What are Management Accounts? - BookCheck

Management accounts are financial reports produced for the business owners and managers, generally monthly or quarterly, normally a Profit & Loss report and a ... Skiptomaincontent Togglenavigation InnerMenu WhatareManagementAccounts? Everybodyhasheardofmanagementaccounts,soeverybodyknowswhattheyare.Wellno,it’sprobablytheopposite,solet’sstartwithsomeexplanation.Managementaccountsarefinancialreportsproducedforthebusinessownersandmanagers,generallymonthlyorquarterly,normallyaProfit&LossreportandaBalanceSheet.InprincipletheyaresimilartoYearEndaccountsbutarelessformalandarepersonalisedtotheuser’s requirements. SeeanexampleofBookCheckmanagementaccountshere  Whoproducesmanagementaccounts? Thereare5.7millionbusinessesintheUK.Asurprising98%have20 orfewerstaff,96%have10 orfewerand75%arejust1person.Onlyatinyfractionofthese98%havemanagementaccounts. Whydosofewbusinesseshavemanagementaccounts? Thereisamixtureofreasons: lackofinterest neverproperlyconsidered toosmall thoughttobetoosmall(butarenot) justneverstarted noformalaccountingsystem assumedinsufficientorinadequatein-houseskill worriedaboutthecomplexity perceivedasunnecessary assumedunaffordable anotherjobtodo–toobusy It’sfairtosaythattherewillbesomebusinessesthataretrulytoosmallortoosimpletorequiredetailedmanagementaccounts.However,theywillstillbenefitfromatleastabasic,quarterlysummaryofsomesortandcomparisonwithpreviousperiods.It’samatterofopinionbutarguablyturnoverof£100,000isnottoosmalltobenefitfromsomedetail. Oneofoursoontobeclientssawasampleofourmanagementaccountsandsaid “Iwouldgivetheworldforthatinformation” Takealookatourservicehere  Whatdomostbusinessesdoandtheresult? Thenormisthatnomanagementaccountsareproducedandneverhavebeen.Mostbusinesseshaveinsufficientsystemsinplacetoknowtheirtruefinancialperformance–iftheydidthentheywouldhaveastartingpoint,ratherthanjustassumptionswhichareoftenwrong.Forexample,anEstateAgentwithofficesinthreetowns–whenaskedwhattherankingofprofitabilitywasbetweentheoffices,thetwoownershadnoinformation.Theyputtheirheadstogethertoestimatetheranking.Induecoursepropermanagementaccountsprovedthemcompletelywrong,yettheythoughttheyweresmartoperators. Typically,abusinessmeasuresitssales,knowsitsorderbookandmighthaveanideaofthebanksituation.Butthat’saboutall.Itdoesn’tknowitsprofitabilityorlackofit.Itdoesn’tknowwhichpartsofthebusinessarebetterthanothers–itjustguessesorperhapsnoteventhat.Itdoesn’tknowitsoverheadcostsanddoesn’tcompareperformancemonthtomonthwithpreviousyears.Inshort,it’swoefullyshortofevenbasicfinancialinformation.Somebusinessesworryaboutthis,othersdon’tbutitstandstoreasonthatifit’smeasureditcanbeimproved.Whenallsaidanddonethat’swhatit’sallabout,thebottom-linenetprofit. Theresultisthatthebusinessunderachievesprofitoristakenbysurprisebecausedifficultcircumstancescanarisewithoutwarning,inparticularshortageofcashandliquidity.Mostbusinessesenduptakingfinancialdecisionsinthedarkandthatcan’tbeagoodthing.Withoutsoundfinancialinformationthebusinessisatriskofsignificantorseriousunderachievementineitherprofitorcashorboth. Anotherkeyeffectofnoaccountsistheriskofovertrading–thatisexpandingsalestooquicklysothatthecompanyrunsoutcashorworkingcapital.Inshort,customersmaynothavepaidbeforesuppliersandstaffdemandtheirmoney.Thisisaverycommonreasonforfirmsgoingbustandit’susuallyahugesurprisetothebusinessowners.Properfinancialinformationwouldhighlightthishappeningsothatcorrectiveactioncouldbetakenbeforeit’stoolate. Evenifmanagementaccountsareproduced,theymaybefailingtoproducevitalinformatione.g.a£4millionconsultancywith19projects–theproblemherewasthatalthoughtheoverallpictureofthebusinesswasmeasuredtherewasnosplitbetweentheprojectssothecompanyhadnoideaoftheprofitabilityandlackedanyfinancialcontrolofindividualprojects. Inour25yearsofexperienceweoftentakeonclientswithissues,oftenunknown,surroundingtheirmanagementaccounts. Ifyou’reseriousaboutimprovingyourprofitability,thennaturally