What gets measured gets managed.
And if you’re running a business then management accounts are your most important tool for measuring and managing business performance.
Take some time to find out more.
What are management accounts?
Management accounts are financial reports that provide detailed insights into a company’s financial performance and position.
Crucially, they are tailored to the business they are measuring. So although a restaurant and a recruitment business will both have a profit and loss report – the structure and content will be different.
Management accounts, if they are to be useful, need to be regular. This could be quarterly, prior to a VAT return, or, preferably, monthly.
They also need to be consistent – from one month to the next, from last year to this year, from actual to forecast.
What makes management accounts useful?
Produce them quickly and then share them, use them and understand them!
Time is of the essence
In most businesses there’s no reason to take more than five working days to produce the management accounts. This means the bookkeeping has to be efficient and the rest of the business has to be involved and invested in the process. For example:
- getting all invoices raised within two days of the month end
- calculating commissions, bonuses, and other costs for which there won’t be an invoice
- agreeing ALL bank accounts to bank statements the day after the month-end
And this is a good reason to produce management accounts each month – you get twelve goes a year rather than four.
Or none!
Use, or snooze and lose
Management accounts need to be used!
They are telling management how their business is performing and they contain clues and messages as to how performance can be improved:
- sales are up but margins are down
- why do have less cash now than we did three months ago?
- will all of our customers pay and why are some taking over 90 days?
- are we allocating costs to projects correctly?
Your business, your questions. But you can’t ask the right questions without the right information.
Of course, management accounts are only useful if they go to the right people. More useful still if they are used in conjunction with and compared to other business information such as sales, marketing, operations and production information.
Is information across your business consistent? Is it discussed and is it understood?
Make sure everyone understands what they’re looking at. Finance is no stranger to jargon and by no means does everyone understand what a balance sheet is.
So make sure everyone knows what they’re looking at.
What’s included in management accounts?
There’s no RIGHT answer but here are the main reports:
- profit & loss for the year to date, vs last year, vs budget / forecast
- profit & loss by month for the year to date and the last 12 months
- balance sheet vs last year
- aged debtors list
- aged creditors list
- cashflow for the last and next six months
Your business may require additional reports e.g. for sales performance, production metrics, stock balances. And if it does then make sure people are producing them in good time.
A word about bookkeeping
Your bookkeeping needs to measure the revenues and costs that are important to measure.
This blog “You can have any expenses you want – so long as they’re Direct Expenses” makes the point very well.
Distinguish between costs of sale (costs only incurred because a sale has been made) and overheads (costs that will be incurred anyway) because they will behave differently and therefore will need to be managed differently.
Financial planning and cashflow
Management accounts are key element of business and financial planning.
A consistent and useful structure for management accounts can easily be used to create budgets and forecasts.
Comparing actual performance to budget and, more usefully, against a series of forecasts updated during the financial year is very helpful and all of this work forms a good basis for next year’s business plan and budget.
SWOT analysis, “what-if” and other business management tools can be more easily deployed in an environment with a strong management accounts foundation.
And don’t forget cashflow!
Some businesses don’t need a cashflow model but most could benefit from one. Our cashflow advice is always to look backwards before you look forwards to ensure your forecast is grounded in reality.
Also, you’re going to need some of the building blocks provided by your management accounts:
- aged debtors and creditors
- good, accurate bookkeeping
- agreeing ALL bank accounts to bank statements the day after the month-end
- actual rather than “hoped-for” expenditure and revenue
- forecast income and expenditure
Everything inter-relates and if you do it well then your business will perform much better.
What are management accounts and why are they useful?
Quite a deep dive into management accounts which I hope was useful.
We help lots of businesses with their financial management and if you think we can help you then please give me a call on 020 7125 0270 or email info@bluedotconsulting.co.uk
Michael – @bluedotmichael
Related links:
Finance essentials for the non-financial
Client profitability analysis – make more money from every sale you make