What does good Management Information (MI) look like – and how can it help you make better decisions?
We often talk to business owners and directors who have plenty of financial information but still don't feel they have a clear picture of what is really happening in their business.
They know how much is in the bank. They know what their sales are. They probably have accounts produced by their accountant.
But do they know which parts of the business are actually making money? Do they know whether margins are improving or getting worse? Do they know what their cash position is likely to look like in three months' time? And, perhaps most importantly, do they have the information they need to make better decisions?
This is where good Management Information – or MI – comes in.
At BookCheck, we provide bookkeeping together with management accounts, so you would probably expect us to be fans of good MI. We are. But the reason is not simply that we like producing reports.
Good MI gives business owners and managers information that enables them to make decisions they might otherwise be unable to make.
So, what does "good" MI actually mean?
There is no single definition of good MI because every business is different.
A manufacturing business will need different information from a professional services firm. A business selling directly to consumers will have different priorities from one selling through distributors. And a growing business will have different requirements from a mature business.
The important thing is that your MI is designed around your business and the decisions you need to make.
Good MI should be:
• Accurate – the underlying figures need to be sound and properly reconciled.
• Relevant – it should tell you what you actually need to know.
• Understandable – there is little point producing a beautifully presented report that nobody understands.
• Sufficiently detailed – but not so detailed that the important information gets lost.
• Prompt – information received months after the event is of limited use when you are trying to manage today's business.
• Consistent – so that you can identify trends and changes over time.
• Actionable – it should help you decide what to do next.
Good does not necessarily mean lots of pages.
Some businesses may benefit from a detailed 40-page report. Another business may get everything it needs from four pages. Some people like charts; others would rather see a straightforward table.
There is nothing wrong with taking advice on what your MI should contain. Not everyone is financially skilled, and an experienced adviser can help you identify the information that will be most useful.
But ultimately, these are your accounts, not the accounts of the person producing them. Your MI should be designed to help you run your business.
Start with the basics
At a minimum, most businesses will benefit from regular information covering:
• A monthly Profit & Loss account
• A balance sheet
• Gross margin percentage
• Sales information, ideally broken down by product, service or route to market
• Costs and overheads, compared with budget where appropriate
• Key performance indicators that are relevant to the business
• Cash flow forecasting
• Debtor information and payment performance
The exact contents will vary, but the principle is the same:
Measure the things that matter, so you can decide what action to take and then measure whether that action has worked.
One of my favourite phrases is:
"Measure what you want to improve."
If you want to improve margins, measure margins.
If you want to improve cash flow, measure cash flow and debtor days.
If you want to improve the profitability of different products or services, measure the profitability of each one.
It sounds obvious, but you would be surprised how many businesses don't have this information readily available.
Why gross margin is so important
One of the most useful pieces of information in any business is its gross margin.
Gross margin is essentially the gross profit – sales less direct costs – expressed as a percentage of sales.
Knowing your overall gross margin is useful. Knowing it by product, service, customer type or business division can be even more valuable.
For example, at BookCheck we effectively have two different businesses: bookkeeping with management accounts, and payroll with auto-enrolment.
We produce separate Profit & Loss information for each.
Why?
Because the two parts of the business have different economics and therefore different margins. If our overall margin changes, we can identify which part of the business is responsible.
Without that information, we would be guessing.
And guessing is not a particularly good basis for making business decisions.
Good MI can change the decisions you make
Let's take pricing as a simple example.
Suppose you sell something for £10 and it costs £6 to provide. Your gross profit is £4 per sale, giving you a 40% gross margin.
You might think that reducing your price by 10% to £9 will increase sales sufficiently to compensate.
But your gross profit per sale has now fallen from £4 to £3.
You would need to sell approximately 33% more units just to generate the same gross profit.
Conversely, increasing the price by 10% to £11 gives you £5 gross profit per sale. You could therefore afford to lose 20% of your sales volume and still generate the same total gross profit.
The point isn't that every business should increase its prices.
The point is that good MI allows you to understand the numbers before you make the decision.
Without knowing your margins, you are making assumptions.
With good MI, you can model different scenarios and understand their potential effect on profitability.
MI helps you understand where your profit really comes from
Sales are important, but sales alone don't tell you whether your business is performing well.
You may discover that:
• One product is selling extremely well but produces very little profit.
