Your accounts might show that your costs have risen or a service is making a loss. But what should you do about it? Before cutting spending or dropping the service, you need to understand what’s behind those results.
Management accounting helps you investigate your figures, compare your options and assess what each choice could mean for your business.
At Sysum Howard Duggan, we can help you work through those questions. Here’s how that process supports the decisions you make when running your business.
Decide whether to keep, change or stop a service
Before you stop offering a service, you’ll need to know whether doing so would improve your business’s overall profit.
Management accounting helps you identify the income you’d lose, the costs you’d avoid and the costs you’d still have to pay.
For instance, an allocation of office rent might make a service appear unprofitable, but you might still have to pay the same rent if you stopped offering it. You’d also lose the income that helped cover that cost, which could leave your business worse off.
That gives you a basis for deciding whether to stop the service, raise its price or change how you deliver it.
Investigate costs before making cuts
Deciding how to deliver your services may also raise questions about your spending. Before making cuts, you need to understand why a cost has increased.
For example, your materials bill might be above budget because you’ve produced more units. Or you could be paying higher prices, using more materials per unit or losing stock through waste.
If you’re producing more, a higher materials bill is probably expected. If prices have risen, you might speak to suppliers. If you’re wasting materials, you’ll need to investigate why. Cutting spending without understanding the cause could leave you short of the materials you need to fulfil orders.
Use job costs to improve your quotes
Once you understand what’s driving your costs, you can use what you’ve learned from completed jobs to improve your next quote.
Management accounting allows you to compare the costs allowed for in your quote with the actual cost of completing each job. You can review staff hours, materials, subcontractor charges and additional work that wasn’t included in the original price.
If similar projects repeatedly take more hours than you allow, you can investigate why and decide whether to adjust your next quote or change how you deliver the work. If customer revisions account for the difference, you might define what’s included and agree how you’ll charge for changes.
You’ll also need to consider when you’ll receive payment. Once you’ve estimated the costs, a cash flow forecast helps you assess whether you can cover them before the customer pays.
Prioritise work when your team is fully booked
Being able to fund a job doesn’t always mean you have the capacity to deliver it. If your team is fully booked, accepting one contract may mean turning another down.
Management accounting can help you compare how much different types of work contribute towards your overheads and profit for each hour your team spends delivering them.
For this comparison, deduct the costs that change when you take on the work. Allocating a share of overheads you’d pay anyway could distort the comparison.
A contract with a larger fee might take twice as long as a smaller job without providing twice the return. That could affect which work you prioritise or how you price jobs that use more of your team’s time.
You’ll need to consider your customer relationships and existing commitments, too. These figures give you a financial basis for those decisions and your business planning.
Check whether your changes are paying off
After making a change, you need to know whether it’s having the effect you intended.
If you’ve increased prices, are you making more profit, or have sales fallen enough to cancel out the gains? If you’ve bought equipment to speed up production, are you completing more orders, and how much does each one cost to produce?
Your management accounts help you track those results. Looking at delivery times, customer feedback and work that needs redoing can help explain them. A machine might increase output, for example, but any faults could mean you’re spending more on replacement materials.
Comparing the results with your expectations can help you decide what to keep, what to change and what to investigate. You can also use what you’ve learned when planning your next investment or price review.
Put your management accounts to work
The value of management accounting comes from understanding what your figures mean and deciding how to respond.
At Sysum Howard Duggan, we’ll start with the questions you need to answer, whether that’s why margins are falling or which services generate the most profit. We’ll help you identify the information needed and tailor your reports around it.
By comparing your results with budgets and previous periods, we can highlight any changes and help you understand what’s behind them. You can then decide what action to take and use future reports to check the results.
Where you need financial leadership, our fractional FD support can help you use those findings to plan recruitment, investment and growth.
If you’d like support using your management accounts to guide your decisions, get in touch today. We’ll talk through your priorities and how we can help.