Management Accounts

Why statutory accounts are not enough

All companies need to file statutory accounts every year but it’s an open question as to how much value if any this information provides to the business. The issues include:

  1. Old information which is out of date - the earliest numbers are at least 12 months out of date, perhaps as much as 21 months if they are prepared just in time to file.
  2. Insufficient information: they are in a fixed format, abbreviated in some respects and are not user friendly.
  3. Difficult to understand: they are really in accountants talk, to a prescribed Companies House format, not easy
  4. Does not show gross margin percentages, charts, comparison over years
  5. No Cashflow information: how do you know that you will have enough cash to pay your team next week, next month or next year?
  6. No meaningful comparisons: in a growing or changing business comparing to last year is not helpful, you need to see how you compare to your plans.
  7. Only meet the needs of Companies House

What’s the alternative – customised management accounts precisely to your specification so that you can understand them and then use them to advantage in reducing costs, improving margins and boosting profitability. They will include KPIs – Key performance Indicators e.g. XXXX. You can even include benchmarking

Management accounts

Whatever you do, don’t follow this path.

Whatever you do, don’t follow this path.

This is based on a recent client story.

A familiar situation, cash is tight, even worse you’re making a loss. So the cash is getting even tighter. So you naturally push the sales button even harder and spend more time pursuing customers. Seems a sensible idea, so why not?

Maybe you’re looking to sell the goods or services that aren’t going to contribute that much to your profits? Fortunately we had provided split reporting Profit & Loss between the two sectors of the business – new work and maintenance. The former was far less profitable. The company tried to move towards maintenance but really had left this decision far too late.

The client was very slow at chasing debtors. This was sporadic and woefully inadequate. Consequently the debtors increased. It took this client six months to start to fix this critical issue. In the meantime credit facilities were tightened by their suppliers, some required payment up front, others reduced the credit limit. This greatly inhibited their ability to trade, they lost contracts and the situation spiralled towards being out of control. The directors used their personal credit card.

They had to make some key staff redundant, inhibiting their possible redevelopment. Insolvency arose and the client entered a Creditors Voluntary Arrangement with a very much reduced size of business, from £4 million down to £1½ million.

The obvious tips:

  • Always focus on debt chasing
  • Live by a regularly updated cash flow forecast
  • Obtain prompt, quality management accounts which you understand and can trust
  • Split these accounts between the key sectors of your businesses, projects, contracts etc.

Then the magic bit - take action to improve profitability and hence generate more cash

Simple really.

Sales is vanity, Profit is sanity and Cash is King – as always

This entry was posted in Accounting, Management Accounts and tagged in Accounting, Bookkeeping, Management Accounts by Caroline