If the word “Accountancy” conjures up images of a staid professional in a pin striped suit who brings you bad news and fills you with gloom, then I'm glad you have decided to read this article!
Your accounts don’t always have to be just a source of numbers telling you how much tax you owe the Inland Revenue.
There is much in terms of Management Accounting information that can be gleaned from your business if you only knew what and where to look for it.
1. MEASURE PERFORMANCE
Understand what is driving your business performance and measure it.
Clearly if you are making an actual tangible product, measuring the cost of that product versus how much you are selling it for will show you if you are running a profitable business overall. Breaking the profits down by product type or market will give you more insight into what types of business is most profitable to you and how you can potentially grow your profit moving forward.
With many service type businesses, time is the key determinant of profitability. The idea is to maximise the amount of profit (not just income) achieved in the most efficient use of time.
Do you know how much time it took to generate last month’s income? If not, set up a process to measure the time spent on a contract, customer etc. and cost out this time to truly understand if it is profitable. You may be pleasantly surprised on which types of contract or client are profitable to you and which ones you need to move away from.
2. FORECAST PERFORMANCE
Look forward and project how much money you are going to make! Many businesses operate from one week to the next without having a good grasp of actually how much cash they are making. Crucially not just how much cash they are going to make but how much cash will be required in the shorter term to make this happen.
By focusing your efforts on forecasting where you what to be in 6 or 12 months’ time, this will enable you to plan ahead and give yourself sufficient time to take action. Cash flow planning may flag that now is the time you need to organisesome short term funding, to enable you to invest in say stock or resourcing, to achieve the next level of sales. The last thing you want is to have to turn away business, or worst still, over trade and run out of cash, just as your business is starting to take off.
3. CONTROL YOUR BUSINESS
Use your management information to control your business.
Specific management information, when collected on a regular basis, embeds an automatic control mechanism into your business. Try to think of those areas it is essential to have some level of control over in order to mitigate risk and avoid business failure if left unchecked.
As long as the control stays within a certain agreed amount you are operating fine and there is nothing for you to worry about, only when the control varies above a certain point is there a flag to take action. Ratios are a good example of internal controls which can be used by a business to check they are online in performance.
Example 1: In order to ensure you are keeping cash flowing, measure how long it is taking you to collect cash from your customers.
Debtor days = Trade Debtors X 365
This will tell you how many days on average it is taking you to collect your debt.
Example 2: Measuring the amount of quality defects picked up in your manufacturing process will indicate areas where your process is failing and whether this is increasing or stable over time.
Quality = 100% - Number of defective units %
This indicates the % of products produced to correct quality first time.
So, next time you pick up your accounts, this should just be the start point for your improvement plans looking forward. Things can now only get better and that surely must put a smile on your face!