you’llensurethatyoureceivepromptly,everymonth,thekeyinformation,bothfinancialandnon-financial,thatyouneedtorunyourbusinesseffectivelyandefficiently. Thisisn’twhatyouraccountantgivesyouintheirformatorwhatyou’veinherited.It’swhatyouandyourteamorBoardhavedeterminedthatyouneed.You’vereallygotto"own"itotherwiseyourisknotextractingthemostbenefitfromthepotentiallypreciousinformation. Someissuesareobviousandeasytoidentify,suchasjustnomanagementaccountsorthey’refartoolateorofpoorquality.Whattendsnottobeobviousorevenadmittedarepersonaluser‘difficulties’aroundthetable.Thesebroadlyfallintotwocategories.Thefirstisasimplelackofunderstandingofwhatthenumbersmeanandwhatactionconsequentlyshouldbetaken.Thesecondisinacceptingasubstandardformofreporting,perhapsassuming,probablywrongly,thatitcan’tbechangedorthatsuchwouldbetooexpensive.　 Asuboptimalreportingscenarioisashamebutit’sworsethanthat.It’spotentiallycostingseriousmoneyifmanagementdecisionsarebeingdelayedorpreventedbecauseofthelackofqualityMI.Thefunnythingis,thatinourexperience,mostissuesmentionedareprettystraightforwardtodealwithandarewellworthconsidering. Beware-it’snotagoodideatocarryonwiththesamereportingthatyouinheritwithoutreviewingastowhetherornotit’sfitforyourpurpose.Circumstancesmayhavechangedovertimesothatthereportingneedsadjustingbutthiswon’thappenautomatically.　 Ofcoursethisappliesequallytocharitieswherearguablyit’sevenmoreimportanttohavetheMIandunderstanditasTrusteesarepersonallyresponsible.　 OneofthemostprofitabledevelopmentsinareportingsystemistosplitthesingleProfit&Lossreportbetweendifferentpartsofthebusiness,suchasinBookCheckwherewereportseparatelyoneachofBookkeepingwithManagementAccountsandPayroll.They’redifferentbusinesses,withdifferentmargins.Ifthey’remixedtogetherinone,whilstyoucanstilltellthesalesperformance,youdon’tknowwhichisimprovingitsmarginprofitabilityandwhichisnot–there’snowayoftelling. Perhapsthemostdifficultobstaclestoovercomeisforausertoadmitalackofunderstanding.Toacertainextentthat’sdowntotheserviceproviderchecking,asking,hintingorotherwise.Butit’smostlydowntotheindividualgettingreal. Whousesmanagementaccounts? owners/managers investors banks/lenders factoring/invoicediscounting accountants taxplanners Whyproducethem? Runningabusinesswithoutmanagementaccountsislikedrivingacarinthedark.Youknowwhatspeedyouaredoingfromthewindnoiseandvibrations(yoursales)butyoudon’tknowyourdirection(yourprofitability)andyoucan’tseeobstaclesyouareabouttohit(shortageofcash&liquidity). Mostbusinessdon’tknowtheirprofitability,marginsandtrends.Sowhybother?It’safundamentalprinciplethatifyoucanmeasureityoucanimproveitsoassumingyouwanttoincreaseyournetprofitit’srathera‘nobrainer’. Thereareseveralkeyobjectivesinfinancialreporting: Tomeasurepastperformanceasabasisforimproving Toavoidcashflowproblemsandmanageliquidity Tohavefuturevisibility Todeterminewheretofocusattentioninordertoimproveprofitability TheinformationprovidedbyManagementAccountsisdesignedtoinformhoweachpartofthebusinesshasbeenperforming,andtherebyguidedecisionmakingtobenefitthefutureperformanceofthebusiness. Somespecificreasonsforproducingmanagementaccounts: Measurethegrossmarginpercentage.Broadlythisisthegrossprofit(saleslessdirectcosts)youmakefromyourserviceorproduct,dividedbythesalesvalue,excludingVAT.Armedwiththisinformationyoucancheckyourperformanceagainstothersinyourbusinesssector.Youcanchecktrendsovertimeandyouaretheninapositiontotakeactiontoimproveyourprofits