My work includes supporting SMEs through due diligence to eventual sale. Buyers want to gain an understanding of business drivers and expectations of future performance. A Sale leads to a heightened focus on the numbers and the quality of the management accounts can create a good or bad impression.
While great management accounts can help a business sale, they are good sense for any business. Incisive information should help you improve performance and gives a good basis for planning ahead. Quality information also should make it easier to gain access to funding.
The 4Rs of management accounts
The accounts I encounter vary greatly in terms of content, presentation, timeliness and to a lesser extent reliability. So what are ‘great management accounts’? I believe there are 4Rs…..
Standard formats from your (or your accountant’s) software may not be good enough. The accounts should reflect the way the business operates and its drivers.
I often see accounts with single figures for sales and gross profit, when information about sales and margin from different income streams would be really useful. It may also be helpful to analyse overheads by department.
I’ve seen management accounts that just comprise a profit and loss account. A balance sheet, together with information on stock, debtors and creditors days should help you monitor the business and maximise cash flow.
Information will vary between businesses. Non accounting information can be useful, such as quantities/hours supplied or order book information.
I could go on….in short management accounts should help you manage your business – the clue is in the name!
Does the idea of extra information seem mindboggling? Information should be easy to digest so that you can home in on the key issues:
- Only include headline information in the first page of the profit & loss account. How much was spent on (say) stationery won’t help you understand the big picture. Yes, the detail should be available, but in supporting sheets.
- Visual presentation of information can be helpful, such as graphs when you want to see trends.
- Rounding numbers say to the nearest £000 will also make information more readable.
Unreliable information can lead to bad decisions. My article A true story – where did the money go? gives a real life example.
Are you really that interested in accounts that are two or three months old? Probably not.
On the other hand I’ve seen businesses that produce their accounts within a week of the month end, allowing for a not quite real time review. While this may be ambitious for many small businesses, I’d say that you should aim to have accounts within 3 weeks. Mechanisms to allow for gaps in information, such as invoices not yet received, should ensure that the accounts are timely but still reliable.
Businesses should not feel constrained and should make their accounts work for them. There is a huge range of information that can be produced… and in different ways. Resource and willingness to use the information will have a bearing, as will the ease of use.
If you would like help in making your accounts ‘speak to you’ then do get in touch.