You receive your management accounts each month. You check your turnover, look at your profit and compare a few costs. And, in general, everything looks okay.
But when you need to decide whether to recruit, review your prices or take on another contract, you still don’t feel you have enough information. Surely your management accounts should provide you with more insight?
For example, you might notice that your sales are growing but your cash flow is still tight. Perhaps your team is busier, but your profits haven’t improved. You can see the figures, but you’re left to interpret them yourself.
Your management accounts should help you understand your performance and make decisions. If they’re leaving those questions unanswered, there may be gaps worth addressing. Here are some signs to look for.
Are your management accounts arriving too late?
If your accounts arrive too late to inform your decisions, you might already have committed to spending before reviewing the figures. This could lead to you spending another month quoting work at prices that no longer cover your costs, or you might commit to recruitment before discovering that your sales have fallen below expectations.
Agreeing a reporting timetable will help you review your business’s performance while you can still respond. That also means getting any outstanding invoices, payroll information and other records into your accounting system on time.
Can you see what’s driving your profit?
An increase in turnover won’t necessarily tell you whether your business is becoming more profitable. Higher supplier costs, discounts or additional labour costs could absorb the benefit of those extra sales.
Your management accounts should help you follow any changes in your gross profit and overheads. Where needed, you should also be able to explore performance by product, service, customer or project.
For example, a customer who places large orders might also need frequent deliveries and hours of support. Without considering those costs, you could overestimate how profitable that work is.
Tracking the time your team spends on each customer’s work can help you understand those costs. You can then assess whether your prices still reflect the work involved and where any changes might improve your margins.
Do your accounts explain your cash position?
When your accounts show a profit but you’re wondering how you’ll cover your next supplier payment, you need to understand where the money has gone. It could be tied up in unpaid customer invoices or stock, or you may have used it to buy equipment or repay borrowing.
Your profit and loss account tells only part of that story. Reviewing it alongside your balance sheet and cash position can help you understand those movements. Details of overdue customer invoices and upcoming payments then help you identify what needs your attention.
Can you compare business performance with your budget?
Your sales and profit figures mean more when you can compare them with what you planned to achieve. Are you meeting your targets and are your costs staying within budget?
Your management accounts should help you answer those questions by comparing your results with your budget and relevant trading periods. If your business is seasonal, comparing your sales with the same month last year can help you judge whether a fall reflects your usual trading pattern or needs investigating.
If your sales are below budget, for example, you’ll need to know whether your orders have fallen or work has simply been delayed. Understanding the reason can help you decide what needs to change.
Can you trust the accuracy of your management accounts?
If your bookkeeping isn’t up to date, transactions have been recorded incorrectly or balances haven’t been reconciled, your management accounts could give you a misleading picture of your business’s performance. Reports drawn from your accounting software can look complete even when key information is missing or adjustments are still needed.
Before you rely on those figures, you need to know what’s been checked and whether anything remains unresolved. Your accounts should make any estimates or gaps clear, so you understand how much confidence you can place in the results.
Do your accounts look ahead as well as back?
Your accounts tell you what happened last month. That’s useful, but you make decisions about next month, next quarter and next year.
Proper management accounts and financial forecasting close that gap. They take your latest figures and project them forward, so you can see where your profit and cash are heading and when they might come under pressure. A rolling forecast, updated each month, will show you your projected year-end position and let you test your decisions before you commit to them.
Finally, do you act on them?
Your management accounts are only worth something if you act on them. Plenty of business owners receive them each month, glance at the profit figure and file them. That vital business insight sits in the pack, and nothing happens.
A regular review with your accountant will walk through any variances against your budget, any cash movements and any KPIs that have slipped. Then, you can agree any actions, each with an owner and a deadline. An accountant who knows your business well can spot the patterns you miss and tell you which numbers deserve the most focus.
How can we help you get more from your management accounts?
If you finish reviewing your management accounts and still can’t explain how your business is performing, help is at hand. At Sysum Howard Duggan, our management accounting service brings that interpretation into your reporting. We can help you understand any changes in business performance, identify any concerns and answer the questions your figures raise, so you can use your accounts to manage your business.
So, if your management accounts leave you with unanswered questions, get in touch with our team to discuss what you’d like to understand.