Accounting & Bookkeeping Cash Flow & Forecasting Finance General

What are the main ingredients to include in monthly Management Accounts?

Ingredients in Management AccountsRegularly reviewing your Management Accounts is one of the most helpful ways for you to monitor the performance of your business.
It is essential to monitor the right metrics so you know how the business is doing and can make adjustments as appropriate.
There is no legal requirement for a company to produce Management Accounts on a regular basis but waiting for the Annual Accounts is too late if you want to make the ongoing adjustments necessary to improve productivity.
The frequency, quality and type of information they contain is therefore crucial.
Ideally, Management Accounts should be produced monthly and should contain an up to date Balance Sheet, a detailed Profit and Loss statement, a Trial Balance and summaries of Aged Debtors and Creditors.
The Balance Sheet shows the company’s assets and liabilities and how much money the business owes to suppliers at any one point in time as well as how much money it has in the bank. Central to this is the cashflow, which needs to be well-managed.
The Profit and Loss (P&L) statement ought to report both monthly and year to date figures. Overall it is a measure of the business’ health although some companies make profits but poor cash flow by not getting paid. The P&L can also be used for much more by reporting sales by market or product sector and their associated cost of those sales and direct costs to monitor margins. It might also group overheads into logical cost areas. so you can monitor the fixed cost elements of your business.
Maintaining a spreadsheet of the monthly P&L is also useful to show trends and monitor the success of marketing initiatives. This spreadsheet in particular is a key tool for establishing a culture of continuous productivity improvement.
The Trial Balance is a useful reference for looking behind the numbers. Essentially all entries in the accounts are allocated to a Nominal Code where the Trial Balance is a list of all the Nominal Codes with a value of all entries against that code. The Balance Sheet and P&L consolidated the values for a number of codes to produce a meaningful report. As an example there may be several different sales codes where the P&L may report only one. I use this example as I have suggested earlier that the P&L report several sales codes since it is easier to monitor the P&L than the Trial Balance.
Another aspect of the Trial Balance is to monitor errors in the accounts since it relies on the double-entry accounting system. If the total debits equal the total credits, the Trial Balance is considered to be balanced.
The Aged Debtors and Aged Creditors are also useful. While I suggest a summary schedule is used to avoid having too many pages of information, the detail reports by customer/ supplier show the individual sales and purchase invoices so you can monitor which ones are outstanding.
The Management Accounts can be a great source of management information but need engagement with your accountant or accounts controller to set up the reports in the first place. If you have the right information you can make the right decisions, it’s all about having the right ingredients.

Business Development & Marketing Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

Businesses should beware of knee-jerk reactions

knee jerk reactionsBeing agile and responsive may be good business practice, but there is a fine line between this and knee-jerk reactions.
While the former can be described as considered responses to relevant data, the latter are more likely to be immediate, unthinking and emotional.
While some instant reactions may turn out to have been productive, overall the chances of such a decision working out well are not high and probably not the best way to run a business.

Knowing when prompt action is needed and when it is better to hold your nerve

Monitoring data on business performance, invoice payments, sales, responses to marketing initiatives and a wealth of other relevant information is, or should be, and integral part of running a business.
However, understanding what that data implies can be much trickier.
The key is to be aware of both the time frames and implications in order to draw reliable conclusions.
A good example is statistical information such as the monthly trends like the PMI/Markit index that reports on activity in the service, manufacturing and other sectors of the economy, or the daily ebbs and flows of the stock market.
Not only can statistics be selective, highly dependent on sample size and on the information selected for measurement, it can take several months before a trend becomes clear.
While some investors trade stocks on almost a minute by minute basis depending on the rise and fall of share prices for a company or commodity, this sort of short term approach to events is unlikely to work well for a business. Indeed, it is not the strategy pursued by investment guru Warren Buffet.
Another difficulty with the knee-jerk reaction is that it may rely on emotional factors, such as confidence or lack of it, panic, self-interest or a desire to win at all costs. This is when investors can lose by following the herd instead of holding their nerve and following the data.

The tools to use to avoid knee-jerk reactions

Any business that has done a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) to inform its business plan and goals will have some protection against unconsidered decisions. Although remember ‘SWOT SO WHAT’, the key to a SWOT analysis is use it as the basis for making decisions.
A second tool is the contingency plan that outlines possible actions and reactions for a variety of scenarios.
Using these in conjunction with analytical data gathered over a sufficient period, relevant to the nature of the business, will improve the chances of making decisions about change that will have the optimum outcome for the business.

Banks, Lenders & Investors Cash Flow & Forecasting Finance General Rescue, Restructuring & Recovery Turnaround

Directors and shareholders should focus on corporate systems not just the numbers

monitoring financial reportingIt will be some time before the former directors of retail giant Tesco appear in court following investigations that arose out of an over-statement of profits revealed by Tesco in 2014.
So far the Serious Fraud Office (SFO) has charged three of them with fraud and false accounting and the UK’s Financial Reporting Council (FRC) is still investigating Tesco’s former auditors Price Waterhouse Cooper (PwC).

Monitoring businesses systems

In our view it is a mistake for shareholders and directors to simply focus on the numbers as this case highlights. Our view is formed by our observation of corporate insolvency that are generally caused by people and systems failures, rather than the financial symptoms that everyone focuses on.
Accordingly, it is more important is to look at the systems and the corporate culture behind the numbers.
Tesco has been well known for aggressively managing its figures to present its business in the best and most profitable light. But it is not the only example of everyone looking in the wrong direction. Another was the collapse of Barings Bank and loss of £827 million in 1995.
While it is obvious that shareholders may primarily invest in a company in order to earn profits, it is surely in their interests to monitor the managers and understand the systems behind such reporting in order to have confidence in a company’s potential for longevity and continued success.
Surely, manipulating the numbers, as was the case of Nick Leeson at Barings and appears to have been the case at Tesco, might have pleased shareholders in the short term but the question is whether such a culture is sustainable.
Independent monitoring on behalf of shareholders and advice for directors, such as the thorough examination that is used by rescue and turnaround advisers when a company is in difficulty, will reveal whether a company’s accounting and reporting systems are conservative or aggressive when reporting its profits.
Short term thinking is not necessarily in the best interests of investors/shareholders who might consider independent monitoring and advice. Such independent advice is normally only brought in when a company is in difficulty or insolvent but it may be useful to have such a monitoring system alongside the auditors.