EP - William Humphreys, partner at Oury Clark Chartered Accountants, explores and explains financial reporting, giving a clear picture of what company accounts are, and why understanding them is a foundational skill for entrepreneurs.

Andy and William run through the various components of statutory accounts, including the balance sheet, profit and loss statement, and cash flow statement. Using a cinematic metaphor, they underscore the necessity of not merely viewing accounts as compliance documents but as vital tools for strategic decision-making.

Throughout the conversation, the importance of engaging with these financial documents regularly is underlined, to help cultivate a clearer understanding of a business's financial health and undertake proactive rather than reactive management. Being conversant in company financials is not just a matter of accounting but a fundamental aspect of effective business leadership.

What you'll learn in this episode:

• Understanding how accounts inform business decisions
• Seeing the balance sheet as a snapshot of a company's assets and liabilities
• How continuous insight into a business's financial position beats waiting for year-end
• The importance and considerations of cash flow management
• How revenue recognition can impact perceived profitability
• What the notes to the accounts really provide

This episode is for UK entrepreneurs and business leaders who want a comprehensive overview of financial reports and reporting standards.

*For Apple Podcast chapters, access them from the menu in the bottom right corner of your player*

Spotify Video Chapters:

00:04 - The Director's Report: A Glimpse Behind the Scenes

04:46 - Understanding the Balance Sheet

13:14 - Financial Statements, the Balance Sheet and Profit & Loss

18:47 - Revenue Recognition

23:34 - Cash Flow and Financial Management

32:44 - Financial Statements: Key Insights and Analysis

37:45 - The Key Questions for Founders

41:03 - Bank Covenants and Charges

49:41 - Reporting Standards

53:34 - Understanding UK GAAP and IFRS

59:44 - IFRS 16 and its Implications

01:09:30 - Transitioning to US GAAP: Challenges and Insights

01:14:31 - Key Insights for Business Owners

Watch and subscribe to us on YouTube

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If you'd like to be on the show, get in contact - [email protected]

The whole account you could see as a movie.

So the director's report is the trailer.

That's the high level.

Oh, I love it.

Sorry, we haven't mentioned.

The director's report is you write at the start.

So that's your trailer.

Your audit report is the film critics.

View of what's happening.

I love it.

The balance sheet, P and L and cash flow, that's your movie, that's the main movie.

And then the notes to the accounts of the director's extended cut that give you a bit of background.

Background.

Okay, which scenes were deleted or how does this bit lead into that bit a bit better?

Welcome to business without the alternative mba.

The show where we cut through the noise, skip the jargon and give you the stuff that actually matters for running and growing a business.

And today I am Andy and I am with Will Humphreys, who's a partner at Ury Clark, one of the sharpest accountants and auditors I know.

Will has spent a career looking at businesses through the eyes of numbers and today he's going to do something that is very important for all of us really, I think explain this accounting content and actually explain what a set of accounts is.

And telling you in plain English without the waffle, what you need to look at as an entrepreneur or as anyone really trying to understand these documents.

So we're going through the foundations here.

That is the balance sheet, the profit and loss, cash flow, what to look at, what to ignore, what questions you should be asking and probably aren't.

And then we'll get into the very exciting rock and roll world of reporting standards.

UK gaap, ifrs, US gaap, and why any of that actually matters to you as a business owner.

So Will, welcome to the show.

Thank you, Andy.

Pleasure to be here.

So I think this topic is actually super important and I think, to be honest, to great extent people don't want to admit, people don't even want to ask, I think, how they should do these things.

But so let's start with a very sort of simple question, I think, how to read a set of accounts.

Okay, so this is like the cornerstone for you and me, William, statutory accounts as we like to call them.

So before we get into the numbers, just set the seed for me.

When a set of accounts lands on your desk, what are you actually looking at and what is in the package?

Okay, so plain and simply, you've got your profit and loss, which a lot of founders are very familiar with.

You've got your balance sheet and then depending on size, you've got cash Flow statement, you've got an audit report and then you've got the notes to the accounts which really give the whole picture.

Okay.

And so for a founder who's never really engaged with this stuff, what's the single biggest misconception they walk in with?

I think it's that they see it as purely a compliance exercise, whereas to what it should be is something they're looking at regularly.

They know in and out, often just by feeling.

They know if the numbers look right and that guides their decisions.

If they're looking at it once a year, they're not getting any insight.

It is very much a compliance exercise.

And yeah, I think the best business is the founders really have a sense of where they are, what their position is and that they're not living by the numbers, but they've got a sense of where they are at all times.

But that's an important point you're raising.

In the UK you do a set of accounts, statutory set of accounts that go on public record and they're due nine months after the year end.

So quite often that information is very old to the founder and therefore less meaningful.

Yeah, and I think that nine months after the year end, that's the red herring.

Yes, you have nine months but there's nothing stopping you doing it within one or two months of the year end.

And I think the best business is, that's what they do.

They want timely information, they want it to be done and dusted and really it's just a tick box exercise.

The year end accounts, because they know the numbers throughout the year and I.

Guess even if they're running management accounts, which they should be regularly, the format's the same, it's just less notes and less stuff.

Yeah, exactly, yeah.

The format can be very similar to what they're looking at through the year.

And yeah, like I said, the year end exercise becomes a lot simpler and there shouldn't be any surprises for them there.

And we'll probably talk about this more later, but you know, it should always interest a founder to know it's the basis on which you're taxed.

Your statutory accounts, there's adjustments for your tax return, but actually these days, less than they used to be, you know, a lot of things are more aligned than they were.

Okay, brilliant.

So I think, I think probably for us accountants this is, this is the big daddy.

And the bit that maybe is more confusing for people, people tend to understand a profit and a loss more intrinsically.

Money in, money out.

Let's talk about the balance.

She the big Big, the big bad boy of the balance sheet.

And I do, I do think this is where people's brains melt.

So tell me, talk, talk me through it.

Like I'm a smart person who just doesn't, who just doesn't know the language.

Okay?

So the, the balance sheet, it's a snapshot at a point in time of the business.

So the way that I like to try and explain it to people is to think about me or themselves individually.

So I've got assets, I've got my golf clubs, I've got my house, I, my bed.

But I've also got liabilities.

I've got my credit card, which, having just gone on holiday, is a bit higher than I like it.

And I've got my mortgage.

So I've got my assets and my liabilities and that is essentially the key to it.

If you've got more assets than more liabilities, that's the position you want to be in.

If you've got a lot of liabilities and not as many assets, then, yeah, that's not a great situation.

And that's the top half.

So at the top of the balance sheet, traditionally, I know is ifrs or something screws this up.

But anyway, we'll talk about that later.

But you got stuff you own, good stuff, stuff you're owed or you own, I guess, assets, physical things, money and bank accounts, things you, you're owed, as it were.

But then there's the bit, there's the bit at the top, bottom that confuses people.

The, the equity.

What's this?

Yeah, so that's essentially your accumulated profits over time that haven't been distributed or taken out of the business.

So I guess a way to think about this is, is quite simply with a mortgage, so you've got your, your house, which is the asset, and you've got your liability, which is the mortgage that you pay down over time.

And over time, as you pay that down, the asset is worth much more than the liability.

So you've got equity, you've got your invested and you've got something coming out of that.

Oh, that's the balancing figure, hence balance sheet.

What's the thing on the balance sheet that people consistently ignore, but absolutely shouldn't?

I think they, they ignore working capital.

