Incisive Financial Understanding

Getting real value from your management accounts?

Why is it that management accounts usually take (at best) 2 weeks and (at worst) perhaps 4+ weeks to produce?  Why is this seen as OK? Do we believe there is no alternative or have we just become resigned to the way things are?

One fact is undeniable - the slow delivery of management information makes it near impossible to proactively manage the numbers side of the business with any great certainty or authority.

Tell me the future NOW!

Our appetite for quick management information is 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.

And without going any further, we bump into a fundamental problem: the vast majority of management accounts being printouts straight from the accounting system are focused, not on the future, but on the past. Whilst there is no suggestion that traditional management accounts are worthless, their value in terms of helping us predict the future, is clearly limited.

What is the real problem?

So it takes too long and gives us pointless information at the end of it - well that maybe a bit harsh.

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.

Probing 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. In short, 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 the cash position - 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 valid concern. But for certain very good reasons (covered in the Entrepreneur financial training) this need not be 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..