Itimposesadisciplineofcontrollingthefinancesandmayuncoverbadpractices Itwilltendtoreduceyearendaccountants’costsastheinformationwillbebetterandmorelikelytobereconciled Establishyourbreak-evenpointforprofitablesales Checkandcontroloverheadcosts Controlstocklevels–measuretrends,benchmarkit Controldebtors–measuretrends,benchmarkit Managetheworkingcapitalcycle–stock,debtorsandcreditors Changingaffectingthebankposition Usekeyperformanceindicators(KPIs)toseeataglancewhat’shappening Grossmarginpercentage Mostbusinessesdonotknowthisinformationbutitisreallyimportanttomeasurethisaccurately.Supposeyousell£500,000perannum.Ifyoucanincreaseyourmarginby1%yournetprofitwillincreaseby£5,000.Whatissobeneficialistocheckthemarginasfollows: Checkthetrendovertime–establishwhyithaschanged,eitherupordown.Examineeverypartofthemargini.e.salesanddirectcoststoseewhatcanbeimprovedsuchascuttingoutlossmakingsales,increasingsalestoprofitablecustomersetc.Examineitlikeahawkassoonasit’sknowneachmonth–whyhasitchanged?Benchmarkagainstcomparablebusinessesinyoursector–howwellareyoudoing,shouldyoubeimproving? Marketingforprofitusingmanagementaccounts Supposeyousell£2,000ofproductinamonthandyourdirectcostis£1,200,yourgrossprofitis£800whichisagrossmarginof40%.Toimproveprofitsthetendencyistofocusonsales.A10%increaseinsaleswillgenerate£80moreprofitbuta10%increaseinmarginto44%wouldincreaseprofitsbythesameamountwithoutthesignificanteffortrequiredtoincreasesales. Toputitanotherwayifthemargindroppedto36%youwouldhavetoincreasesalesby10%tostandstill.Butifyoudon’thavemanagementaccountsyoucannotknowwhatishappeningtoyourmargins.Thuswithoutmanagementaccountsit’sdifficulttooptimiseprofitability. Onceyouknowyourgrossmarginasapercentageofsalesyouhavetheknowledgetoexperimentwithpricechangesaspartofyourmarketingmix,withoutthedangerofgoingbustbecauseyourmarginiswrong.Ifsalesarenottoogood,manybusinessownersthinkthebestthingtodoistradetheirwayoutoftheproblembyreducingpricestowinmoresales.Whereasinmanycasesthisistheworstthingtodo,asitoftenhasanegativeeffectonprofits.Managementaccountsmayshowthatincreasingpricescouldbethebetteroption. Takethefollowingscenario.Foraproductsellingfor£10withagrossmarginof25%,reducingyourpriceby10%to£9meansyouhavetosell66%moretomakethesameprofitasbefore,(£250),yetincreasingyourpriceby£1to£11meansyoucanaffordtosellalmost30%lessunitsandstillmakeasmuchprofit.Theroutetoincreasedprofitscanoftenbethroughpriceincreases,ratherthanpricereductions. SaleUnits SaleEach CostEach GrossProfitEach GrossProfitTotal 100 £10 £7.50 £2.50 £250 166 £9 £7.50 £1.50 £249 70 £11 £7.50 £3.50 £245 Whichismorelikelytohappen,priceupby£1perunitandsalesfallby30unitsorlessorpricedownby£1perunitandsalesupby66unitsormore? Howaremanagementaccountsproduced? Thefirstrequirementisasoundaccountingsystem.Thisneednotbecomplicated,butitmustbesound.ThismightbeSage,XeroorevenjustExcel,butwhateveritissomeonewhoknowswhattheyaretalkingaboutshouldcheckitssoundness.It’samatterofopinionastowhoiscapable,butaqualifiedaccountantwouldbeagoodstartingpoint.Thisneednotcostalot,sometimesit’sfreebutit’sanessentialone-offcheckbecauseifyouraccountsareunsound,theyyouwillproduceunsoundormisleadingreportsandhenceyouwilllikelymakewrongdecisions. Armedwithsoundinformationit’sthenquitestraightforwardtodesignreportstoyourrequirements,evenforasmallbusinesswithmodestaccountingskills.Youmightneedhelpbutitwillprobablybeworththeinvestment. BookCheckcandesignyourmanagementaccountstosuityourexactneedswithourBAR-BookCheckAdvancedReportingsystem.Checkitouthere  