So they really need to think about.

For founders, it's, it's all about cash.

They're going to be cash tight.

So they want to think, okay, what have I got to keep on going for the next few months?

So they look at the cash figure and think, okay, I've got cash in the bank, but they don't.

Look over the next 3, 612 months,.

How much cash does a business need in a bank?

I mean a bit of a, bit of a bendable question, isn't it?

But I think you raised a great point.

Yeah.

I mean it depends on, on the business.

If I'm an individual thinking about my own personal life, it might be I want 6 month cash in the cash in the bank as a buffer for a business.

I guess it depends on the seasonality.

If it's quick in, quick out goods, you'd probably want at least 2, 3 months more.

If you're selling to supermarkets, they like really long terms to pay you.

So you want quite a bit more of a cash buffer.

Yeah, you've basically got to think it through for your business if it's growing fast and you're having to spend more now for money later, isn't it?

And debtor days as you say.

Yeah, so.

So I'm looking at my balance sheet.

It's in front of me.

I'm in the accounting meeting.

I wanna, I wanna seem like I know what I'm doing or ask an intelligent question.

Two or three things I should be checking every time without fail.

Yeah.

So the cash and net current assets we've talked about.

The other big thing is any loans, any external finance that you've got.

If you were in a situation where that gets called in ahead of time, that could put you in big trouble.

So you need to be thinking, okay, do I have any covenants or anything around that loan?

And then it's thinking about, okay, what's the trend of the business compared to three months ago?

Is the situation looking better, Is it looking worse?

Because those are the, the early warning signs that you might need to do something about it.

I was taught a long time ago that if you want to make sure your accounts are right, look at the balance sheet.

And without teaching someone double entry bookkeeping and the wonderful art form that you and me understand about how these P and L and these balance sheet interact.

Because to be honest, it takes a little bit of time to get your head around.

We can sort of explain it roughly, but it sort of takes a little while to sort of truly click.

But you can just look at the balance sheet and you can go line by line.

So I feel like for a business owner they should be going line by line on their balance sheet.

If there's anything they don't recognize, they think is wrong.

Because there are mistakes all the time, aren't there?

Oh yeah, absolutely.

And we'll come onto it later with the accounting standards.

They're not black and white on a lot of things, so you could see something presented slightly differently.

But the founders and the business owners, they'll know, like, if they think something doesn't look right, chances are it doesn't look right.

Yeah.

Like, you list out your house, they should be able to work down that thing and it should be stocked.

Well, how much stock have you got?

It says you got 200 grand here.

We don't have 200 grand of stock.

That's rubbish.

You know, it's like, well, it says there's this much loans.

We don't have that loan anymore, do we?

Do I have that loan?

You know, it should be a real eye opener.

Yeah.

Because the numbers don't lie to an extent that as an accountant, because of the way double entry works, if there's something there, there's something to it that can be looked into, isn't it?

It's not nothing, but it might be in the wrong place.

Yeah, exactly.

And that's why it's important to discuss these things with your accountant, because to them it might make absolutely sense, absolute sense in terms of the double entry bookkeeping.

But the founder or the business owner can look at it for two minutes and say, well, that bit's wrong.

And that bit's wrong because we did this during.

And if you fix your balance sheet, if you know what's in your house and who you owe money to, it will also fix your P L. Yeah.

Is the basic principle, isn't it?

They interact.

Cumulatively, you're correct.

There might be a bit of time difference, but yeah, if you've got your balance sheet correct, then as at that point in time, you're good.

Yeah.

So actually the answer to this question is go line by line.

Understand your balance sheet probably more important than people naturally sort of look at the P L, don't they?

And they go, how much am I paying my accountant?

You know, whatever.

Yeah, okay, very good.

We touched on this a little bit.

Okay.

So we talked about retained earnings.

So this is then.

This is then the bottom.

You got assets, you've got liabilities, then you got the bidding at the bottom, and the bid at the bottom should add up to the bid at the top.

And then.

Yeah.

So effectively this is what the money invested plus the money you've made or lost historically and not taken out.

Yeah, essentially.

Yeah.

So if you put 10,000 into the business and over the past few years, since you started, you've made a hundred thousand Pounds, then in total you've got 110,000 sitting in retained earnings.

And if I took dividends, then that.

Would reduce that amount.

So you're taking money out of the business.

So if you took 50,000 out, using our example, you would come down to 60,000 in reserves.

And an easy example there would be, there should be 110,000 represented through the assets and the liabilities.

If I take 50 grand out of the bank account as a dividend.

Yep.

The bank account doesn't have 50 grand in it anymore.

Exactly.

So the business is now 50 grand lighter at the top of the bottom.

Exactly.

And that's really where, thinking it through, looking at the numbers regularly would impact those decisions.

Because me as a business owner, I might think, okay, I need to buy this car, so I want to take some money out of the business.

But if you're dropping down that bank balance in the business by 50k, it might cause problems in the business.

Yeah, it's this sort of tension I've noticed exists with entrepreneurs because some of them deal very much in a cash world and maybe they should.

It's not a bad place to exist.

But I've seen that so often.

I think this is a very common error, often is that they see the money coming in the bank account, they're doing very well up the front.

You know, the cash is coming in and thinking, well, this is going well.

But they're not without the balance sheet and doing it properly and working out what you do owe that over there.

And actually this money's spread over nine months.

You sort of, it's that, that's almost the.

I guess we'll talk about cash flow, but that's almost the, the, the, the, the entrepreneur or the founder could be living in quite a cash world.

Yeah.

And, and I guess it's having that rainy day fund as well, like tax liabilities.

Covid fund.

Covid fund, yeah.

You lose a major customer or your tax liability nine months after the year end, all these things can come along.

So if you're working day to day on what my bank balance is, then yeah, you're going to run into problems.

Okay, very good.

So that's the balance sheet.

Now you all know what a balance sheet is.

Brilliant, actually.

Explain William.

And then the P L. So profit and loss.

This is, this is where the founders live, isn't it?

But are they often looking at it wrong?

What do you see?

Yeah, I mean at the basic level, it's your sales less your costs gives you your profit.

And I think there's a Definitely a misconception that the profit is equal to cash.

So if I'm profitable, my business is doing well and I've got cash in the bank.

But that's not necessarily the case.

I think as well, people look at it in, in total, they look at it as one thing, but you need to, you need to break up the profit and loss.

So you need to think, okay, what's my sales?

What's my gross margin?

So if I'm selling, let's say I'm selling glasses, I've got the, the sale of the glasses and I've got the actual cost of the glass.

And then further down you've got, okay, the people that are running the finance team or the people like other payroll costs, and you've got an office that you've got to rent and you've got to break it down into sections.

And, and really the, there's the, the cost structure rule is a third, A third, a third.

So in terms of your sales, I think got 100 pounds of sales.

You want to think a third of that is going on my direct cost.

So the cost of the glass, A third of that is going on like my admin costs, my overheads, my office space.

And then the third is the profit.

Which is what, on the principle that your net profit.

Those are quite good margins in some businesses.

Some businesses you get tiny margins and it's a volume gain, isn't it?

Yeah, yeah, but effectively you'll say, you know, let's just take a nice business would make a 30% net profit out of what it's doing and that.

And therefore, yeah, you've got your, your gross profit, which is after direct costs and then your overheads of your office and your Christmas party and whatever else down there.

Yeah, that's a good way to think of it.

Okay.

Ebitda.

