Financial Direction is about using good management accounts to improve profits and cashflow. That’s a pretty big claim, so what do I really mean?
Xero produces management reports for you (other software packages are available). They look very similar to the accounts you get at the end of the tax year, but the value comes from looking at them on a more regular basis – usually monthly – and in more detail.
Unfortunately just printing out the reports can give misleading results. Think about:
Are your accounts up to date? This sounds simple, but isn’t as common as you’d think.
Timing: if you deduct a whole year’s insurance costs from just one month’s sales your results may be skewed disastrously. This is where stock counts come in and also prepayments (spreading an invoice over several months) and accruals (estimates of costs not yet invoiced.
Once you have accurate and reliable accounts you can choose whatever figures you want to shed light on what’s going on “under the hood” in your business: really, the sky’s the limit.
Just to start with you need:
- The right level of detail: maybe you want to bundle all office costs together but how about separating staff costs between office staff and production workers?
- A profitable history is reassuring, but it’s the future that really matters. A forecast will show you where the risks are.
- Then you need some KPIs that show how healthy the business is simply and speedily:
Good management accounts should give you information to identify the actions required to steer the business towards your objectives and track the results.
- Financial: debtor day, profit margins, growth rates
- Non financial: customer numbers, spend per customer, open orders
- Variances: how this month compares to last month, or to forecast