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January prediction: Your least profitable months in 2019
Do you run a business that sometimes has massive fluctuations between the profit or loss you make one month and the profit and loss you make the next? Is a high proportion of your revenue dependent on weekend trade? If so, I’m writing this in January 2019 and can already tell you the months where your Profit and Loss Statement (P&L) will be the worst.
January, May, July, August and October will be your worst P&L months in 2019 if you are a business that relies on weekend trade.
How do I know this? I once had a client who came to me whose P&L regularly made a 16,000 ‘profit’ one month and a 10,000 ‘loss’ the next. This clearly insane phenomena made me delve into some heavily held preconceptions about management accounting and why it is the way it is.
My client (or I should say his accountant) was comparing incomparable accounting periods (i.e. calendar months). Why are they incomparable? Because nothing is going to balance for a business that pays its full business rates, rent and utility bills by calendar month, but actually makes it profits by full weeks, mostly on weekends. Instead, you need to create comparable accounting periods and allocate your costs to those accounting periods proportionally.
For example, if a business pays 10,000 in rent, utilities and rates per calendar month, in 2019 they will need to pay 10,000 in July (where there is only 4 trading weekends) as well as in June (where there are 5). A business that relies on weekend trade is going to have about one fifth less revenue in July than June, but still be expected to pay the same overheads. So they will feel like they made a great profit in June but then have the anxiety and shock of having a terrible July.
Unfortunately, accounting like this just isn’t helpful because it doesn’t reflect reality. If there is one useful thing the accounting bodies could do, it would be to recognise this and invent optional accounting periods that are not calendar months, and instead are calculated based on full trading weeks in each period. Appropriate costs, such as overheads, would then be allocated proportionately. Businesses that rely on weekend trading can then use these periods as an official method of accounting, to align with the informal interpretation of reports they currently have to conduct in order to make any sense of the damn things. What was the purpose of these management reports again?!
The table below shows a comparison of what the accounting periods could look like in 2019.
Current accounting period
|The new OPTIONAL weekend-based period|
|Period||No. of full weeks*||No. of weekends||Period||No. of full weeks||No. of weekends||Example dates for 2019|
|Jan 2019||4.5||4||AP1||5||5||31 Dec – 3 Feb|
|Feb 2019||5||4||AP2||4||4||4 Feb – 3 Mar|
|Mar 2019||4||5||AP3||4||4||4 Mar – 31 Mar|
|Apr 2019||4||4||AP4||4||4||1 Apr – 28 Apr|
|May 2019||4.5||4||AP5||5||5||29 Apr – 2 Jun|
|Jun 2019||4||5||AP6||4||4||3 Jun – 30 Jun|
|Jul 2019||4.5||4||AP7||4||4||1 Jul – 28 Jul|
|Aug 2019||5.5||4.5||AP8||5||5||29 Jul – 1 Sep|
|Sep 2019||4||4.5||AP9||4||4||2 Sep – 29 Sep|
|Oct 2019||4.5||4||AP10||5||5||30 Sep – 3 Nov|
|Nov 2019||4||4.5||AP11||4||4||4 Nov – 1 Dec|
2 Dec – 29 Dec
*This means the number of full weeks there would be in that month. For example, February 2019 starts on a Friday and ends on a Thursday, meaning if you add the first Friday, Saturday and Sunday to the last four days of the month, you have just created a normal Mon-Sun week (take a quick look at a calendar to see what I mean). The biggest problem months are the ones with a difference between the number of full weeks and the number of weekends. January 2019 is a great example – it has nearly 5 full weeks but only 4 weekends. **Because accountants like to invent acronym as a way to make the industry look more complicated than it is, let’s call these AP’s or Accounting Periods.
Having looked at the table, it might be hard to understand the benefit of the extra complication. So let’s continue the example of June and July 2019 using some example figures. Let’s assume that on average, Bill’s Burger Bar makes 5,000 per week in revenue with 3,500 of it coming from weekend trade. Bills has a 50% profit before rent and rates. Bill’s combined rent and rates are 10,000 per month. Here is what June (with 5 weekends and 4 full weeks which means an additional 3,500 in revenue) and July (with only 4 weeks but still having to pay a full calendar months of rent and rates) 2019 will look like in the current accounting method:
|June 2019||July 2019||August 2019|
That’s a big difference right? I’ve added in August (which has 4.5 weekends and 4.5 weeks) to make it even more pronounced. Let’s make the same comparison using the new weekend-based periods:
|AP6 (June 2019)||AP7 (July 2019)||AP8 (August 2019)|
*Why is the rent and rates less? Because we are apportioning it to the period. If the normal monthly cost of rent and rates is 10,000 then that is 120,000 per year. When you divide that by the number of weeks, you get an apportion of 2,308 per week. Both AP6 and AP7 have 4 weeks so those AP’s have an apportion of only 9,231 instead of the arbitrary 10,000. AP8 has 5 weeks so that gets an apportion of 11,540 because it has more weeks it is generating revenue.
The result is a much more stable profit and loss. You’ve gone from a 1,750% fluctuation using the current method, to negligible fluctation in the new method. Which method allows for better decision making in your business?
You sometimes (like in this example) get a slightly less accumulated profit over a small combination of periods (noting that over a longer combination of periods there is no difference), but what you do get is stability, allowing you to plan and manage more accurately.
You might say that is crazily arbitrary and no professional in their right mind would adopt this approach. Maybe, but the accounting bodies have a very long history of creating accounting methods that make no logical sense. Take the Accrual Accounting Method, which I believe was only created to allow CEOs of big corporations to recognise forward revenue in order to hit their bonus targets.* Despite seeing how that played out with ENRON, it still exists. Or the arbitrary way that in most developed countries, Fringe Benefits Tax (FBT) is calculated in different ‘tax years’. So my idea of a weekend based accounting period that reflects the reality of the business environment for businesses that rely on weekend trade, seems far more sensible than many other accounting principles.
*Of course, later being justified for all kinds of other reasons, not the least which would by my part use of it in inventing this new method.
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