Whatskillsarerequiredtoproducemanagementaccounts? Thisisabittrickytoanswerbecausetoacertainextentitdependsonwhattheyarebeingusedforbutgenerallythebook-keeper,withpossibleassistanceatamonthend,needstobecapableofcoveringthefollowing: Abankreconciliation–absolutelyessential,youmustprovethatyouhavethisandnotassumeanything.Ifindoubtcheckwithyouraccountant,it’saquickjobtodoso. ReconciliationofVAT–usuallynotdone ReconciliationofPAYE&wages–usuallynotdone Sounduptodatetidysalesledgeri.e.debtorinformation Sounduptodatetidypurchaseledgeri.e.creditorinformation Stockandworkinprogressifyourbusinesshaschangingvalues Accruals&prepayments–usuallynotdone Depreciation Butbeware–onlytopbook-keepersachievealloftheabove,sotakeveryspecialcarewhenrecruitingasyouwillbeputtingallyourtrustinthisoneperson.Thoroughlycheckreferencesandfindsomeonetochecktheirskills,perhapsyouraccountant.Whatyouarelookingforisareconciler,notjustaninputclerk. BookChecksupplieslotsofcurrentclientreferenceswithfullcontactdetailsforprospectiveclients.Youcanalsoseeourtestimonialshere  Whatdomanagementaccountslooklike? TheycanbeproducedfromyouraccountingsystemsuchasSage,XeroorinExcel.Checkthatthechartofaccountsissoundi.e.notmissinganyaccountsorduplicatingany. Excelismoreflexiblebutit’simportanttoreconciletoyouraccountingsystem(unlessthatisjustExcel)otherwiseyoumayshowwronginformationwhichratherdefeatstheobjective.IfyouraccountingsystemisjustExcelandyouhave acashbooksummary,thenensurethatthisreconcilestoyourbankaccount. Youshouldalsorealisethatthiswouldbepurelyacashpicture,whichisnotthesameasaprofit&loss.Profit&lossisameasureofperformanceoveranaccountingperiod,whereascashpositionisasnapshotpictureofcashbalancesataspecificpointintime.Ideallyyourreportswillincludebudgetssoyoucancompareagainstyourtarget.Whatdoyouexpectforsales,grossmargin%,overheadsetc?Wherethebusinesscanbesplitintosectors/departments/locations/projectsthenseparatethereportingaccordingly. Theresultsareoftensurprisingandwillleadtoeffectiveprofitablemanagementaction.It’seasyalsotocompareagainstpreviousyearsorevenanumberofyears.Whatdoesthetrendlooklike?Youcangobelowthesurfaceandcheckyourtopperformingcustomersandproducts–thenaimtoboostorreplicate. Whattodowithmanagementaccountsoutsidethebusiness? Impressyourlenderwithsomefacts,it’swhattheyarenormallydesperatelymissing.It’sbesttoreportregularly,goodorbad.Infactaccompanyingbadinformationwithsomecommentaryandplantofixwillbemuchappreciated,itwillcertainlymarkyououtfromotherbusinesseswhosimplydon’treport.YouaremuchmorelikelytowinafacilityandatabetterratewithqualityMI(ManagementInformation)asthebankssay. Reporttoyourinvestors–thiswillbereallyappreciatedifnotessential Issuetoyourfactoringorinvoicediscountingprovider AllowyouraccountantsorparttimeFinancialDirectortoadviseonperformance Allowyouraccountantstoplanyourtaxaffairs Useasabasisforobtainingmoreandlowercostfacilities Managementaccountsofferbusinessownerstheopportunitytogaincriticalinsightsintothefinancialsideofbusinessperformance.Theycangivea‘dashboard’justlikeapilotneedstoguideanaeroplane.Ontheonehand,managementaccountscangiveearlywarningsignsofnegativetrends,whileontheotherhand,theinsightsgainedleadtobetterbusinessdecisions,whichwillallowyoutooptimiseprofitability. Naturally,higherprofitabilityenablesgreaterinvestmentinthebusinessandhencefacilitatesfuturegrowth.WithoutManagementAccountsthepictureisalotlessrosyandtheprospectsforabusinessnotasgood. ASummary Ifyoumeasure,youcanImprove–enoughsaid. HowcanBookCheckhelpwithManagementAccounts? TofindouthowBookCheckcanhelpyourbusinesswithManagementAccounts,pleasecalluson08008830711oremailprofit@bookcheck.co.uk.Welookforwardtohelpingyouwithyourbusiness. ContactUs Name* Email* Phone Company Message Sendenquiry