Everyone loves ebitda, maybe, except us accountants.

I just, I just can't get my head around ebitda.

Half the time it's like excluding half the stuff.

But let's just, let's just remind ourselves, okay.

Ebitar is earnings before interest, tax, depreciation and amortization.

Correct.

And depreciation and amortization are the same thing, aren't they?

To us account, essentially.

Yeah, for the purposes of this.

Yes, same things, by the way.

Everyone.

So anyway, it could be ebit.

Maybe they just needed an A on the end.

Anyway.

So is this actually a useful number or is this something people hide behind?

What's your, what's your view, William?

On what it.

On it.

It's a proxy for how much cash are you generating from.

From what you're doing.

That's what it's about.

Yeah, it's a quick way to get to that.

Forgetting about the interest you're paying the bank, the money you'd have to pay to the tax man, the money you should be investing in assets, depreciation that, you know, you need a new machine.

Yeah, it's just pure like what cash gets generated.

Yeah, exactly.

So it's a good, it's a good proxy for that.

Where it falls down is, is like you said, it's the, it's the fixed assets.

So if you've got a warehouse that you, you've had to build or you've got.

Yeah.

Mach that you're rent that you're using.

It's assuming the EBITDA figure is.

Assuming that there's no cost of that.

But every 10 or 20 years you're going to have to replace that machinery.

So there is a real life cost to that.

So people that I think focus on ebitdar, it's, it's the trendy thing, it's the sexy thing to.

To think about even more so adjusted ebitda, which then you just, you.

What's adjusted ebitda?

Adjusted EBITDA is you, you take EBITDA and make further adjustments.

How are you just based on vibes.

You adjust it however lives to make it.

It feels like, I always feels like to me that someone that didn't understand accountancy sort of comes along and sort of says, oh, I forget that.

But no, I think I'm being unfair.

I mean one of the ways I justified it to myself years ago was if you were going to buy a business that was making money and you said, I'm not going to invest anything in this business.

I'm just gonna.

It's got these machines, it produces this money, it's got these people.

I'm just gonna milk it.

Basically.

Then I kind of get it as a sort of rule to say someone's going to pay three times.

So I think within five years, if I don't invest anything, this business will probably dry up or start failing.

But I've got three good years ahead of me where I'm just going to chunk profits.

I'm not going to invest.

But I still get stuck on, well, what about the tax?

Do you know what I mean?

I still get as an accountant, I'm still like, yeah, but you, you're paying three times.

But some of them's going to.

Is going to be taxed so, yeah, yeah, I know that.

Yeah, it's a very good point.

But I like the way you think about it because from someone selling the business, if you take it on the flip side, they're thinking, what is this business worth and how much is it generating?

Whereas the buyer, they might be thinking, well, I'm actually going to, in the background thinking about all this investment I'm going to put into it so that EBITDA is going to be much greater for me going forward.

Yeah.

To sort of strip down the.

It gives you this high sort of cash figure that, okay, if I did nothing.

Yeah.

I should be a.

You know, I'm, that's my base.

There's 100 grand EBIT.

It's, you know, it's going to be three times multiples, 300 grand.

And it's like it's making 100 grand a year.

Even if I don't spend anything over the next five years, I should probably get 3, 400 grand out of it, isn't it?

It's like, oh, fair enough.

Yeah, I know.

Like the, the top investor, I mean, Warren Buffett, he doesn't like you a bit.

He hates it.

Yeah.

Big up.

More of Buffett.

I know and his business partner.

They think it's.

Yeah.

Cinematic.

Yeah.

But I think unfortunately we're in a minority and we do, we do live and die by it.

Yeah.

Okay, let's talk about revenue recognition.

So I think this is quite an important area actually, versus actually having the cash.

Okay, so let's explain to me revenue recognition.

So revenue recognition is, is essentially when you recognize revenue.

So it's when you're actually making the sale.

So if you're selling goods, it would be at a point in time, if you've got subscription services or something over a period of.

You would recognize the revenue in your profit and loss over that period that very often or rarely matches the cash.

So you'll have the cash, you might have it up front and then you've got the revenue to recognize afterwards.

So let's do a similar example.

You do a software deal for a year's contract and they pay you 100 grand.

Yeah.

And you get the cash.

Day one.

You're like, brilliant.

Yeah.

And at that point in time, you look great, you've got big bank balance, but then there are costs for you to fulfill that sale over the following 12 months.

In fact, a better example, because I watched a business go bust on it, he would sell hotel vouchers.

So he would sell hotel vouchers that you could then cash in within two years.

So he would.

It was quite a good business in a way because the hotels, like, didn't mind offering sort of discount because they get sort of money up front too.

But he get all this money up front.

Yeah.

And then he, he blew too much of it.

And then people start trying to book these days and then he has to pay the hotel, basically.

Yeah, yeah.

And it catches up with you.

It's that sort of lumpy stuff.

Software is not so bad often because you often don't have to do much for 12 months.

Do you know what I mean?

Yeah, yeah.

Less so.

But then it's.

I mean, it gets back into the accounting standards point that people will try and pull that revenue earlier to, to make them look better for investors.

So it's an area of manipulation.

But yeah, revenue recognition doesn't align with cash.

So you have to.

Well, obviously the tax man's interested in your revenue recognition, but.

And we'll talk about the standards, but as you say, they're not black and white.

You can take a view on it.

Yeah.

And this.

So when you're starting out and you're trying to raise money, you're trying to recognize revenue quickly and then once you start making money, you start trying to recognize revenue more slowly, basically.

Yeah.

So you get a sort of funny push and pull of like how you interpret the, the things.

Yeah.

And in the, in the auditing world, we always get told that revenue recognition, it's the biggest area of fraud.

Right.

We're trying to pull revenue earlier, look better or delay it to try and pay less tax.

Hence companies quite often have their first audit and there's a big adjustment.

Yeah.

And actually that's not necessarily.

Fraud would be a big word.

Often they're just being casual, like they just recognized everything upfront.

Yeah, yeah.

And then you look at it and say, well, you've got three year commitments here.

You've got all sorts of stuff.

Your revenue has been overstated for years.

And it's a bit of a Ponzi thing, isn't it?

You can kind of hide it if you're growing and growing.

Yeah, it kind of works because you keep recognizing out front.

And it all looks fine, doesn't it?

Yeah, yeah.

Suddenly shrinking.

Then it's suddenly like, I can't even do it in my head.

But you're.

It suddenly starts.

Starts looking not so good, basically.

Yeah, yeah.

Essentially brilliant.

Cash flow.

I hate cash flow.

I hate cash flow.

Because when I did accountants, well, I still do accountancy that when I had to do cash flows, I Could never get my cash flow to work.

I have to say.

It's a.

Because cash flow is like, there's the balance sheet in the P L and cash flow is sort of the opposite in a way, isn't it?

It's the sort of like real time.

It's like flipping everything on its head and sort of understanding it.

Come in.

So cash flow statement, most underrated document in the pack.

Yes, definitely.

For, for a non accountant, it's amazing.

For an accountant you can, you can almost get to the cash flow intuitively by looking at the profitable debtors and the birth.

Yeah, yeah, exactly.

But, but to a non accountant and as a quick snapshot for an accountant, it just tells you what has that money done in the year?

Where's the money come from that I've got in, where's the money gone that I've got out?

Maybe that's why, I mean even.

That's a quick hack, isn't it?

You could have fantastic turnover, but always go and look at their debtors because if their debtors are going up and up, it means they haven't got the money in.

