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Saturday, March 04, 2017
Flying Blind - Do Your Management Accounts Include This?
Nowadays passengers aren’t allowed into an aircraft cockpit. But all of us can picture it: A tight space crammed full of hundreds of mysterious controls and displays, showing navigation information, engine information, speed, altitude and so on.
No pilot would fly without this information, because it enables them to make good, safe decisions. Without it, they are ‘flying blind’, and risk crashing.
That’s how I think of businesses that don’t produce management accounts every month, too.
To make the right decisions you too need hard data, telling you what’s really going on in your business. If you try to chart your course without the financial facts, you too are ‘flying blind’. You may not crash, but you’re unlikely to get where you want to, either.
As I explained last week, monthly management accounts are an internal document that do what it says on the tin: They help you manage your business better.
So what should be in them?
Every management account pack includes the basic information you’d expect to see:
Turnover, gross margins, operating profit, overheads, cash in bank, debtors and so on. But that’s not where it gets interesting…….
Every business has key facts they need to monitor to know how well their business is doing. These will be unique to you.
For example, one of our clients operates on very tight margins. If the cost of their raw materials moves even by 1%, their profit can easily be wiped out. They need to keep an extremely close eye on this, so that they can adjust accordingly.
Another client is very dependent on two large customers. One of their key objectives for this year is to increase their client base, so they are less exposed if one of their big clients decides to leave or to cut their spending. Their management accounts track what percentage of their business these two clients are worth.
What figures are crucial for your business?
Once you’ve established your KPIs, ‘dive deep’.
For example, a clients providing training courses was having issues with profitability. Initially we tracked how profitable each category of course was each month. With time, we realised that this wasn’t detailed enough. They needed to see the profitability of every single course in order to make more informed decisions.
What kind of detail would be useful for your KPIs?
Show progress over time.
Your figures are not meaningful until you can see them in context.
£200K in sales in January can be good if that’s up from £100K last January, or bad if it’s down from £300K.
Benchmark against previous results, showing progress over time. Compare, also, to where you thought you’d be – those figures are in your budget. Use charts or graphs if necessary to make the material palatable….
Your management accounts are not there to help you understand the past. They’re there to help you manage the future (although those are intertwined…).
Set out on paper what you expect to happen over the next month. What do you already know about your cash flow? What do you already know about your KPIs?
Over time, you will learn what information is useful to you, and adjust your management accounts accordingly.
When we work with a new client we start with a monthly management account template, which we tweak as we learn more about the client’s business and their challenges. Over time the accounts become ever more bespoke – and progressively more valuable.
This is the kind of information mature businesses take for granted.
If you have big ambitions for your business, but lack the financial information you need to grow strategically get in touch. With proper management accounts each month, every decision you take will be more effective.
We’d love to help you fly…