Incisive Guide to Better Management Accounts
Getting real value from your management accounts? Chances are you're not:
- First off, many small businesses (and some not so small) produce no management accounts at all. Tracking performance from no more than what a bank statement tells you is simply not enough for any business north of a one-man band.
- But even when monthly management accounts are routinely produced, they often comprise just the Profit & Loss Account (or income Statement) for the month (with or without comparatives). No balance sheet in sight. This suggests that it's the P&L that really matters.......oh dear! But then how many people truly understand a balance sheet? In our experience, precious few.
- The other almost universal phenomenon is that management accounts are invariably historic. They look backwards, not forwards. Why is that? Sadly, it's a question I've pondered. You hear of eminent historians. Ever heard of an eminent futurologist? Me neither. So may be predicting the future is not seen as being particularly valuable. But for any business it certainly should be. You've survived the past but will the financial-design of your business see you survive the future?
- Not wholly unrelated is the question of how long management accounts take to produce at month-end. At best 2 weeks and, at worst, perhaps 4+ weeks. Why is this seen as OK? Do we believe there is no alternative or have we just become resigned to the way things are?
- Lastrly, whike you might get Profit & Loss Account comparatives for the prevcious month or same month from the prior year, why is there such an absence of information on meaningful trends? The point being that key patterns in the numbers that management teams need to track, build up cumulatively. A single comparative number is worthless. Moreover, the majority of these trends are associated with the balance sheet but in contrast, virtually all comparatives are drawn from the Profit & Loss Account (or Income Statement). It's no wonder, so many businesses don't see problems looming.
Why does it seem people have been conditioned to produce financial information this way? One fact is undeniable - the slow delivery of often partial, backward-looking, obsolete, financial information, devoid of any meaningful trends, renders it impossible to meaningfully and pro-actively manage the numbers in these businesses.
But there is no suggestion on our part that they are prepared with anything other than the utmost diligence, as accurately as they can be and in good faith.
Tell me the future NOW!
But those running businesses have an appetite for speedy financial information and it's driven by an understandable desire to foresee how the future is likely to unfold. The earlier we can foresee what the future might have in store the more time is available to adapt to or head-off any problems identified.
Let's look for a moment at why management accounts seem to take so long to produce. After all, we're told there are good reasons for it. When we probe further, the core problem, it seems, is usually that the company's accounting system is being used to fulfil two dual but conflicting roles.
On the one hand it's obviously (and quite rightly) capturing the everyday financial transactions in the books - based on the posting of invoices and movements in cash. However, on the other (and particularly at month-end) the focus shifts to getting the 'right' profit figure. This necessitates various paper-chasing activities culminating in journal adjustments such as accruals.
But does this create a more valuable end-product? After all, you should never be waiting to receive or get sight of an invoice to work out what your profit is - you'll always be lagging well behind reality on the ground. And the net result can often be a profit figure that bears little relation to what's happened to the cash position - something that is acutely unsettling for entrepreneurs.
What's the alternative?
Evaluating profitability (particularly at Gross Margin level) is essential but much better achieved by tracking 'Expected v Actuals' through a separate costing system (however primitive) than trying to use the accounting system per se.
In this way, one can compare estimates, orders and (where available) invoices and assess profitability across all jobs, contracts, products or services. The physical existence (or absence) of an invoice is rightly irrelevant.
In short, divorcing profitability (and related aspects) from the main accounting system, dispenses with a significant amount of work and with it, the need for month-end delays that have come to plague business financial management. So 'flash' figures can be produced (with up to date books) within as little as 24 hours of the month-end.
What about accuracy? One objection to change is that management accounts produced in any shorter timescale will be inaccurate. And if this were true this would certainly be a concern. But for reasons covered in the Entrepreneur financial training this need not necessarily be the case.
Aside from opportunities to potentially speed up their production, there is also an opportunity to re-focus management accounts on the future. Where we prepare management accounts for clients, we try to work on a '6-months back; 6-months forward' basis underpinned by a robust cash flow model which, because of how it's designed, has proved able to red-flag pressure points well in advance using graphs to highlight critical trends.
The bottom-line is that there is a pressing need for financial information to offer greater insight into what has happened and greater foresight as to what is likely to happen. Hampered by the time taken to produce them as well as their content, conventional monthly management accounts typically fall short of what's needed.