Are your management accounts letting you down?
Just because you produce detailed management accounts every month showing your profits, cash flow or even balance sheet position, don’t think you have it all under control. Are your management accounts letting you down?
Where can it go wrong? Here’s a few ideas:
The management accounts letting you down are too complicated
You can’t see the wood for the trees. You have huge amounts of detailed analysis on sales by month, by product type, by region, by margin, but it is very difficult to identify highlights or trends. If there is too much detail, the messages are too difficult to pick out or get lost altogether.
They are wrong to start with
Most businesses have their annual accounts either audited or prepared by external accountants. This involves an automatic validation of the accuracy of the management accounts and it is rare that adjustments are not made to the initial management accounts before producing the statutory accounts.
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There are rarely any checks on the accuracy of the management accounts produced each month and so errors go uncorrected and inaccurate management accounts may result in unwarranted responses.
Management accounts letting you down don’t always tell you what to do
The skilled user can interpret the trends shown by the management accounts. Alternative lines of action may be identified – but which one is the most effective? Too often the management accounts provoke a reaction along the lines of: “Well that’s interesting, but what do we do to correct it?” And then nothing happens.
Costly to produce
Particularly for the small business, they fall into the trap of devoting disproportionate time and energy into producing the perfect management accounts. These documents are expensive to devise, produce and maintain and if you are not a “skilled user” your energies will be better spent elsewhere.
There is a strong case for micro business ignoring management accounts altogether and just keeping to (say) measuring 4 key variables month by month on a graph – turnover, debtors, stock and cash. After a few months, the graph will tell you at the sweep of an eye if you have a problem.
More and more these days, businesses change very quickly so you constantly need to be on the lookout for measuring new factors in different ways to understand your business dynamics properly. But changing your management accounts is a big exercise and there is a ready temptation to put it off until the end of the year. Or the next year.
Two columns or three?
Time and time again, people fall into the trap of comparing “this year with last year” and look for explanations as to why they are materially different. All too often the answer is that it is last year that is abnormal and this year has simply reverted to the trend which is evident if you look back a further year. Three years, not two is the answer,
Are you guilty of telling stories?
Life is full of complexities and so are your management accounts. The brain copes with all this uncertainty by developing a plausible narrative to explain what’s happening. We convince ourselves that our initial assessment is correct and then spend our time looking for evidence to support that theory. We interpret our management accounts in a narrative form and feel in control of the chaos that is business (and life). This is a delusion – random events are happening all the time and only by a constant revision of your narrative will you truly understand what is happening.
These are some of the downsides – but don’t let them put you off having management accounts at all. Having an idea of where you are going (budgets and forecasts) and a sense of where you have just been (management accounts) is still a lot better than flying blind. Just bear in mind that if you are not careful, ‘management accounts letting you down’ will take you off in completely the wrong direction.
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.
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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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