Management Accounts Give You More Information - Why Not Ask For Them

Empowering SMEs (Issue 046)

Have you ever had a critical look at the financial accounting information that your accountant is providing to you or that your accounting system is delivering to you?

Do your Financial Accounts give you the information that you need to be able to effectively manage your business and add value to your business?

If not, why not ask your accountant to provide you with “Management Accounts” rather than a consolidated set of financial information that has probably been prepared as part of your business’ Income Tax Return supporting data.  That type of approach does not give you management information that you can use to help you run your business!  The Tax Office is happy with a total income figure for a business but you should not be happy with consolidated financial information if you have individual departments or activities operating within your business!  You need information pertaining to an individual department or activity to effectively manage that department or activity.

Let us look at what you are probably receiving at present – a consolidated set of Financial Accounts irrespective of the number of business departments or activities that you are conducting within your business.

Does the Profit and Loss Account that you are currently receiving look something like the following:

Income

 

$3,200,000

Less

   

Opening stock

$     70,000

 

Purchases

$1,300,000

 

Freight

$     45,000

 

Sub Total

$1,415,000

 

Less

   

Closing Stock

$     72,000

 

Sub Total

 

$1,343,000

Gross Profit

 

$1,857,000

Less

   

Overhead Expenses (with details provided)

 

$1,900,000

Nett Loss

 

$     43,000

If you are running a number of business activities within your business structure does this set of financial accounts assist you to determine which section of your business is causing the problems and losing money?

Would it help you if you received a Financial Report for each individual department or activity within your business which might then tell you meaningful information on what is actually occurring within your business?

Would access to an individual department or activity Profit and Loss Report help the person who is directly responsible for the management of that department or activity by giving that management person some meaningful information on the financial performance of the department or activity that they are responsible for?

A detailed Profit and Loss Account for each individual department or activity would disclose the following information:

Name of department or activity
Income for this department or activity
Sales of labour
Sales of materials
Total income

Less cost of goods sold for this department or activity
Opening work in progress
Opening stock
Materials purchased
Freight
Labour
Labour on costs
Subcontractor costs
Subtotal of direct costs

Less:
Closing work in progress
Closing stock
Subtotal

Cost of goods sold

Gross profit for this department or activity

You could then have calculations prepared of Key Performance Indicators that are relative to the individual departments or activities.

For example:

  • Materials percentage of income for the Department
  • Subcontractor percentage of income for the Department
  • Labour percentage of income for the Department
  • Labour on costs percentage of income for the Department
  • Gross profit percentage of income for the Department

Financial accounts presented in this manner are referred to as “Management Accounts”. Why – because they supply some meaningful information to management.

Big businesses prepare their individual activity Financial Accounts in this manner.  Indeed, most big businesses operate as a series of individual businesses that are supervised by a regional manager but they have deliberately downsized the business unit so that it can be more effectively managed. Big businesses then make sure that that individual manager receives meaningful Key Performance Indicators and other information to assist that manager to effectively manage that business department/ activity.

Is this the type of information that you would like to be receiving from your accounting system/accountant on a monthly basis?  Would this type of accounting information assist you to identify problem areas within your business?

Management Accounts prepared in this manner will also assist in a benchmarking analysis being prepared on the individual departments within your business when those individual departments could be compared to similar businesses or departments from other businesses.  When the financial data is prepared all within one Profit and Loss Account it does not enable meaningful financial data to be prepared for management to make decisions on future activities or even what is going to happen tomorrow within the business.

Do you think that receiving Management Accounts and having the ability to sit down and talk to your accountant about what those individual departmentalised accounts are saying about the performance of the individual departments would help you to run a better business?

If so, my suggestion is that you have a conversation with your accountant and ask your accountant to organise your accounting system so that management accounts together with Key Performance Indicator information and periodic benchmarking analysis is prepared for your business.

You could then sit down with your accountant at a periodic business improvement meeting on a monthly or quarterly basis to review the individual department or activity performance.

Would you like to know more?  I would like to invite you to participate in a free webinar for business operators, directors, managers that we are presenting “Management Accounts Give You More Information Why Not Ask For Them?” on Wednesday 18 September 2019 at 12.30pm AEST.  To register please click here.

If you would like to access articles that we have written on key aspects of business operations please visit our website www.esssmallbusiness.com.au where you will find a range of articles some free some for a charge that you can subscribe for.

If you have any questions, please send an email to peter@essbiztools.com.au or telephone Peter on 1800 232 088.

 

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Episode 046 - Management Accounts Give You More Information - Why Not Ask For Them

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