Why a simple set of management accounts will tell you whether you are making a profit (or a loss!)
An alarming number of businesses fly blind when it comes to understanding how they make a profit. Others get to the end of the year to get an unpleasant shock that they have in fact made a loss. By then it may be too late to take remedial action.
Many businesses have no regular management accounts and simply rely on knowing what is in the bank and a vague feeling of how busy they are – in other words, the business is running them. They are not in control of it.
How many of these simple questions can you answer “yes” to:
1. Do you know what you are selling?
At a superficial level, obviously the answer is “yes”. But are you selling a product? Or is there an associated service as well such as repair work or annual maintenance? Do you hire or make outright sales or both? And most importantly, are you really providing a “solution” for your customers which should allow you to charge a premium price?
Do your Management Accounts reflect these different income streams or do you simply record “turnover”?
Management Accounts are not a case of one size fits all. Do not simply apply the default chart of your accounting software – make them relevant to your unique business.
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2. Do you know which income stream is most profitable?
Move on a level, knowing what you sell is a good start, but do your Management Accounts tell you which income stream is the most profitable? Can you match the direct costs of sale to the individual income streams to tell you the gross profit by type of sale? If not, how do you know what to do or sell more of – and conversely which ones to cut back on?
3. Do your Management Accounts make any direct comparisons?
As simple statements of activity, Management Accounts on their own tell you very little. There needs to be immediate benchmarks or comparisons with:
- Your budget
- Previous year (and ideally the year before that too because simple year on year comparisons can easily hide the trend you are trying to pick out)
4. And is there a cashflow statement too?
Many profitable businesses go bust because they run out of cash. They over-trade, activity levels are high but they generate insufficient cash compared with the available working capital. If you can’t collect your debtors more quickly, stretch the creditors or persuade the bank to lend you a bit more then you run out of cash and it’s all over. To prevent that happening your Management Accounts need to show what is happening to cash as well as the underlying profit trend.
5. Do you now what “good” looks like?
In other words, have you set any “Key Performance Indicators” to strive towards and confirm that your actions are having the desired results? The more sophisticated users of Management Accounts will refine those accounts and constantly re-set the budget in the endless pursuit of enhanced performance.
6. If you prepare the Management Accounts, do you “own” them
Who are you preparing the Management Accounts for? Just yourself, your boss, the staff or are you the external accountant who prepares the figures, hands them over and silently moves on without a word or explanation?
In turn, this should prompt questions such as:
- Is there a one page (not more) Executive Summary of each month’s performance?
- How soon are they ready after the month-end?
- Are the Management Accounts simply columns of figures or is there also a short, written narrative, graphs, charts etc?
Quiz over – how did you do? Well done if you could say “yes” to all six – your Management Accounts are in top top order.
But, obviously, this is not a game. If your Management Accounts are not giving you the information to understand how your business is performing and pointing you in the direction of improving your performance, you need to take urgent action before it is too late.
Some people find their Management Accounts boring and devoid of useful information. If that’s what you think, take a hard look at them and ask the above questions again. Business failure is not boring, it is uncomfortably exciting and financially painful.
The skillful use and application of quality management accounts will make your business stronger and more resilient to challenges – if you need help in this area of financial management then seek an expert to support your ambitions.
Straight talking business advice on management accounts from Yorkshire Powerhouse
Now you’ve read our article on management accounts – have you any more questions?
Here at Yorkshire Powerhouse, we’re happy to help as much as possible – is there anything else we can do to help you, do you have any further questions or can we help introduce you to an expert – please let us know:
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