Management accounts are essential for every business.
Quite simply, you need to know how you are performing and you need to know what to change or do more of in order to perform better.
Why management accounts are a good idea
Management accounts, ideally produced monthly, tell you how your company is performing. For the month, the financial year to date, against budget, against last year.
Armed with this information and, ideally, other non-financial information, a management team can get the business to perform better by doing more of what works and less of what doesn’t. Things like:
- controlling costs
- improving margins
- boosting cashflow
- reducing risk through better credit management
Sounds useful? Here are five steps to help you get useful numbers that will make a difference.
1. Monthly management accounts & five-day deadline
Produce your management accounts, using a format that everyone understands, within five working days of the month end.
They should contain no surprises (do you really not know how your business is performing throughout the month?) and your top team need to discuss the numbers, absorb the messages and take action.
2. Profit & Loss information
You need profit & loss information for the month, year-to-date and compared against your budget and against last year.
Variances from budget and last year need to be understood and explained.
You also need information on gross profit margins, ideally by customer and by product / service.
Finally, there is a risk of being too focused on the present. Try to include some longer-term analyses such as moving average and last twelve months performance data. These smooth the peaks and troughs and give you a good sense of the trends in performance.
3. Cashflow and debtors
A profitable business can still go bust if it hasn’t got the cash to pay the bills.
Also, it’s a huge pain to run a business with a poor cashflow when it always feels as if you haven’t got enough money in the bank.
So include cashflow and debtor information in your management accounts pack and hold people’s feet to the fire to make them accountable for this part of your business performance (not just financial people – sales people have a big part to play in credit management!).
4. A picture paints a thousand words
An MD of a client of ours simply does not understand pages of numbers and he is not alone. Therefore, include graphs and charts to tell the story in a different way.
Graphs often make a point more strikingly than numbers and are particularly useful for portraying a longer-term story and showing the forward-looking trends.
5. Calls to action
There simply is no point in producing management accounts that are not acted upon, so include calls to action and make sure that at the meeting where performance is discussed there is an agenda item that follows up on last month so you know action really is being taken.
Finally, none of these steps will be very effective if you don’t have the people or the accounting software in your business to produce the information you need when you need it, so make sure that you have these basics right and seek help if you don’t.