Tag Archives: Reports

What makes good management accounts?

Usually management accounts look very similar to the set of accounts that you get at the end of the tax year, but on a more regular basis – usually monthly – and in more detail.

Most cloud accounting software produces all these reports, so surely that’s enough? In some ways, yes it is, but there are two things to remember:

First: “rubbish in, rubbish out”. Simply printing out a snapshot of the accounts is unreliable. To improve the quality of the information you need to:

1. Make sure you have enough detail to see what’s going on – “Administrative costs” is good enough for the year end accounts, but does it help you see where the costs have built up?
2. Check all the sales and purchase costs have been included (and the accounts are up to date). this sounds simple, but isn’t as common as you’d think.
3. Think about making sure that only costs associated with this month are included – if you deduct a whole year’s insurance costs from one month’s sales your results may be skewed disastrously.
4. This is where stock counts come in, but also prepayments (spreading an invoice over several months) and accruals (estimates of costs not yet invoiced).

This creates accurate and reliable accounts. The second thing to remember is that there are no rules as to what you need to show in management accounts. The real benefits come from shedding light on what’s going on “under the hood” in your business.

Things like:
Financial metrics: debtor days (a comparison of how long customers take before paying), ratios splitting sales between different products or services, etc
Non financial metrics: customer numbers, spend per customer, active orders, etc
Variances: how this month compares to last month, or to forecast
Forward plans: a radar highlighting where problems should be expected, and an idea of liabilities (tax bills) in future.

Good management accounts should give you the information you need to identify the actions to take to steer the business towards the objectives that you want and they help you track the results of those strategies as well as the unintended consequences.

This is not about having reams and reams of paper to look through every month. You need a dashboard that shows the information that you need neatly summarized so that it doesn’t take an expert to find the figure that you want, and clear and unequivocal so that you can make decisions quickly.

If you would like to find out more, or you have a specific issue that you need help with then contact Susie either via the website here or direct on 07801 199671 or susie@poundlane.co.uk

Profit and Loss – which one is it?

To continue my Management Accounts series I want to look at the individual reports in more detail, starting with the P&L.

I guess Profit and Loss is an odd name – it’s always going to say one or the other, not both!

A Profit and Loss report (P&L) provides an overview of the businesses profitability. As such, it is the report that everyone wants to see. It’s usually also the simplest report to understand, but what do you need to know to be able to use the figures?

The P&L is a calculation of the profit that’s left (hopefully) after you take all your costs away from your sales revenue.

I recommend looking at monthly Management Accounts, so the P&L might look like this:

An example of a monthly profit and loss report

An example monthly P&L report

Make sure you know what you’re looking at:

Firstly, it’s important to make sure you are comparing like with like; if you are looking at March it’s important to make sure all the costs and sales relating to each job, or unit of product are included.

It is important to match costs to sales to make sure the profit figure is correctIn my example, if the garage need to make sure they have included all the costs of the cars they sold, otherwise they would be fooling themselves with extra profits this month and a big loss later on.

Pound stack
What does it all mean?

Result: I’d start at the bottom – the profit (or the loss) for the month is pretty obvious.
But what about the margin; that is how much of your sales was left as profit? This lets you see how effective the business is at making profit.

Gross Profit: Next I’d work my way up to gross profit, that’s the difference between sales and the costs directly associated with them.

Gross profit is sales less the cost of parts and processing to make the sale. All the fixed costs of running the business, like rent and most salaries are counted as Overheads. So, Costs of Sales change when the amount of sales change but Overheads don’t – they may not be entirely fixed, but they change for other reasons.

Gross profit can be a tricky thing to pin down; making a healthy net profit requires a healthy gross profit, but that in turn requires two things. Graph

You need a good gross margin percentage, so that every job you do has sufficient profit after the Costs of Sales have been paid for but at the same time you need to be carrying out enough jobs (sales) to turn that gross margin percentage into money profit.

Sales: If a business does more than one thing (and that could mean selling direct to customers and also selling the same product to wholesale customers, or online) then it’s useful to know as much as possible about how the total sales figure is made up.

Comparison: All this information is great, but you’ve got to look at it in context.

It’s useful to know how much profit you’ve made in a month, but it is more useful to be able to compare it to other months, and to compare it to a target.

A P&L report should be easy to read Sometimes fitting in all the information can be a challenge – there’s a balance between having all the numbers you want and fitting them on the page!

Space allowing, I like to show the 5 previous months and a budget for the current month in my report. However, in some businesses it is helpful to also know what the same month last year looked like, to account for seasonal differences.

It’s also useful to know how you are doing compared to your target for the whole year – this month may be below target, but if you’ve had several exceptionally profitable months this alone might not be a cause for concern.

If you don’t yet have a target, well… I would suggest that you get one!
It could be as simple as covering your costs, but it’s more likely to be enough profit to pay the shareholders a dividend.

It’s worth remembering that if you need to make loan repayments, this isn’t included anywhere on the P&L report. The cash required to do that will have to come out of profits, so you might need to reflect that in your target setting.

I think I might need to come back to that another time!