One of the things I love most about my job is providing the first set of management accounts (we refer to them as financial insights) to a business owner where they have either never received any before or what they have received in the past was crap.
The reaction and feedback are always the same - how did we cope without these before?
I had the pleasure of seeing this first-hand with different clients twice last week. Below are genuinely some of the words I plucked from their responses.
“I really needed this is my life”
“It's actually a bit life-changing”
“It’s really but some fire in my belly”
“For the first time, the numbers actually make sense”
This isn’t a case of me blowing my own trumpet*, but it is an excellent example of what most small business owners are missing out on
*Wife check:
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Apparently, this is me blowing my own trumpet, and my ego is out of control
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Playing the Trumpet is still not cool - I strongly disagree, and yes, I can actually play the trumpet!
What even are “Management Accounts”?
One of the biggest issues with getting owners to see the value in management accounts is a fundamental lack of understanding of what they are.
The term Management Accounts has too many correlations in their mind to the end-of-year statutory accounts - no wonder they don’t want more of that!
This is one of the reasons I refer to them as financial insights instead. This gives a better indication of what they include.
Management Accounts are financial reports prepared regularly (monthly or quarterly usually) to facilitate informed decision-making.
The internal focus is key. Whilst these reports (or variations of them) can sometimes be shared outside of management (investors, wider team members, lenders etc.), they are there to help the management.
The format and content can vary hugely from a basic P+L & Balance Sheet to a huge array of graphs and written commentary - We will cover this below in more detail.
As management accounts are for internal use only, rather than external stakeholders, we have a lot more freedom regarding how they are prepared. We are not bound by the same accounting rules, standards and policies that external accounts are prepared under.
This isn’t to say you should go wildly off-piste and start making up your own standards, but it does give you the freedom to concentrate on what empowers your management to make the best decisions without the shackles.
Why are Small Business Owners Missing Out?
The lack of understanding above is a key reason. You can’t value what you don’t understand. This is a major contributor to the under-investment in finance functions for small businesses.
Businesses should be investing 2%-4% of turnover in the finance function.
If you are underinvesting in your finance function, you will always prioritise compliance (Statutory accounts, VAT returns etc.) over the value-added reporting areas.
There are two broader trends though that are bringing about change. Traditionally month-end closings (covered below) and management reporting were just for big companies. It took a massive amount of effort and resources to put together using large in-house teams. It just was not feasible for small business owners to replicate this.
The vast leaps forward in accounting tech have empowered much smaller teams to pull data from various sources much quicker and have significantly reduced the resources needed to pull this off.
The second trend has been the change in how the accounting industry works with ambitious small businesses. The rise of virtual outsourced finance teams and access to CFOs on a fractional basis means that any sized business can and should now consider management reporting a must rather than a nice to have.
"In the business world, the rearview mirror is always clearer than the windshield." – Warren Buffett
The Alternatives
You wouldn’t drive your car wearing a blindfold. Running your business without decent management reporting is the same thing - a bloody terrible idea that will end in certain death (Business Failure - the owner may or may not survive).
Over the years, I have seen owners come up with all sorts of justifications as to why they don’t need full reporting, but I can group them into a combination of the following:
Cash Accounting
Looking at your bank balance and making decisions based on how much cash you currently have on hand with no other context is not a great idea.
Cash accounting is not accounting. It might work if you have a very simple business model and are very small (sub £100k) but for everyone else, no.
Cash is not profit.
Year End accounts
Making decisions based on the annual set of accountants your “once a year” accountant has prepared is mind-blowing. For starters, some of the data behind these accounts will be up to 1 year and 9 months old by the time they are filed…
Secondly, think about who these accounts are prepared for. They are produced in a format that allows HMRC to see how much tax you owe (technically, that’s the CT return, but the point remains). They are not in a format that allows any informed decision-making.
P+L from Xero
Out of the three, this is the least worst choice, but it still has massive issues. There will be no adjustments made before you look at these reports. The reports won’t be tailored to you, and there is no commentary to help you understand what is happening.