Yeah, simple thing, you go, look, trade debtors to everyone.

Trade debtors means trade debtors and trade creditors.

Is the money you owe people for trading as opposed to, you've led Bob 500 quid and he owes you it back just because he felt nice or something.

That would be a debtor.

But yeah, that's a really, that's a good thing.

When you look at accounts, you say, what turnovers?

Chucking it out.

But then if you look at the debtors and they've sort of doubled, you know, and it's like, oh, hang on, are they not actually.

You know, and that.

And bad credit control goes toxic quick.

If you don't collect something a year later, good luck getting it a year later.

You're not on it with someone.

You know, you can get stuck quickly.

Yeah.

So, okay, so very useful document for non accountants to see the money coming in out of the business.

Okay.

And if you could look at one number in the cash, if you only looked at one number in the cash flow statement, what is it?

It's.

I'd go for the cash generated from operations.

So that's, it's, it's the better number than thinking about profit.

So your profit, you can think, okay, I'm making profit, I'm doing well.

But in reality is what you're doing generating money.

How's it.

The cash flow is literally laid out, money in, money out, isn't it really?

What's it, how's it laid out?

Well, you, you start with your profit and then you make adjustments.

So for things like depreciation, that isn't cash.

And then you take account of the fact that people who owe me money are paying slowly.

So I might have.

So you take your profit.

Your profit's 100 grand.

Depreciation is the fact that you bought an ass.

You spent 200 grand on an asset two years ago that you're amortizing over 10 years.

Some machine.

So that keeps coming out of your P. L. But the money was ages ago.

Yeah.

So actually you.

You've spent the money so you can take that out.

So your 100 grand profit goes up at that point versus stripping out something you've actually paid for historically that you're spreading.

Okay, great.

Then what was the next layer?

The next.

Are people paying you slowly.

Yeah.

So you've got a load of sales in there, but you've not been paid for those yet.

So it looks good, but you've not got the cash in.

So you might be making, but not.

It's these adjustments.

So interrupting.

It's these adjustments that give you an indication that the numbers look good.

Yeah.

But actually maybe they're not good or the numbers look bad and maybe they're quite good.

Yeah.

So if you're profitable but not generating cash, that would be giving me warning bells that okay, I need to chase my debtors harder or rearrange terms with my suppliers to.

To slow down my outflows or stop.

People ripping money out the business or some.

Something else.

Yeah.

And then meanwhile you could have the other.

That you're loss making.

But then you look at the cash flow statement.

Actually things are pretty good.

So that would suggest work in progress or something or long jobs or something.

What would it suggest if you're sort of loss making or it's not.

The profit's not great, but the cash flow statement says the money's coming in.

I mean, yeah, there's other things.

So you might be getting new investments from people or the director putting money in.

You might have had things might be like R and D claims that the cash comes later, timing differences.

So there's lots of things that could impact on it.

But yeah, I guess the big one is where you're profitable, you think you're doing well, but you're actually losing money.

Okay.

So the number to look for there was.

What did you call it?

Cash generated from operations.

Cash generated from operations.

So line in it usually pretty clear.

Yeah, I mean I think we've both seen profitable as businesses go bust, but it's really what we're talking about.

It's, it's debtor management.

Yeah, it's, it's debtor management.

Plus for businesses that sell goods, it's stock.

Like you could have six or 12 months of stock sitting there when really you can just have one or two.

And creditor management to be paying your creditors too quickly or yeah, you pay.

Them straight away because you think, oh, I'm going to keep really organized.

But in reality if you could pay them after 30, 60 days, then pay.

Them on their terms on the now.

I mean the only time we change that as a rule for ourselves and I do agree with this philosophy, although it's is pay the little guy, you know, if we have any supplies.

A sole trader.

I think that is a, I think almost it's a moralistic duty to say I'll try and get your invoice paid in a week.

And then it's the abhorrent stuff that the little guy gets screwed by the big guys who say, well no, Our terms are 90 days and you're going to have to shout and scream at us to get you to pay.

I mean it's just terrible that.

Yeah, yeah, yeah, supermarket is the big one.

It's unbelievable.

It should be illegal.

I never understand why they don't do it because it would do so much for the economy.

I mean people say the supermarkets and these big businesses, well, they're investing heavily.

I think we should just say if your company is a large company, you have to pay everyone in 30 days.

You're not allowed to have longer terms because it will drive the money back into the small and medium business.

Yes.

Who can move forward?

I mean we, I'm sure we both, I'm sure we all know people who've fallen out of business because they didn't get paid.

They did to them to the big company it's nothing.

But to them it was a massive job they did for 50 grand or something and they thought, well, I'm working for X Blue chip car, it'll be fine.

It's like.

Well actually they're the worst.

Yeah, definitely.

So kind of as a medium sized entrepreneurial business we feel that we've got a sort of duty of care to the, to the, to the small guy.

I mean man and woman in that.

Okay, brilliant.

Now we've got the notes to the accounts.

Probably the least read, most misunderstood and probably one of the things we spend most of our time.

When you're training to be an accountant, yeah, it's learning how to do the notes.

So talk to me about the notes.

Nobody reads them.

Should they?

Yes, they definitely should.

It.

It helps to paint the whole picture.

You can get the, the highlights from the primary statement.

So your, your P L, your cash flow, your balance sheet.

But it really helps to fill the whole picture.

I was, I was thinking about the.

Ahead of the podcast, thinking about different ways to explain this and the, the whole accounts you could.

You could see as.

As a movie.

So the, the director's report is the, the trailer.

That's the, the high level.

Oh, I love it.

Sorry, we haven't mentioned the director's report is.

You write at the start.

Some people write nothing.

But some people write a lot.

Yeah.

And they will tell you in the director's words how they think business is.

Yeah.

And what their plans are for the next.

Yeah, brilliant.

So that's your, that's your trailer.

Yeah.

Your audit report is the, the film critics view of what's happening.

I love it.

The, the balance sheet, P L and cash flow.

That's your, that's your movie.

That's the main movie.

And then the notes to the accounts of the.

Like the director's extended cut.

Oh, okay.

Give you a bit of background.

Okay.

Which scenes were deleted or how does this bit lead into that bit?

A bit better.

Obviously we're going to be the credits, but.

No, I like that.

No, no, I like that director's cut.

It's like the extras on the dvd.

Yeah.

Yeah.

It's like if you spend a little bit longer and you're prepared to invest a little bit more time, you can really get some more interesting stuff out of it.

And what do we.

I mean, I sort of jump around and the most juicy ones.

What do you think?

Is it related party or what's that?

What should I look at if I'm trying to look at a business?

I mean some of the stuff I look at is what commitments they've got.

So potential like legal cases against them.

So what would that go under?

Don't go under contingent liabilities.

I'd like to know about employee numbers, which you have to disclose.

Well, let's just start.

Contingent liabilities is an interesting one because so often people don't want to recognize things in the accounts and there's this push and pull, which is hard to explain that.

Yeah, if something is likely to happen and can be valued, then it needs to go in the accounts.

But by.

So say there's a chance you're going to get sued and you think, well, we are going to get sued and then can you validate?

Yeah.

You know, if you can value it, then it should go in the accounts.

Problem with putting it in the accounts is you're kind of recognizing it as.

Yeah.

Unliable.

In my own opinion, I think that it's more likely that I'm going to lose this problem.

So there's.

And you don't want to affect your tax too.

