Updated: Sep 26, 2019
You know all about the financial reports you have to produce for your business. The profit and loss account and balance sheet you need for your company accounts, the profit figures you need for your year end tax returns, but what do these reports really tell you about your business?
The problem with these reports is that you likely produce them purely to tick boxes, we call it compliance. They're reports which look backwards, which are prepared to meet accounting rules and standards, they're for the whole business with no split between different parts of your business and as there's little urgency to prepare them until some time after your year end, by the time you have them in front of you, time has passed and they're fairly meaningless in terms of making decisions about your business in the future.
You're bound to have endless questions about your business throughout the year. Have you ever wondered:
What was my gross profit margin last month?
Is that better or worse than usual?
Do I make more money by selling product 1 or product 2?
How long do my customers take to pay me on average?
Will I have enough money to pay my VAT bill this quarter?
Can I afford to take on a bigger office space?
How much would I need to be turning over to pay for an extra member of staff?
If you have, you're ready for more than just year end accounts and it's time to think about management reporting.
How management reporting can help you make business decisions
Finance is an important part of any business's strategy and a good bookkeeper or accountant who can give you management reporting support will be able to help you set forecasts, KPIs and targets which help you keep track of the figures you really need to answer your questions about the business.
The beauty of management reporting is that it's not driven by accounting rules. It's purpose is to provide information to users within the business, to answer management's questions. It's not restricted to financial year ends and can be prepared for whichever period you want to monitor, it doesn't have to be prepared for the whole business and can be segmented if you want to monitor just specific products or services.
As well as answering your questions, management reports can also alert you to problems way before you might know otherwise. How disadvantageous would it be for your business if you weren't aware you faced a cash flow shortage for the coming quarter until your accountant has prepared your year end accounts?
How can I monitor the financial performance of my business?
Profit and Loss
Of course, your Profit & Loss report and your Balance Sheet give you a good overview of what's happening in your business, and we recommend that our clients review theirs quarterly if not monthly to keep a view of what's happening. If you have different products or sectors to your business, you might find it useful to break this report down so you can see the view for each sector and the totals alongside.
Budget and actual
You should have a budget for income and expenditure in your business and this should be monitored every month to call out variances and potential problems. Only asking yourself questions about where and why you've over or underspent, can you understand what's really happening in your business. You can also use this insight to review your forecast for the months ahead to give you a view of where you'll be by the end of the year.
If you're still sceptical about why you should set a budget, check out our blog post - The problem with not budgeting.
It's essential to understand your cash position, how much cash you have available and what's going in and out. A quarterly forecast is useful for predicting any upcoming problems as a quarter usually takes into account any rent and VAT payments which generally fall quarterly.
Specific targets and KPIs
After this you'll want to set some specific targets and KPIs for your business based on the questions you have about your business, and these will change over time.
Your KPIs could cover anything you have the figures to monitor but some examples are:
Sales volumes and the gross profit margin on each of your products
How long it takes the average customer to pay you (known as debtor days)
Turnover per member of staff
Average amount spent per customer transaction
Profit per square meter of office space
Knowing these stats and comparing the month on month will help you ask important questions about trends in your business and to be armed with the facts you need to make decisions about your business's future direction.
We love working with clients who need support with monthly management reporting. If you'd like to find out more about how we help growing businesses, please get in touch.