There are no alternatives. None of the above is going to suffice.
The Risks of Operating Without Effective Management Reporting
It always amazes me, but I regularly come across large businesses (7 figures+) that don’t have this in place. Some of these are even making a profit. Regardless, I can’t help but think, “imagine if they did have it in place!”.
This is what happens without reporting:
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Poor decision-making
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Cash flow challenges
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Missed growth opportunities
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Inability to adapt to market changes
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Loss of financial control
Understanding your numbers is a competitive advantage for small business owners.
What do Great Management Reports Look Like?
There is no one-size-fits-all all answer. They need to be tailored to the business and the management team.
Lots of visuals, graphs & charts. Single important numbers are highlighted, and the more detailed full breakdown is for those who like lots of data. It’s important to keep in mind how people process information and mix up the presentation.
I am a big believer in the visual appearance encouraging engagement.
Alongside the expected reports like P+L, Balance sheet and Cashflow, you will also include the KPIs relevant to the business - this is a huge topic I will cover outside of this post.
Actuals vs Budgets/Forecast and variance analysis also form a key part of the reports.
The Key Ingredients
Crafting a set of Management Accounts is like baking a great cake. You have to have the right ingredients.
Accurate Data
First things first, make sure your bookkeeping and financial records are tight. Use an expert, don’t DIY! Equally as bad as having no Management Reporting is making decisions based on crap data.
Bespoke Chart of Accounts (COA)
Your Chart of Accounts is the list of categories in your bookkeeping system to which you book sales & expenses (at its most simplistic). All bookkeeping systems come with a standard COA. This needs to be tailored and bespoke to your business based on what reporting you ultimately want to see.
For example, most systems will default to one “sales” line. Being unable to break down sales in your reporting to anything more meaningful will cause all sorts of problems.
Period End Close with adjustments
Create a period-end close process and make it robust. Set a deadline to get all information & expenses into your bookkeeping system.
Next, someone needs to make adjustments (journals) to ensure the data you are looking at is relevant for that period. Let me explain.
You have won a large new project, £100k. It will take 4 months to deliver. You have invoices for the work upfront (well done!). Without adjustments, the £100k sales will sit in this month’s reports. This £100k should be spread over the period you deliver the work, i.e. £25k each month.
These adjustments are necessary to match expenses and sales to the same period. Showing 4 months of sales in one month and then showing the costs in months 2-4 will give you artificially lumpy reports that tell you nothing.
Speed
The quicker, the better. The fresher the data is, the quicker management can make decisions and take action.
Actionable Commentary
Most Owners and Managers do not have a great understanding of the numbers, so the commentary is vital.
Our job is to tell the story of their numbers in a way they understand and, most importantly, that they can use to take action. With action, the whole thing becomes worthwhile.
This is where I love video. Recording video commentary is far more engaging and likely to be listened to over large blocks of written text.
Ever evolving
The Management Reporting should not be static, it becomes stale. As the business changes and evolves, so should your reporting.
Reviewed Regularly
The Management Accounts should form a vital part of the rhythm of your business. Create a process of reviewing these at the same time every month or quarter and find accountability for the actions.
This will likely form part of the board meeting for slightly larger businesses, but for solo founders with a small team, find a coach/accountant/accountability buddy to drive action.
If you made it this far, thank you. This post turned out slightly longer than planned, but it needed saying. It is the biggest predictor of financial success in small businesses.
Having effective management reporting is a game-changer for small business owners. By implementing tailored financial insights, you can make better-informed decisions, seize growth opportunities, and maintain financial control. Don’t miss out on the competitive advantage that comes with understanding your numbers – embrace the power of outstanding management accounts and drive your business to success.
About the author
Luke Desmond
Fractional CFO for Tech, eCommerce & SaaS. CEO @Crisp_Acc provides virtual finance functions. Co-Founder @getvaulta SaaS Startup for accountants.