You have to spend time, effort and money to prepare accounts – you don’t have a choice as it’s a statuary requirement, so why not use the information contained in your accounts to make sound business decisions. It’s like owning a car, yes you can put petrol in and drive for quite a while but unless you service the car eventually you are going to have problems. Management accounts are like a service for your business.
For example, you may spend $xxx on Google Adwords or Facebook adverts, how much business has either brought in to your business compared to the cost. If one has a greater return than the other then wouldn’t you want to know and shouldn’t you switch spending to the one that is performing. Also you may sell more of product A but it costs more to produce that product B which therefore makes more profit per sale. Why is this and shouldn’t you know why and shouldn’t you look at pushing product B more or investigating costs on product A?
Management reports are run from the information in your accounts that you have already spent time, effort and money to compile and runs reports over that information. Your accounts are trying to talk to you but you need to be able to understand what they are saying. Management Reports help you to interpret this information.
“Shouldn’t my accountant already be able to see this stuff” I hear you say? Yes to a degree, they can look at your accounts, Balance Sheet and Profit & Loss and see areas of concern and highlight these but without running management reports they can’t drill down and pinpoint the problem. Again like the car, you can drive it to a mechanic who can listen to your car and say this and this is a worry but without doing a service can’t pinpoint the actual problem and attend to it.
Your accountant runs reports over your accounts as they currently stand and from the information supplied highlights problem areas or areas that can be improved. They then discuss these results with you and together you come up with a plan as to what you want to concentrate on and what you want to achieve over the next month, quarter, 6 or 12 months.
Your accountant then tweaks your chart of account and cost centres and sets some rules and tracking codes up in Xero to capture the information required. You can look at costs (the who, what, where of the costs), the return on investment of certain items, cost of sales etc. They can also set goals for the business, which you have together determined, and set measures in place.
At the next set of Management Accounts (whether monthly, quarterly, 6 monthly) the reports are run again and the information from the fine-tuned accounts will reveal more information as to what is happening and where you are at with the agreed goals. The accounts can then be re-tweaked to delve into what has been shown or why (if you’re not) achieving targets ready for the next set of management accounts. You are now making decisions on facts and not gut feelings or vague figures (which are too general to be of much planning use).
Over time Management Reports will also reveal trends, which will assist with those business decisions you need to make.
As you can see you will have a lot of information and more detailed and targeted information to review, plan and run your business on. As said you already need to do accounts so why aren’t you taking full advantage of the information already there to run and plan your business.
Firstly tax returns and financial reports are required by IRD (Banks, Financial Institutions etc) who specify the minimum information to be disclosed in those reports. They are for external review and are a snapshot of the financial state of the business at that point in time. Management reports are for the business owners’ eyes only and give more detailed information about the businesses performance or lack of. They are produced using more focused data and require time to review and interpret to come to more detailed analytical conclusions to make business decisions upon which will require a meeting between the accountant and business owner to discuss and plan.
One size does not fit all, the Management Reports need to be tailored to your business and your business goals and aspirations. A motor mechanics accounts are different to a café operation, an online retailor or a builder etc. However, all businesses have one thing in common, they can all use Management Reports as a tool to plan, design strategy, set goals, measure goals and to keep a close eye on business health and trends.
Posted: Sunday 20 January 2019