DIY Management Accounting And Business Performance Review
I’m a great believer in getting accountants and clients to work together for mutual growth. Alternatively, here’s how to do your own brief Management Accounting exercise. Hopefully this will underline the ease and value of the process! What you need: If your accounting system is not up to date, or you don’t have one, never mind, for illustrative purposes, go find the last set of accounts you can find.
So what are we looking at here? Your set of accounts will hopefully have at least a Profit & Loss Report with details of 1) sales and 2) costs by month over the year, along with 3) a balance sheet.
# 1. Sales
Look through your monthly sales pattern for correlations:
The month your sales were up, what else was going on?
- Did you run a particular promotion?
- Was your social media more active?
- Was your google adword spend higher?
- Did you have interns in the shop?
If you can pinpoint something, you can repeat it.
Similarly if your sales were lower.
- Was a significant employee out of sorts or on vacation?
- Was your website down too long for maintenance?
- OR was it something completely out of your control: Construction in your street, bad weather, a VAT rate increase?
Mark it down and change what you can.
Related: Top Ten Tips For Managing Your Books
# 2. Costs
In simple terms, sell more and spend less to increase profits.
An extremely underused tactic is supplier analysis and negotiation. Look at your supplier spend, compare the similar ones and call the sales rep with the facts in front of you.
“Joe, I spent almost 100,000 with you over the last six months. I spent half that much with O ‘Shea’s but I’m thinking of moving more of my spend over to them. What can you do to keep me from switching?”
Think about what you would like from them.
- Lower prices and/or longer credit terms are both good options, but use your imagination,
- do they have a customer base you would love to get into?
- How about a shared promotion or a case study?
Pick up the phone, armed with your info, and remember in this case, you are the customer.
# 3. Balance Sheet Ratios
When examining your balance sheet, assume the role of an investor.
This is the area they focus on to see if your business is worth the risk you are asking them to take. Even if you are not considering investment or getting a loan, this is good exercise to help you get a handle on where your business stands financially.
Here’s a few key things they home in on, and you can easily calculate:
- Debtors days : This is a method of finding out how well you are managing your collections. A nice low figure here is required, 30 to 60 days. Anything higher than that, causes a concern that at least some of your Debtors figures may never be collectable. How to calculate: Take your total Debtors figure and divide it by your average daily sales. (annual sales / 365) Or use the spreadsheet to plug in your figures.
- Creditor Days: Same as above, but on the flip side. How to calculate: Take your total Creditors figure and divide it by your average daily purchases. (annual purchases/ 365) Or use the spreadsheet to plug in your figures. A low figure here ( less than 30 days) says you are not spending enough time negotiating credit terms with your supplier. On the other hand, an extremely high figure here (over 120 days) may indicate that you cannot or are careless about paying your suppliers, which will not give confidence in your ability to negotiate prices.
- Liquidity Ratio: This is an overall acid of your financial health. Click here to have a spreadsheet do the math for you
What to do with this information?
Watch it from month to month.
- Set yourself one target per month, such as reducing your Debtor Days by 10 days, or getting extra credit/lower prices from 2 suppliers.
- Mark it on your calendar.
- And remember this: It’s too easy to get caught up in the day to day running of the business, if 2 months or more have gone by without you doing a review, find a way to make an appointment to get it done.
Either with your accountant or a self employed pal who could do with the same discipline! This exercise is best done with up to the minute figures. If you are having trouble getting your hands on them.
Here’s a tip:
Cloud accounting is the most efficient way to keep your figures up to date largely due to its collaborative attributes. You can link it to Receipt scanning applications to cut down on data entry, and you can easily grant access to a bookkeeper or accountant to help you keep it up to date.
Related: How To Handle Your Accountant
What do you think, is this something you could do for your business?