I understand that not everybody loves working with numbers and that some people are bored to tears pouring over financial statements, which are often prepared by the company’s financial or administrative person and are usually filled with irrelevant detail. The truth is, a good set of management accounts should be everyone’s responsibility – making sure that all aspects of business are covered.
A financial statement tells a story. Take for instance a statement of comprehensive income (or income statement) – consider this a movie that tells the story of what has happened in terms of your trading over a period of time. A statement of your financial position, on the other hand, is a photo: an exact reflection of your position on that day.
Management accounts that are prepared should be the basis for operating, marketing and financial decisions within a company, a point of reference in order for a company to outline its strategy. Management reports can be compiled internally if you have the expertise, although it is a good idea to invite an expert external person to cast an independent eye over the process. As long as the numbers are accurate and relevant, you can establish a great deal about how the business is really doing and what it is capable of. Although there is a definite trade- off between accuracy and relevance and accountants are often focussed on ultimate accuracy at the expense of relevance.
In our analysis of businesses and what makes them successful we have noted a strong correlation between preparing and discussing management accounts and a profitable business.
There is a trade-off between the accuracy and relevance of information, setting dates to discuss the management accounts puts the discipline in the place of regular reporting which improves the accuracy and relevance of the information discussed. I advise monthly meetings but quarterly meetings are also an option.
Meeting regularly with your accountant to talk about your numbers and having an experienced professional available usually makes for clear and thorough decisions rather than knee-jerk reactions and impulsive choices. A good discipline is to actually hold off on any large or risky decisions until you have had a financial review with your accountant. That one-hour meeting could be priceless if it will save you from making a bad decision. Your accountant will be able to raise and report on any risk your business faces, new legislation, rand exchange rate fluctuations that may have an effect, inflation outlook, solvency of customers or suppliers, interest rate forecasts, expected SARS commitments and, most importantly, cash flow. A healthy cash flow results in a healthy business.
A great add-on is to supplement your financial reports with the rest of your company reports, i.e. operational, marketing, ITC and human resources. If each of these is aligned with your business strategy, your business roadmap is a clear one. Good management accounts will reflect more than your financial status and should also report on:
- cash flow projections
- compliance issues
- internal controls
- SARS commitments
Your accountant should not just be the guy who produces a bunch of spreadsheets at the end of each quarter; your accountant should be your go-to person, the person you meet with every month to analyse how your business is actually doing, how you can minimise your tax burden, and where your business needs attention. This will result a clear picture for you to make better, informed business decisions. This is what we call “progressive accounting”.
Partner, Hobbs Sinclair Chartered Accountants