So so often there's this sort of battles, particularly in audits, isn't it?

I don't want it to go in the accounts and the orders are saying, well, it looks like it might happen or something.

So then you have in the notes section where it usually ends up, isn't it?

Or is that.

Yeah, yeah.

You'd put it in the notes.

You put it in the notes to say.

Just to make you aware.

To make you aware.

Yeah.

Just so we're not hiding anything.

This is going on.

We don't know when it's going to materialize, if it will materialize or how much.

But so that you know this is here.

So definitely show up some stuff.

Yeah.

So definitely look at your contingent liabilities.

Yeah.

And then you said.

Do you say employee numbers?

Yeah, employee numbers.

Great.

1.

How many people work in a business?

You can, you can look up any, almost any company on Companies House and find out how many staff they've got.

Lovely website.

Yeah, look fantastic.

I mean I love.

I just did this yesterday.

I mean if you don't do this, you're crazy.

Anytime you're working with a supplier that Britain has one of the easiest to access.

Open portal Companies House, Google company's house.

Go there, find out the company name which is sometimes be buried at the bottom or in.

Look in the privacy, privacy policy they have to put in the actual company name because be sometimes hard to work out.

You can try and search by director but that can be quite long winded.

But yeah, you put it in, you pull up the accounts and I mean so often you know they lo that.

You know they.

That you look at the retained earnings and it's negative and like especially if you see retained earnings.

Last year they had retained earnings of 50 quid and this year they got negative 200 grand.

It's like they just lost 200 grand somehow.

Yeah, they're losing money.

There's nothing in it.

They've got one employee.

It's like late filing their accounts.

Late filing their accounts.

Fantastic.

It really changes your opinion of something that you've just had a very impressive meeting on Zoom with.

Oh yeah, these are you're saying to your boss, these are the people, they know what they're doing.

Yeah.

They're the big dogs.

And it's like, I mean, I think you are crazy to do business with someone and not do it.

Because the whole principle of a limited liability is they get limited liability by having public information.

That's the deal.

Doesn't exist in America.

Yeah.

That's our deal and it makes sense.

So make the most of it.

Make the most of it.

So sorry, I'm rambling on myself.

So, okay.

Continual liabilities, employee numbers, anything else.

You can get information.

So the balance sheet, you've got a high level.

These are my creditors.

But then the notes to the account, she likes to get a breakdown.

So you might see.

Okay, have they got any external finance or loans or owe millions to the director because he's put money in there.

So you can really drill down into those high level debtors, creditors to get a better sense of.

There's more detail on the debtors and the creditors.

Yeah.

Breaking them down.

Yeah.

And then the related party transaction is always funny.

It's like the bosses.

The boss has borrowed 100 grand off the business or.

Yeah.

Or I don't know, I mean you've got to disclose it.

Avenue.

Or that he's put money in so he's having to prop it up in some way.

Yeah, yeah.

So the notes, I think, I think that's just like always in life.

There's a lot of notes and it's just you feel like what's this page?

And there's all these accounting policies.

Yeah.

I mean I don't think people are very good at keeping their accounting policies up to date, do you?

I wouldn't get particularly lost with you.

I mean it's useful information.

Yeah.

I mean if you're looking at big companies.

So I quite like to look at really big companies like Tesco.

Look at their accounts.

It's.

Yeah.

And you're not just a few pages, it's hundreds of pages.

Hundreds, isn't it?

But they're really interesting.

They put time into it and it's not boilerplate wording.

It is actually quite.

Well for me it's quite interesting.

Well, they would bother to do it properly.

But exactly what you mentioned is very true for most small businesses is boilerplate wording.

A lot of following the standards.

Yeah.

But they testers will have to say, well we're PLC and this is exactly how we recognize.

Yes.

They won't want to do the minimum.

They will do what they feel they need to do.

Yeah, but then you get past the accounting policies and then these notes start and there's numbers on the accounts, isn't there, that sort of reference?

So when you're looking at that, there's not much information off in the P L. Balance sheet can be a bit sort of.

Well, actually, we should explain that because this.

Do we talk about that?

Just give me a sense because.

Okay, I've gone onto Companies House, they said there'd be all this information.

Nothing here.

What does that mean?

Yeah, so if you go from one extreme to the other, so the big companies, Tesco, you can see everything, everything that we've been talking about.

If you've got small companies under certain size thresholds, then they don't currently have to file the profit and loss.

So all you'll get is the balance sheet, you won't get a cash flow statement and you'll get some notes.

So it's pretty limited in terms of.

And then in between the two, you'll have a profit and loss and a cash.

Simplified.

A simplified one though, isn't it?

You don't get the detail piano, you.

Don't get the detailed.

Yeah.

So even for the likes of Tesco, you won't get the.

The proper line by line.

This is how much they spent on.

On rent.

This is how much they spent on employee entertainment.

Don't you.

Even in Tesco, there may be certain.

Certain ones, but you don't get the full.

The full picture.

It's still a sort of cut.

And then if there's only a balance sheet.

We talked about this before, how do you tell if they've made money or not?

Which is often what people want to know.

Yeah.

So that would be looking at your retained earnings.

So broadly speaking, if your retained earnings have gone up, they've made a profit.

If it's gone down, then they've made a loss.

But I guess the red herring which you spoke about earlier was dividends.

So you could have made a profit but taken a lot of money out of the business.

So retained earnings might have not changed or gone down.

So it's then looking in the notes where that should be explained.

And because we live in a country where we don't really look at capitalization of companies, you have to explain to people from overseas sometimes who are very like, oh, we've got to put 50,000, you know, pounds, and we say, well, we don't really do that in England, it's a pound, you know, probably 90 of companies are capitalized with a pound, or maybe they've gone to Raise money.

So they've got other money in there.

But I think because of that we're sometimes a bit sort of casual about how much you strength you should have to your balance sheet.

But it's important, isn't it?

If they've got a negative balance sheet, they, you know, they're ripping all the money out the company so you can go back years and years and years and you can see, well if they are profitable, they're taking every penny out all the time.

Yeah, that's not, that's not good business.

No, it's again, you want that rainy day fund, you want that, that war chest in case something goes wrong.

And if you've already taken everything out the business, you got to put that back in some way which yeah, then relies on just the liquidity of new investors or the director, which they're living.

On a knife edge effectively.

Yeah, yeah.

I think you like me as an account.

I get a nice warm feeling when you do open a set of accounts sometimes.

And you think this is a well run business.

Yeah, you know, it's like the balance sheet is nicely positive.

They've got plenty of cash in the bank but not too much.

They're making money.

You could just sort of tell, can't you?

As filed on time, it's like.

Yeah, yeah, there's a lot of indicators and just in the conversation with the, with the other side, they'll know what's going on.

You can have an informed discussion.

Yeah, they're the enjoyable ones.

Yeah.

The enjoyable.

Yeah.

I was thinking and thinking of one I was just looking at the other day.

Nice family business, may I say, and I was like, you could just tell really quickly you just start thinking, yeah, they're, they're building something here.

They've, you know, they've been around a while and they've got, you know, plenty of stuff.

Okay, brilliant.

So practical founder framework.

Give me the framework.

A founder quarterly sitting down with their accounts.

What are the five questions they should be asking?

Okay, so the first two I'm going to combine, which is for a founder, the usual key is cash.

So it's cash in the business but also cash personally.

So you can look at the management accounts and you can think, okay, over the next three, six months, what is the business going to need in terms of cash?

