November 2020

How does good quality Management Information (MI) aid decision making?

For an organisation that combines outsourced bookkeeping with management accounts, you would expect us to be “fans” of what good quality MI or what we would call management accounts, can do for a business. 
We have heard MI compared with the devices connected to a modern car being serviced – the type which gives the mechanic an immediate picture of a raft of key statistics. We are biased of course, but we believe that MI does more than that - it gives information that enables you to make decisions that you wouldn’t otherwise achieve. 
So how does it work?
MI is different for every business as each is unique. Different industries, routes to market, organisational structures, stage in the development of the business can all require different information. That being said, there are a number of measures that will exist in pretty much every MI, these are:
• A monthly profit and loss and balance sheet
• The gross margin percentage. This is the gross profit (sales less direct costs) divided by the sales value, excluding VAT
• Sales information, broken down by product/service and distribution channel, usually shown against target and in the context of the past year’s performance
• Detailed information about costs and overheads usually shown in the context of budgets
• Performance against a bespoke set of key performance indicators
What kind of decisions can this help you make?
Decisions that can enhance your profitability.
• Possibly for the first time you will have a true understanding of which products and services and routes to market are making you the most profit. On the back of this you are likely to change your business strategy to optimise your sales mix to generate the most profit. You might withdraw certain products or services or prioritise one route to market over another. 
• With products, services or distribution routes that are least profitable you can focus on costs in these areas, with the aim of reducing them and making them proportionate. A common issue for service related business is inadvertently over servicing, where you deliver a level of service that is not proportionate to the return that you make. Banks are a prime example of this whereas they now focus on customers serving themselves e.g. ATMs, online banking, online statements etc. You can even see the same dynamic with the likes of McDonalds and their large tablet like touch screens where you self order, cutting the number of staff required in the restaurant.
• Where the market will stand it, you can look to increase prices to bolster the worst performing products, services or distribution routes and improve the profitability of everything else. 
Smarter operational decisions
• Sales Managers or Directors love the information because it allows them to structure sales incentive schemes that are proportionate and drive the behaviours that bring the best possible business mix from a profit perspective. Gone are the days when hitting the target is enough, they can now hit the target with the most profitable products.
• Marketing Managers or Directors who can find themselves under increasing pressure to demonstrate return on investment and justify budgets, can direct their marketing to focus on generating leads for the most profitable products, services or distribution routes.
• Procurement Managers love the information as it can help enable them to manage stock levels smarter and reduce the possibility of getting stuck with stocks of unprofitable products.
• Finance Managers/Directors and MDs love the information for lots of reasons, but one of the most important, perhaps only behind understanding profitability and managing cashflow, is visibility of debtor days. This visibility can help allocate appropriate resource to following up outstanding amounts, reviews of payment terms and even ceasing doing business with particular customers if they cannot be persuaded to change their behaviours.
• All of this highlights the importance of ensuring that the right people in your business receive the precious MI. We feel it also justifies one of our favourite phrases – “Measure what you want to Improve”.
• IT Managers or Directors love this kind of information as it gives them a basis to prioritise their long “to do” lists for development. 
If this has sparked your interest and you would like information of this kind that could enhance your business then maybe we should talk?

Some things never change – Cash is still King

The last six months have strongly underlined the everlasting creed that ensuring your business is sufficiently funded is still your most important objective, bar none. It’s always been the case, now some businesses will have to fight this one more strongly than ever but the same principles apply.

If you’re in the fortunate position of wanting to expand your business, you still need to be careful. Your most likely challenge, even if you don't realise it, is going to be funding. Yet that seems counter intuitive because more sales equals more cash - so what's the problem? It's the timing difference – often the cash goes out before the extra sales income appears. That delay needs financing - the more the growth, the bigger the gap. So where will it come from? Will you have enough?

Unless you have sufficient spare cash then you'll need to do what most expanding businesses don't do well and that is plan the funding. A cash flow forecast is really essential - often that seems a challenge but it needn’t be. Complete accuracy is not necessary, but it should be close enough to give you an idea of what to expect. Then you can take action to facilitate your plans – maybe you can agree extended terms with your suppliers if you explain what is happening your end or perhaps look at alternative method of funding.

This applies most particularly to businesses that sell on credit to customers, however, even those which are paid at point of sale still have to finance the extra stock, selling and admin resources in advance. There's nothing sadder than seeing a 'successful' rapidly expanding business go bust so make sure that doesn’t happen to you.

On the positive side good cash planning will enable you to expand without this restriction and will boost your profits.

A Five Point Action Plan:

1) Make Cash Flow top of your agenda every day

2) Review, implement and improve your Credit Management system and chase your debtors effectively

3) Produce a cash flow forecast for at least a year and update it frequently

4) Line up alternative methods of funding

5) Charge more, increase your margins and profitability


This entry was posted in Accounting, Business Development, Management Accounts and tagged in cashflow by Caroline