• A particular service is highly profitable despite generating fewer sales.
• One route to market costs considerably more to operate than another.
• A particular customer requires so much servicing that the return isn't worthwhile.
• Certain overheads have increased without producing any corresponding benefit.
That information can lead to much better questions.
Should we concentrate our sales effort on the most profitable products?
Should we stop offering something that consistently produces poor margins?
Should we change our pricing?
Should we reduce the level of service provided to certain customers?
Should we change the way we market a particular service?
Should we invest more heavily in an area that is producing strong returns?
These are management decisions. Good MI doesn't make the decisions for you – it gives you the information you need to make them intelligently.
MI isn't just about the Profit & Loss account
Another important part of good MI is cash flow.
A profitable business can still run into serious financial difficulties if it doesn't have enough cash available at the right time.
This can be particularly dangerous when a business is growing quickly.
Growth sounds like good news, and it usually is. But growth can consume cash. You may need to buy more stock, employ more people, increase premises or equipment costs, and provide additional credit to customers before you receive the corresponding cash.
So one of the most important pieces of MI for many businesses is a cash flow forecast.
It can help you identify potential problems before they become crises.
And that is one of the great benefits of good MI: it can allow you to see problems coming rather than discovering them when they have already happened.
Different people need different information
Another mistake is assuming that everybody in the business needs to see exactly the same MI.
They don't.
A Sales Director may be particularly interested in sales performance, conversion rates, customer profitability and sales mix.
A Marketing Director may want to understand which products or services generate the best returns from marketing activity.
A Procurement Manager may need information about stock levels, purchasing costs and slow-moving or unprofitable products.
A Finance Director or Managing Director may be particularly interested in profitability, cash flow, debtor days and overall financial performance.
The important thing is to get the right information to the right people.
There is little value in producing an enormous management pack if nobody has the time or inclination to use it.
Prompt MI is essential
There is another word I would add to the definition of good MI:
Prompt.
This is often overlooked.
Imagine receiving your management accounts six months after the end of the period they cover. They may be perfectly accurate, beautifully presented and full of useful information.
But how useful are they now?
Management information is there to help you manage the business. If you receive it too late, you are looking backwards rather than managing forwards.
Ideally, management accounts should be produced soon after each month end, while the information is still relevant and there is still time to act on it.
This is one reason why the quality of the underlying bookkeeping matters so much. If the bookkeeping isn't up to date and accurate, the management accounts cannot be either.
Good MI also reduces management pressure
There is a less obvious benefit to having good MI.
It can take a considerable amount of pressure off business owners and management teams.
Without reliable information, decisions can become stressful because you are trying to work out what is happening from incomplete information.
You may find yourself instinctively focusing on increasing sales because sales are the most visible measure.
But increasing sales isn't necessarily the answer.
If you know your margins, costs, cash flow and customer profitability, you can make decisions based on facts rather than instinct.
That can make a significant difference to the way a business is managed.
What should your management accounts tell you?
I would suggest starting with a simple question:
"What do I need to know in order to make better decisions about my business?"
Your management accounts should then provide the answers.
For many businesses, that might include:
- Are we profitable?
- Is our profitability improving or declining?
- Which products, services or customers are most profitable?
- What is happening to our gross margin?
- Are our costs under control?
- Are we achieving our budget or targets?
- What is happening to our cash?
- Are customers paying us promptly?
- Where are the potential problems?
- Where are the opportunities?
If your current management accounts don't answer those questions, it may be worth looking at what you are actually measuring.
Good MI puts you in control
Ultimately, that's what good Management Information should do.
It should help you move from "I think this is happening" to "I know this is happening."
It should allow you to measure performance, identify trends, spot problems, recognise opportunities and make informed decisions.
And it should do all of this while the information is still sufficiently current to allow you to act.
You don't need hundreds of pages of reports.
You don't need every possible financial statistic.
You need accurate, relevant, understandable and prompt information that is tailored to your business.
Get that right and management accounts become much more than a monthly reporting exercise.
They become a management tool.
At BookCheck, we provide an integrated bookkeeping and management accounts service, primarily using Xero and also Sage. Our aim is to provide businesses with accurate and prompt financial information that they can actually use.
If you would like to discuss what good MI could look like for your business, please get in touch.