Does it have that there or am I going to have to get it from somewhere?

But then also personally, they're running their own lives as well.

They might have kids going to school, they might have a car or a house and, and they need to fund that.

So they might be in the back of their head thinking, I need to take some money out of the business.

So you have to think about those two together to think.

Okay, is this all imbalance?

Very good.

Very, very good point.

This sort of owner managed business, we're assuming there that the, the business is a sort of extension of your family, not just the cash in your own business.

What's the.

What cash have you got?

Yeah.

And what are your commitments coming up?

Your school fees or something?

I don't know.

Okay, number one and two.

Very good.

Then the covenants, I would always say.

So if you've got external finance, you really don't want to be falling short of those and you want to be prepared in case you are looking close to them.

So, so thinking, what are the covenants?

Is it a certain level of interest cover?

Is it a certain level of assets?

Am I in trouble with those at all?

Well, should we go sideways a little bit?

I mean, you're saying covenants, which is bank covenants, which suggests there's a charge.

So a company's house, you can see if anyone's got.

It's a thing you should click on too, isn't it?

You can say, oh, what have you.

You click, basically arrive on the page and it will tell you when were their accounts due, Are they filed on time?

Is their confirmation statement filed on time?

Slightly less.

And then you click a thing, don't you?

And you could see the filing history.

Yeah.

And then what?

You've got charges.

You've got charges.

You've also got directors on there and persons of significant control.

So you can see who actually is behind it all, who actually owns everything.

And on the filing history there might be lots of stuff, they might have filed loads of things.

They might have investors coming in and out changes direct.

So you've just got to scan through it for accounts, last set of accounts that were filed.

Yeah.

And you can click this little checkbox.

To, oh, right, I didn't know that.

Yeah, save me some time, save me some time then.

But then you look at charges and what does a charge look like?

What, when do I care?

Or what does it say?

So a charge that would be most commonly the bank saying, yeah, we'll loan you this money, but we're going to take out a charge effectively, we're going to secure our debt on your property or your stock or your fixed and.

Floating, as they like to fix.

And floating.

Exactly.

So fixes all the fixed assets and floating.

Is anything moving?

Yeah, stock and cash.

Yeah.

Like again, mortgage example, if I got into trouble and I wasn't paying my mortgage repayments, they would potentially call in that and say, okay, well I'm going to take possession of your house.

And if you see businesses can have quite a few charges, it's not necessarily the end of the world.

You know, they might have a few different debt providers, but maybe a bit of a red flag too, if there's too many.

Yeah, definitely.

Because if they're, they've not got one single source of funding that if you're thinking they're always trying to look for new finance.

Yeah.

It's potentially a red flag.

Okay, so.

So dragged it sideways.

So cash that cash in the business.

Cash personally check the covenant.

So check your fulfilling your covenants.

So you've got to know what your bank covenants are, which will be ratios and stuff on there.

Yeah, yeah.

We want you to be this profitable, this much cash.

Exactly.

Which is the bank really giving you a framework from which they believe you need to run this business for them for it to be safe.

Effectively.

Yeah.

All right.

Number four, I would say anything unexpected, the, the founders, the owners of the business, they should have a sense of, of what the business feels like.

So we as accountants, we, we can balance everything and it looks like it's sensible, but they'll know.

Okay.

That that isn't right.

Or why is that happening?

Or what's happened over here, Is that.

Looking at the balance sheet again or just looking them all?

Just try and try and look at it generally.

All of it.

Yeah.

I think you said before that you could go line by line and of.

Yeah, that.

That feels right.

Or.

Yeah.

We had a Christmas party there.

So if there's, if, if there's anything.

He blew the budget.

Yeah.

Stands out like a sore thumb, that one.

Yeah.

You.

We didn't chat about it before, but I always think one of the most confusing notes is deferred tax.

As a, as a, as a line item, can we just ignore deferred tax?

That's in the notes always, isn't it?

Yeah, yeah.

Keeping this understandable, I would probably avoid deferred tax.

Yeah.

Just there's going to be.

I think the point there is there's going to be stuff in your notes that don't worry about it too much.

I mean, deferred tax is effectively trying to work out what the asset.

Whether you know where you are in your tax position relative to harnessy.

It's not worth working out.

It's an accounting.

It's an accounting adjustment.

Yeah.

Not many people we'll leave it at that.

Number five.

So we've looked at you going through anything unexpected is number four.

Number five, I think your, your margins.

So your gross margin, starting with that, the, the cost, your direct costs of buying stock and then your sales price, is that margin consistent?

Is it getting squeezed?

People like Tesco, they work on very small margins, but if that slips by even half a percent for them, that will, that will be key.

So consistent is important.

Okay, brilliant.

I mean your net profit as well as your gross profit.

I mean ultimately margin is profit, isn't it?

It's that sort of whatever's the old line, is it?

Turnover is vanity, profit is sanity.

It's sort of, you know, getting down to the root cause of it.

Okay, you've been brilliant.

What question are they asking their accountant that they.

And what questions should they be asking their accountant that they are currently not asking?

A very open question.

Am I missing something?

So they're, they're busy running their business, they're looking at it day to day, but they're not necessarily thinking about R and D schemes or investor reliefs or tax reliefs or changes to legislation, which is the stuff as accountants we will be all over and we're seeing every day.

So just having that open dialogue with your accountant saying, is there anything outside of my day to day business that I should be thinking about?

Yeah, and there's a sort of, maybe there's an interesting thing to understand.

What's going to go on public record, what's going to go to the bank.

I guess, I guess that would be covered by the covenants because yeah, you don't want to bash out your accounts and say, oh that's brilliant, that's all done.

And then as you say, you file your accounts on record and you've broken a bank covenant or something like that.

Yes, it's going to be fun.

I mean if you ever file anything on company's house that you want to get taken down having done it, because once upon a time someone accidentally stapled something to the back of some accounts, which was a wonderful moment.

But it's really, really hard to get things taken down for Companies House.

So it has become easier, has it?

Yeah, in the last couple of years with some law changes, it's now easier.

So.

So as long as you've got some good reasons, you can, you can email them and there is a, an easier route now.

So.

Oh, that's great because we had to go to court, it cost about 50 grand.

I mean it was a hilarious moment some administrator had when they, they just stapled for some random stuff too, but it was like what we got to get it taken down.

So yeah, you had to go to court and get permission.

Oh, that's good to hear.

Because, because otherwise Companies House was always like, you could fix them, you could refile, you know, you could say, oh actually amended accounts and stuff like that.

But the old ones always sat out there, didn't they?

Yeah, yeah, no that, yeah, changed now.

So we had one last year where, where we needed to remove what had been filed erroneously.

Wow.

And you applied to Companies House to you?

Yeah, yeah, we emailed them explaining the situation and they actually REM the document.

Well, that's good to hear.

I think probably the other thing you and me should comment on is Companies House were ridiculously relaxed historically.

They would publish Mickey Mouse limited with a billion pounds on the balance sheet and then people would try and get loans off.

The fact that they got these accounts, I mean just not.

They didn't look at anything.

But they've definitely got a little more on the case.

I mean I've also noticed that they will.

If you don't file your accounts on time, it is a criminal offense for the directors to not file their accounts on time.

So you can get some pretty scary letters and they will come up, they will take you to court if needed.

Now I mean I see that that never used to happen.

Now it's like, you know, one in 10 companies you'll get the right.

