with us he has developed the small central admin office into a competent accounts department. He has introduced us to monthly management accounts in a standard style that records:
• Actual results against forecast for the month and year to date for each income and expense line, laid out in a spread sheet style so that variations in branch performance are obvious.

• We soon saw the wide differences in sales of some products between branches, and also were able to see clearly difference in costs and expenses that needed explanation.

“Because of his use of accounting techniques which he describes as ‘basic stuff’ I have been able to move back to developing the three branches I control, and increase their contribution to an already profitable firm.”

Mr C.

• Age 28.
• Unmarried, lives with younger partner.
• No children.
• Went to university, degree in business studies, focused on sales and marketing.

Business background:

“Joined multinational from university, disliked corporate culture and regimented structure. Joined local estate agent on friend’s recommendation as senior negotiator.”

Business history:

“The agency is long established but with ambitions that fell apart when the owner was diagnosed with cancer. I became the senior member of staff after only 15 months when owner was unable to work.”

Financing:

“The firm has an overdraft facility with a high street bank which became nervous once the owner’s condition became known.”

Staff:

“Two negotiators, junior negotiator, two property managers, branch secretary, part time bookkeeper, part time weekend staff.

“Suddenly I found myself in charge of a flourishing business whose owner had tragically left for the foreseeable future. My immediate worry was pressure from the bank, which demanded forecasts and monthly management accounts if the overdraft facility was to remain in place.

“Going back over bank statements for previous years, it was obvious that the account moved into credit in the good sales months and then moved back into the red once bonuses had been paid and the quiet winter months set in.

“Equally obvious was the skilled hands on financial management applied by the owner, that I did not have.”

Accounting techniques:

“University gave me some basic knowledge of accountancy but no real grasp of financial management for a small but flourishing firm.

“The part time girl that was the accounts department was used to doing the routine day to day jobs but no more.
“My short term solution was to hire a lady (Sarah) who, working from home, had set up an outsourced accounts deparment based on Sage computer software. She has become the longterm solution in short order.

Setting up the vital books of account, mostly in the form of spreadsheets, was not too difficult. Our continuing part timer does most of it, but I have trained every member of staff to input their own information working to the rule that no one goes home until their part is done.

“We are working to regimental routines in that respect and I share the knowledge of our progress with all the staff on the tenth of the succeeding month when Sarah emails our results for the preceding month.

“These meant little to me at first although Sarah was able to set up a line by line comparison with the previous year, which provided some guidance. She has since introduced us to her ‘Chart of Accounts’ which has an individual line for each item of income and expense. All of us have contributed to making a forecast for each of these lines so that we now have a forecast of our profit and loss for the next twelve months.

“Playing around with the software, and I am sure there are many software packages like it, Sarah provides us with easy to read management accounts which comprise:
• Profit & loss accounts by branch and for the firm
• Balance sheet
• Cash flow statement

“We have the information – now we must use our intelligence and management skills to use it.”

These are three ‘needs-must’ solutions to the worrying subject of accounting – see, you’re not alone!