Selling a business will put your numbers under close scrutiny. Buyers want to gain an understanding of business drivers and expectations of future performance. A lack of key information will put you on the back foot and can affect the eventual outcome.
Leaving aside M & A, focused management accounts make sound business sense. Incisive information helps 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
In short your management accounts should be helping you run the business. However, the management accounts I encounter vary greatly in terms of content, presentation, timeliness and to a lesser extent reliability. If you want management accounts that add real value then I believe there are 4Rs that need to be borne in mind:
A while back, I helped a training business that was struggling to understand its margins for its different income streams; the financial controller was using a standard format from the accounting software and the management accounts had no information about margins; the main cost was people and the wages of all staff appeared on one line. The required information was available, but needed to be brought out and presented in a way that reflected how the company did business.
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; (during a business sale the balance sheet will come under close scrutiny).
Information will vary between businesses. Non accounting information can be useful, such as quantities/hours supplied or order information.
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 including headline information in the first page of the profit & loss account will help you focus on the big picture. Yes, detail should still 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 can 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. 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.
There is a huge range of information that can be produced… and in different ways. Resource and willingness to actually use the information will also have a bearing on the way you go. However don’t feel constrained by the way things have been done in the past, think about what is really important to the business and make the accounts work for you.
An external review can provide both a fresh perspective and the bandwidth to make changes; so if you would like help to make your accounts ‘speak to you’ then do get in touch by e-mailing firstname.lastname@example.org or calling 07836 331677.