It's gone to legal court case.

Yeah.

I mean the moment you file your accounts.

By the way, do you ever get one of these letters and you're absolutely bricking it.

The moment they're filed, everything's dropped.

Yeah.

But they will kick in some really heavy law to say, you know, we're going to go for you criminally as your duty to file accounts.

I mean there's been this shift.

Really.

Yeah, there has.

And I think at the, the heart of it it's the money making exercise for them.

Oh really?

They make a lot of money from levying penalties.

They've increased the penalties, of course.

And yeah, taking people to court, it does get them money.

But yeah, they, they very much in the past they were, we are just here to show you what documents have been filed.

Whereas now the, the powers have changed.

So they're, they're having.

And actually take some responsibility for what they're showing.

Yeah.

Because you're one of the only countries in the world you can set up a company from overseas.

The click of a button, that's a Sort of big difference.

And hence it's sort of quite open to abuse, I guess.

Yeah.

That's interesting.

I didn't know they make money taking people to court for.

Anyway, don't muck around with Companies House too much and don't expect them to be terribly sympathetic about it.

But you know, they will understand to an extent you've had some bereavement or something and you probably have a little more time than you think.

You'll have a deadline if you've missed, missed the day.

I mean, this, this, this old wheeze is about changing year ends and stuff to extend periods.

But you know, if you miss a deadline, then they'll start sort of saying you're in trouble.

But as long as you keep communicating with Companies House, you can push that out probably, you know, you'll probably get loads of penalties.

But you're not going to shut it otherwise, are they?

Yeah, you can keep communicating and, and if you've got things like HMRC tax filings outstanding, they won't close the company, they'll just ramp up the pressure on you.

Yeah.

But, yeah, occasionally people get very scary letters and ring you out saying, I'm going to prison.

It's like, yeah, well, maybe.

What does a healthy set of accounts actually look like versus one that are quietly in trouble and what are the telltale signs?

Strong reserves, which is.

Yeah, accumulated profits that the key here is haven't fully been stripped out.

So that business has got profits, it's been profitable, but it's got a bit of a war chest in case something went wrong.

I think that's the big one.

Good debtor control.

So not having debtors blow out of control.

They're good at calling in their debts, the people that earn the money for doing the business, and good interest cover as well.

If you back to bank covenants, anything like that, that it's, it's perfectly fine to have external finance, but as long as you're, you're staying on top of it and it's not going to get called in unnecessarily.

And you mentioned earlier too, filing on time.

Yeah.

Filing in good time.

Yeah.

Filing a confirmation statement correctly.

Yeah.

Basic errors, not locking around, I guess as well.

Yeah.

So brilliant.

Act two, you've been fabulous, William.

I think.

I hope you've all learned something really useful about understanding your account.

Act Two is the very exciting rock and roll world of reporting standards.

So gap, which is General one, is generally accepted accounting practice.

Yeah.

It's the UK one, IFRS International Financial Reporting Standards.

You've got to meet.

Look at me, look at me.

I'm on fire.

So these are the different ways.

So obviously these things aren't black and white.

These are the, the different ways that you interpret a set of accounts.

So let's zoom out, Will.

It is pretty confusing, some of this.

So there are three frameworks.

Can you just sort of take us through, you know, give me a rough idea of each one and what we're talking about here.

The most common ones you'll see are UK gap and IFRS.

So UK gap, that's FRS102 is the specific standard.

It's the most simple, it's the most widely used by people in the uk.

It's been around quite a while with various variations, but it's, yeah, it's nice.

And practical and British.

Nice and practical and British, yes.

Probably was the leading standard globally, I imagine.

I don't know, I don't know if it is anymore.

Probably not with ifrs, but anyway, yeah,.

So, yeah, IFRS is next level complicated.

It's, it's international.

Is it the French who did the ifrs?

I don't know.

I don't think it is the France.

I feel it's, I feel they've got the French, the French are evolved.

So it's a lot more complicated.

It is internationally used, so it is well understood if you're, you're working internationally with your business.

But yeah, it is a, it is acceptable in the uk, but a lot more complicated.

But it's very interesting point when you say international because obviously you might have companies in several locations.

The reporting standard would vary how they appear.

So there's a push to have a standard globally.

Exactly, yeah.

So that's, that is what the intention of IFRS is.

Right, so you've got, yeah, obviously UK Gap, ifrs.

Then if you've got an Australian company, you've got Australian Gap.

If you've got a US company, you've got US gaap.

If you've got a Canadian company, there's Canadian Gap.

So I'm grinning at myself for what Australian Gap is.

I'd love to see that.

The Australian attitude would flow through very well, I think.

Anyway, I, I, we should all do Australian Gap.

I bet that's the best gap.

That's the sort of like.

Yeah, very relaxed.

Very well, just like.

Oh, you know, get to the point, mate.

Okay, okay, brilliant.

So who has to use what?

So in the uk, doing accounts in the uk, you have to use UK Gap or ifrs.

International standards.

We get a lot of questions around.

I'VE got a US parent company and a UK subsidiary.

My US parent company uses US gaap, so I'll just use US GAAP in the uk.

You can't do that.

The uk, you have to use UK GAAP or International Financial Reporting Standards.

And the us, in their usual way, as I understand it, are slightly.

That they're the ones who don't want to adopt ifrs.

Yeah, exactly.

So, like you said, the ifrs, the intention was that over time everyone would use this and it would be consistent across the world.

And the US were like, no, we're pretty happy with ours, thanks.

No.

So what now is happening is IFRS is reluctantly gradually converging to US Gap.

Is that what's happening?

That's the general movement.

So can't beat them, join them.

Exactly, yeah.

Brilliant.

And then, yes, sadly, UK Gap is also following suit and going down that route too.

And we say sadly, and we'll probably get into this.

But we can tell you, when a client says, oh, we've got to do ifrs, we have to say to them, you do realize this will cost you twice as much.

Yeah, there's twice as much stuff to do and it's more complicated.

Exactly, yeah.

And that's where it gets back to just seeing the accounts as a compliance exercise.

If.

If you don't really have any reason to use ifrs, it is just a lot more disclosures that you're not going to get anything out of.

Okay, so let's do UK gap versus IFRS.

UK gap.

You may have heard these terms, FRS 102, FRS 105 for micros.

FRS 102 came in halfway through my career.

It was much excitement because it used to.

There used to be lots of frss.

It was FRS 1, like 10, 11, 12.

Before my time.

Oh, my God.

But yeah, and then they said, oh, we'll have.

But yeah, is the UK gap.

It's been through all these evolutions.

Is it fit for purpose now?

Is it a mess?

What's your view on it?

And tell me about these FRS.

It's good.

I mean, 90% of businesses in the UK will use FRS 102 or 105, which is.

Yeah, for smaller entities, it makes sense.

It's.

It's the most simple of the standards.

Unfortunately, it is moving more towards ifrs.

So the, the difference between the two is.

Is narrowing, but it still is.

Yeah, the.

The best one out there.

And any client, if it's just got a UK base, not international, I would definitely recommend they use it.

Okay, brilliant.

And I was just Trying to look up.

Did the French.

Are the French responsible for the ifrs?

No, it was a loose body of professional carrying organizations from the uk, us, Germany, Australia, Germany, France, Japan, Mexico and the Netherlands.

So, yes, France was at the table from the beginning.

We knew it.

Absolutely.

You know, and our German friends.

Anyway.

Brilliant.

Okay.

