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MI; Management Accounts; Accounting; Reporting

What Good MI looks like

What Good MI looks like

In short it's quality information that allows you to make informed management decisions to improve the profitability and value of your business. Good implies that it meets your individual requirements, it’s sufficiently detailed but not too much and that you fully understand it – you own it. But it needs to be prompt – another ingredient of Good. It needs to tick all these boxes to be successful. 

Good does not mean it needs to be voluminous. Every user is different. Some will really benefit from some 40 pages, others will do much better with 4. Some love bar charts, some hate them - of course both can be provided. It's really up to you as an individual to work it out and then make your requirements known to whoever is producing the MI. They are your accounts – not those of the accounts producer. There’s nothing wrong in taking advice on what is Good – not every user is finically skilled. There is nothing to stop you being guided by someone who has the expertise so that you're in a position to understand and use the Good MI. 

Good implies that the information is sound. It's not good if it’s beautifully produced and prompt but not reconciled or wrong. So it’s crucial to take whatever steps are necessary to ensure that it is sound. This may include a quality health check. This is not difficult to organise - it’s just a matter of asking. 

An average user would list the following as possibly known information: 

•    sales
•    sales orders
•    what’s in the bank or not 

What most users would not know, which Good MI would provide, is:

•    a cash flow forecast for some months – to avoid problems
•    the gross margin percentage – so it’s measured then improved
•    the overheads costs – so it’s measured and then reduced
•    a quality P&L with comparison to budget / previous year – so profitability is boosted

Notice a pattern here? Measure the things that matter then you can determine what action you want to take and track progress. Do this and you are in control of your business performance and you are not just letting it happen.

A Good system includes management accounts that are of the quality of the year-end but produced soon after each month end. Some businesses have it, most don’t. Of course these reports need to include the gross margin % - much better when split between different sectors of the business. For instance, in BookCheck there are in effect two businesses. The first is bookkeeping with management accounts and the second is payroll with the auto enrolment. They are really separate businesses which is why we produce their own P&L reports each month. Not surprisingly they produce different margin percentages. Then when the margin changes we know which side has caused it. Otherwise it would be pure guesswork, which is worse than useless.

What it can do for your Business

The most important objective in your business is to ensure that you don't go bust or run into serious cash flow difficulties. So Good MI in the form of a cash flow forecast is a vital part of preventing such a disaster. This is particularly necessary in current times when businesses are regrouping after the pandemic. Many are growing rapidly, compared with say a year ago. Counter-intuitively this is a potentially dangerous situation because it's likely that such growth will cause a cash flow issue or crisis. Will there be sufficient receipts at the required time to pay the bills and your staff? It's absolutely critical that this is considered.

The second most important objective is to make as much profit as possible. That is somewhat different to increasing sales which is the automatic urge. Increasing sales is all very well as long as the focus is on profit. This of course assumes you know what the profit margin is of each project/contract or product or service – do you have this information? This is where Good MI really scores. Fixing this gap will probably be the most profitable step you could take.

There is a massive almost hidden benefit of Good MI which is not to be undervalued. It takes an enormous amount of pressure off management if the facts are known. Informed decisions can then be taken to improve. Otherwise it’s stressful trying to work out what to do which tends to result in an undue focus on increasing sales. 

It's really important to understand the effect on profits of changes to the selling prices, both up and down. In chasing sales it's very easy to assume that a reduction of say 10% in the selling price is going to be a good idea, because it will increase sales by more than 10%. This is horribly wrong as this example will show. Suppose your gross margin is 40%

sale units sale £ change sale each cost each profit each profit total
100    £10 £6 £4 £400
133 -10% £9 £6 £3 £400
80 10% £11 £6 £5 £400

 With a 10% reduction in selling price you would need no less than 33% more units of sale, just to stand still. Not attractive. On the other hand increase your price by 10% and volume can drop by 20% - far more attractive. Find your margin and play with the numbers. It surprises just about everybody.

An associated challenge with a lot of MI that it involves serious time from a director level or even an expensive FD in its production. This is a questionable use of such valuable time. With poor quality MI it's a double whammy. Good MI scores a double bonus here.

All in all an impressive list of the real benefits of Good MI – achievable by every business. If you would like to talk to us to see how we can help put Good MI in place for your business and put you on the road to better performance, please get in touch. 

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?