Funding

Boost your Profitability by using quality Management Accounts

In our 25 years of experience we often take on clients with issues, often unknown, surrounding their management accounts.

If you’re serious about improving you profitability then naturally you’ll ensure that you receive promptly, every month, the key information, both financial and non financial, that you need to run your business effectively and efficiently.

This isn’t what your accountant gives you in their format or what you’ve inherited. It’s what you and your team or Board have determined that you need. You’ve really got to "own" it otherwise you risk not extracting the most benefit from the potentially precious information.

Some issues are obvious and easy to identify such as just no management accounts or they’re far too late or of poor quality. What tends not to be obvious or even admitted are personal user ‘difficulties’ around the table. These broadly fall into two categories. The first is a simple lack of understanding of what the numbers mean and what action consequently should be taken. The second is in accepting a sub standard form of reporting, perhaps assuming, probably wrongly, that it can’t be changed or that such would be too expensive. 

A sub optimal reporting scenario is a shame but it’s worse than that. It’s potentially costing serious money if management decisions are being delayed or prevented because of the lack of quality MI. The funny thing is that, in our experience, most issues mentioned are pretty straightforward to deal with and are well worth considering. 

Beware - it’s not a good idea to carry on with the same reporting that you inherit without reviewing as to whether or not it’s fit for your purpose. Circumstances may have changed over time so that the reporting needs adjusting but this won’t happen automatically. 

Of course this applies equally to charities where arguably it’s even more important to have the MI and understand it as Trustees are personally responsible. 

One of the most profitable developments in a reporting system is to split the single Profit & Loss report between different parts of the business such as in BookCheck where we report separately on each of Bookkeeping with Management Accounts and Payroll. They’re different businesses with different margins. If they’re mixed together in one, whilst you can still tell the sales performance, you don’t know which is improving its margin profitability and which is not – there’s no way of telling.

Perhaps the most difficult obstacles to overcome is for a user to admit a lack of understanding. To a certain extent that’s down to the service provider checking, asking, hinting or otherwise. But it’s mostly down to the individual getting real. 

Quality Management accounts should be a terrific basis for boosting the profitability and hence value of the business so our advice is - don’t waste the opportunity. 

Management Accounts – Part two in a series of three blogs.

Management Accounts – Part two in a series of three blogs.

In this the second of three blogs we look at who uses Management Accounts, what are the reasons for producing Management Accounts?

Who uses management accounts?

• owners/managers

• investors

• banks/lenders

• factoring/invoice discounting

• accountants

• tax planners

Why produce them?

Running a business without management accounts is like driving a car in the dark. You know what speed you are doing from the wind noise and vibrations (your sales) but you don’t know your direction (your profitability) and you can’t see obstacles you are about to hit (shortage of cash & liquidity).

Most business don’t know their profitability, margins and trends. So why bother? It’s a fundamental principle that if you can measure it you can improve it so assuming you want to increase your net profit it’s rather a ‘no brainer’.

There are several key objectives in financial reporting:

• To measure past performance as a basis for improving

• To avoid cashflow problems and manage liquidity

• To have future visibility

• To determine where to focus attention in order to improve profitability

Some specific reasons for producing management accounts:

• Measure the gross margin percentage. Broadly this is the gross profit (sales less direct costs) you make from your service or product divided by the sales value, excluding VAT. Armed with this information you

can check your performance against others in your business sector. You can check trends over time and you are then in a position to take action to improve your profits

• It imposes a discipline of controlling the finances and may uncover bad practices

• It will tend to reduce year end accountants’ costs as the information will be better and more likely to be reconciled

• Establish your break-even point for profitable sales

• Check and control overhead costs

• Control stock levels – measure trends, benchmark it

• Control debtors – measure trends, benchmark it

• Manage the working capital cycle – stock, debtors and creditors

changing affecting the bank position

• Use key performance indicators (KPIs) to see at a glance what’s happening

 

Gross margin percentage

Most businesses do not know this information but it is really important to measure this accurately. Suppose you sell £500,000 per annum. If you can increase your margin by 1% your net profit will increase by £5,000. What is so beneficial is to check the margin as follows:

Check the trend over time – establish why it has changed, either up or down. Examine every part of the margin i.e. sales and direct costs to see what can be improved such as cutting out loss making sales, increasing sales to profitable customers etc. Examine it like a hawk as soon as it’s known each month – why has it changed? Benchmark against comparable businesses in your sector – how well are you doing, should you be improving?