What your management accounts should tell you

Management accounts should help you decide what to do next. A pack of figures is useful only when it explains how the business is performing, what has changed and which questions need attention. The right discussion starts with your priorities, rather than the length of the report.

Start with reliable and timely information

Agree how often you need the accounts and when they should be ready. Monthly reporting may suit a business with changing costs or activity, while a different rhythm may work for a smaller operation. The key is receiving information while it can still inform a decision.

Reliable reports depend on the underlying records. Missing invoices, unreconciled bank transactions and inconsistent cost coding can make a change in performance difficult to interpret. Ask which estimates are included and which balances still need clarification.

One large annual payment can also distort a single month’s result. Your accountant can explain how costs relating to several periods are treated, so that comparisons remain meaningful.

Understand what is happening to your margins

Turnover alone does not explain the quality of growth. Look at what remains after the direct costs of delivering your goods or services, and how overheads affect the final result. Compare the current period with the budget and a comparable earlier period.

Where the records support it, examine performance by product, service or department. A busy team may be delivering work with a lower margin than expected, while a smaller line of business may contribute more strongly. Keep the allocation of shared costs consistent so that comparisons are fair.

When a margin changes, investigate the cause. Pricing, discounts, purchasing costs, rework and the mix of jobs can each tell a different story. The figures should point to a conversation with the people who know the work.

Read the balance sheet alongside the profit

A profitable month does not tell you whether customers have paid or whether a substantial bill is approaching. Review debtors, creditors, stock, borrowing and cash alongside the profit and loss account.

MBall’s management accounts and business support can help bring these figures together. Reading them as a whole gives a more useful picture than treating the profit total as the only measure of progress.

• Are overdue customer balances growing?
• Is stock building up faster than sales?
• Which supplier and tax payments are approaching?
• Have borrowing or director balances changed unexpectedly?
• Does the cash forecast reflect the latest position?

Investigate unusual movements before assuming they are errors or signs of a problem. Some will reflect normal timing; others may reveal an operational issue worth addressing.

Finish each review with a decision

Choose a few measures that reflect how your business works. These might include gross margin, overdue debt, job profitability or recurring revenue. Define each measure clearly and use the same calculation from one review to the next.

Record the actions agreed, who will carry them out and when you will review the result. A reporting meeting that identifies a pricing issue should lead to a pricing decision, further investigation or a clear reason to leave things as they are.

Ask your accountant to explain any figure you cannot connect to the business. Management accounts are most valuable when you understand them well enough to challenge the assumptions and use them confidently.

To discuss a reporting approach that supports your decisions, send MBall an enquiry using the form alongside this article.