And now this big push towards our fi.

IFRS adoption, particularly for larger UK business.

Is it.

It.

It's just more complex.

Is it better?

Are there some pluses?

Give me some positives.

I mean, yeah, if you're, if you're a really big company, if you're listed, it is better.

It's a lot more precise than FRS 102, which a point to note is FRS 102.

And IFRS, they're principles based.

So they'll say this is the principle that you should follow us.

GAAP is rules based.

Oh, okay.

So that's the big tension between the two.

So.

Oh, they're completely different in a way.

Yeah.

So an example would be turnover is recognized on the probable flow of economic benefit or something.

I can vaguely quote something like that.

So that's a principle.

Yeah, principle saying the probable flow of.

So you're, you're going to recognize your turnover on the base that you probably got this money, more than likely it's yours, is it?

Something like that.

And what the U.S. one would say,.

Well, if you've got this specific situation with this particular quirk, this is what you do.

Oh, wow.

Which follows their tax a bit more.

I would say their tax is very prescriptive.

Yeah.

Whereas our tax is quite a sort of.

It's more judgment, but it seems very prescriptive.

US tax just layers and layers of.

Rules, which definitely creates tension.

If they're coming to us with a very strong view that this is what the rules say.

Of course it would say I have to recognize my revenue, like.

And we would say, well, but on principle, you don't, you know, you don't know you're going to keep that money or, you know, it might say that.

Yeah, well, that's a nightmare.

You can't really emerge those.

It's like, you know, NF STOs and Apple is.

Yeah.

Which is.

Yeah.

IFRS, it's.

It is principles based, but it's becoming slightly more rules based to try and converge.

But yeah, I mean, there is definitely companies where IFRS is useful, the really big companies.

It gives you a lot of detail and it really lets you understand the businesses.

And if you're, you're an investor, you're a shareholder, then it's really useful information.

But for.

Yeah.

Smaller, smaller businesses, it's just more admin costs.

Yeah.

Not a real extra information.

What are the big extras?

It does.

What are sort of some of the big headlines.

It does that IFRS gives you extra information on.

So the accounting policy you mentioned, there's.

There's a lot more in those.

You have to talk a lot more about judgments and estimates and really go to town in terms of some of the disclosures.

You've got to talk about your maturity of lots of different financial instruments, how you approach credit risk and interest rate risk.

And you have to do revaluations a lot.

Do you as well?

Is it that sort of thing?

Yeah, that can come into it.

Yes.

There's a lot of different elements that just.

It's a whole nother level of thinking which a lot of it doesn't.

Isn't necessarily helpful or intuitive, but.

But it can to certain investors, I guess, provide information which is.

So while you can, assuming you're not massive.

Yeah.

Use UK cat.

It'll be cheaper and give you everything you need.

Absolutely.

Okay.

And that's not to say you can't move to international standards later, which I guess is an important rule to make a point to make.

You don't have to stick with one forever.

Yeah, we see.

What we see is, and this can easily happen to you is you get a new CFO in who's, you know, they maybe been working very internationally says, oh, we've got to move everything to ifrs.

Yes.

And it's like.

Do you.

You know, it's.

It's a kind of.

We end up trying to sort of say, do you really want to do that?

It might seem like a nice idea, but what's the benefit?

Who's for.

But then if you had accounts that some are in, what does Europe require?

Ifrs or this, what, this French gap, this Belgian gap.

Yeah, yeah, they shot now.

Yeah.

A bit of hit and miss.

So, yeah, there is gap in those local countries, but yeah, you do see.

And ifrs as well.

Okay.

So it's.

It's a bit like.

It's like all these things in life.

When do I.

To sort of.

As you mature as a business, isn't it?

You've got to have.

You've got to be able to afford the advice, you've got to be able to have a good team doing the finances.

Yeah.

So, you know, if it's.

If it's Bob in a shed with his wife doing the accounts, definitely UK gap.

But you know, once it's.

Once It's Bob and Jane and 500 people and they've got a proper accounts department and they're going international.

Fine.

Yeah, let's cross the thing.

Yeah.

And you need technical people on, on the business side, on the client side to really understand like the, the differences and subtleties as well.

This is really important.

You need a skilled team internally.

Yeah, yeah.

Otherwise, otherwise you're going to be lost in just jargon, effectively.

Yeah.

Or producing the numbers or you're going to be asked questions you don't understand.

And look, we specifically, we're going to focus in on IFRS 16.

Now if that doesn't get you excited, you have not lived or you've lived a better life than ours, baby.

So that's leases on balance sheet.

So this has generally changed how a lot of companies look on paper.

Give me, give me the plain English of what this, why this matters and what this is about.

Yeah.

So.

So interestingly, UK Gap has now followed suit and converged on this as well.

So this, this point sort of is relevant for UK Gap as well.

But I guess the old intuitive way of thinking about it is with a lease, you're renting an office space.

I pay for the office space for that month and I recognize a rent cost in my profit and loss.

Someone in their infinite wisdom thought, in actual fact, you've got a 12 month lease here, you have an asset because you get to use that space for 12 months.

So I'm going to recognize an asset on my balance sheet to represent that fact.

And you've got a 12 month commitment.

So you've actually got a liability there.

So you what?

Okay, so say the rent's a thousand pounds a month to keep it easy.

Your asset is 12, I've got a year.

So 12,000 asset and then a liability.

11,000.

Yeah.

A month in.

Yeah.

That's bollocks.

Yeah.

Can I use that profession to what I learned.

That's definitely the French.

That's just.

There's people overthinking that.

Yeah.

Which is why, what benefit is it to anyone?

It's confusing that.

Exactly.

And that, that's the, the annoying thing about it.

Because UK Gap, it allowed you to do it in the, the logical way, which is I've paid a thousand pounds, I recognize the cost of a thousand pounds, but now that's moved away from that.

So to, to the ordinary business owner it makes a lot less sense.

Anything.

The whole point of accounts is they need to be understandable.

Yeah.

And we have like a duty.

That's the whole principle, isn't it a duty of anything that changes your understanding of your accounts is what you have.

You have to stop us in order to that.

Well, you know, that number is big and if it wasn't in accounts, it changed your view of the business.

Yeah, but you've immediately got something that.

I've been explaining this before, but every time I get explained it, my brain just says, and common sense says that's nonsense.

So this, this, this is a bad plan.

I mean, why there's no one at the table to say this is not what.

I can't see what we gain from this other than confusing everyone and wasting time talking about it.

Basically, yeah.

And yeah, I struggle.

I still try and understand the reason behind why it makes more sense.

And yeah, the, I guess one of the knock on effects is that in your pnl you don't recognize a rent cost, you recognize depreciation.

What?

That's nonsense because it's making it look like an asset you own.

You don't own it.

It.

Yeah, exactly.

You have a right to occupy it.

You know what this suggests to me?

I'm just going to keep bashing the poor French even though I love them dearly.

Sorry, it's, it's not meant genuinely, but it's like a French economist has got involved because it's quite economic what they're doing.

It's like it's an economist where we have the right to access, we need to recognize it.

You know, supply and demand.

Yeah, yeah.

But at the end of the day we're paying rent.

Yeah.

Oh my God.

That's outrageous.

That's really upset my Britishness.

It really has.

They should get us to do the standards.

The Aussie should sort it out.

We could leave it with us, mate.

We'll have this knocked out in a.

Week and it'll be five pages.

It'll be five pages.

Yeah.