Management Accounts are ESSENTIAL.
Management Accounts – what are they again?
When I speak to SME owners, many of them have never heard of management accounts, let alone understand how vital they are to business development. In this article I want to explain why they are not just a “nice to have” but rather how they can help an organisation navigate their way to successful (profitable) business growth.
So what are Management Accounts?
Management Accounts are figures, usually produced either monthly or quarterly (ideally monthly) which quantify the financial results of the company’s activities. They are there only as a result of what the business has achieved, and should be designed to enable management to quickly see how they’re doing against their overall plan.
Unlike financial accounts, management accounts can be designed around a company’s information requirements. They are not dictated by protocol. Instead they should be tailored to the organisation’s needs and should remain fluid – they should be changed if they no longer provide the direction the management team needs to fulfil its strategy.
Management Accounts were created as a control mechanism and decision making tool and should be used as such.
In order to do so, however, they must be aligned with the strategic plans of the business. For example, if the company plans to grow its sales in the retail sector, then it’s essential that each month it monitors sales by market sector. If it aims to build market share, it must know the size of the market. If the plans are to grow average order value, then that needs to be recorded and monitored.
How can Management Accounts be used to increase profit?
Let me give you an example.
I went to see a business owner yesterday. He has plans to grow his manufacturing business. It’s a very manual process so he has a team of productive staff.
He has a choice to make with regard to the products he sells in order to grow his business. He needed to know which of those products were more profitable. But he didn’t have that information to hand. So I went in there, did some time and motion studies and created a costing & profit profile for each of his main product lines.
In order to make more profit he needed to focus on marketing the most profitable product lines. It follows, then, that going forward he should monitor how much of each product he sells, to make sure that his strategy is working out. This should then be one of the key performance indicators he includes in his management accounts.
When you’re working in manufacturing, you don’t always sell all of your productive capacity. Therefore productive capacity is a key component of profitability. The more throughput you can get for your money, the better. The more you can sell without increasing cost, the more profitable you will be. Also, if you have spare capacity (that you’re paying for anyway) you can afford to reduce selling prices in order to increase volume and the gross profit will drop through to the bottom line.
He didn’t know how much capacity he had. And if he didn’t know that, he didn’t know how much more he could sell without increasing his cost. Or how much he could sell at reduced prices to increase volume and bring in more gross profit to cover his fixed costs.
If he records the number of items he produces each month, and the cost associated with it, he can see just how much his team can produce at that certain cost. The peaks will reveal themselves and he can see when he hits his “manufacturing ceiling”. So his management accounts must include quantities produced to monitor those trends.
Why should I have management accounts?
Business growth is not an exact science. You know yourself that, even when you have a thorough, well researched plan, things can change. The outcomes are not always what you expected. You try something for a while and find it doesn’t work, so you do something else.
If you keep a record of what you do, and how well it worked, then you can make informed decisions about what to do in the future. And have a pretty good idea what the outcome will be.
Management accounts take the guess work out of the decision making process. It still won’t be 100% (because none of us can predict the future) but it will give you a guide against which to make informed plans.
So where should you start?
Management accounts are all about monitoring the success (or failure) of a company’s objectives.
Your business growth strategy will contain some key initiatives you are going to take in order to develop your profit. Those things that will make or break your plans. Simply start recording your progress.
For example, if you plan to create more leads using LinkedIn then you need to record how many you get to see if your strategy is successful. If you want to win more orders from a particular market sector, then include sales by market sector in your management accounts.
It’s not rocket science. And it doesn’t have to be time consuming. It doesn’t even have to be a comprehensive set of management accounts with full blown overhead analysis and profit and loss account. Start by simply recording your key performance indicators and work your way up to a full set of management accounts.
How can I help?
I’ve been producing management accounts for over 20 years, and using them to advise managing directors and business owners for over 15 years. If you want to learn how to use management accounts to drive your business forward then book a FREE 30 minute consultation with me. Just click on the phrase management accounts and put a date in the diary. I’ll call you so there’s absolutely no cost and no catch.