West Midlands - Monthly Financial Review - Management Accounts

"Problems can become opportunities when the right people come together" (Robert South)

Our monthly financial review service is designed for directors who want to get a better control of their company's finances and performance.

Are you making some of these common finance mistakes?

If you saw something wrong at work, a machine dripping oil or stock piled up haphazardly you'd get it fixed wouldn't you? If you saw or heard a sales person handling a customer in the wrong way you'd take action.

It's your company and you are the person responsible. You have set high standards and you want things to be done right. You want your business to reach the goals that you have set.

Financial control works in the same way. You find a problem and its causes and then fix it.

What makes financial control seem more confusing is that it's in a strange code.

You look at your business and see products, machines, people and activities but when you look at your accounts you probably just see lots of numbers that only seem to make sense to a financial expert.

How can a non-financial manager hope to get a clear understanding of the messages in the accounts without the years of study needed to become an accountant?

It's difficult. You need a translator and that's exactly what our monthly financial review is designed to do.

You don't need to be able to read a musical score to appreciate music and you don't have to be an accountant to unlock the secrets contained in your accounts.

Our monthly financial review is an early warning system that monitors your key figures and reports the findings in plain English.

It's our responsibility to communicate the important financial issues to you because passing on that understanding is the first vital part of you using the information to improve your business. And we know that it's only by helping you to improve your business that we continue to earn our fees.

Imagine the benefits of being able to make decisions faster and more accurately, correcting unfavourable developments as soon as they appear and finding positive trends and opportunities so that you can take advantage before they disappear.

Now isn't that what you have wanted from your accountant but they don't offer that type of service?

Small Changes Lead To Big Effects

You're in business for many reasons but one of the most important is to make a profit.

But profit's an elusive concept.

As a simple definition it's the difference between sales and costs.

This means that you can't affect your profits directly. Instead you need to find ways to increase your sales or reduce your costs.

Because profit is the difference, a small relative change in sales or costs can have an enormous impact on profits.

There's always an opportunity to improve but it can be difficult to see opportunities in your own business.

It's easy to get used to the way things are and accept things that could (and perhaps should) be challenged. That's because people see things differently and it can be useful to hear their opinions.

The 1% Profit Improvement Plan

To show the big impact of small changes let's look at how a 1% improvements plan can have a dramatic effect on profit.

Consider a typical small business that has sales of £1 million, a 30% margin on its sales and overheads of £280,000 per year. At this stage the business has an annual profit of £20,000.

Just look at the effect that a 1% increase in sales volumes and sales prices can have combined with a 1% reduction in costs.

	Original	1% Sales Volume Increase	1% Sales Price Increase	1% Cost Reduction	Revised
	£000	£000	£000	£000	£000
Sales	1000	10	10	-	1020
Cost of Sales	(700)	(7)	-	7	(700)
Margin	300	3	10	7	320
Overheads	(280)	-	-	3	(277)
Profit	20	3	10	10	43

To keep things simple I've rounded the 1% saving on overheads up from £2,800 to £3,000 but it still shows that from these small changes the profit has more than doubled from £20,000 to £43,000.

That a 114% improvement in profit from improvements in three key areas by just 1%.

By monitoring your finance monthly, you get to see things quickly.

Any improvements in monthly figures points to an opportunity which you will want to find and strengthen.

But some opportunities are time sensitive and are lost unless seized during the window of opportunity.

Other opportunities are competitor sensitive - whoever notices and takes advantage of the opportunity first will gain most of the benefits available.

Opportunities are created all the time but to get the benefits they must be found quickly. This can be done by going over your finances thoroughly each month.

The Downside

Just as profit is very sensitive to small improvements in sales and costs, the negative effect of problems can be severe.

In the example above a 1% improvement in prices, volumes and costs more than doubled profits but it just takes a 1% deterioration in the same factors to remove all the profit.

Any unpleasant surprises bring additional costs, reduced sales and/or delays.

The longer a problem is allowed to grow out of sight, the bigger the damage and the more difficult, costly and time consuming it is to correct.

"It isn't that they can't see the solution. It's that they can't see the problem." (G.K. Chesterton)

A business that doesn't have the equivalent of our monthly financial review is operating in the dark.

What chance does it stand to make the most of the opportunities when it can't even see that it has a problem?

Example - A Story From My Past

I remember only too vividly a time in my past when it became really clear to me just how important it is to have a monthly financial review - basically management accounts and a clear understanding of the issues.

It was at the beginning of 1991 when I was the Finance Director of an engineering company selling into a market dependent on the construction industry.

Just two years earlier as a new management team we'd been able to increase profits by 78% which we'd largely been able to hold the following year when other members of the group were struggling from the recession.

We were very profitable, regularly making over £100,000 profit each month.

We met our target in November.

December was always a bit of a funny month with Christmas and customers stocktaking but we did OK. January was disappointing but was put down to a blip.

Perhaps we were complacent. We were seen as the stars in the group. But we were in for a big shock.

We lost £30,000 in each of February and March and by May we were losing £90,000 in one month before allowing for redundancy costs.

The problem - volumes were down about 15%, we and our competitors reduced our selling prices in a series of tit-for-tat moves and our manufacturing productivity fell sharply as we cut back production to reduce stocks.

I'd never seen profit disappear so quickly but because we knew about the problem and could put a value to the various causes we were able to take corrective actions necessary.

We couldn't get back to the previous profit levels but we managed to stop the losses and by the end of the year had recovered our year to date losses.

Without the discipline of preparing monthly management accounts and reviewing them as a team we would not have realised the full financial effects of the problems.

Without the financial modelling for our forecasts we wouldn't have been able to steer the company back to profitability.

So How Does Financial Control Work?

Financial control starts by you having a plan with clear objectives and targets that are achievable.

It's easy to have a business plan or budget that shows fantastic profits but it's only real when the cash is in the bank. Make sure that your plan can be achieved and it's backed up by an action plan.

In the real world, activities are performed that produce and deliver your products and services to your customers. These activities produce results that can be measured and compared against the targets already set.

This feedback tells you whether your company is performing better or worse than expected. If the performance is good then you can carry on performing in the same way but if performance is poor then you need to adapt the way that the business works.

Feedback System

Depending on the changes you have to make and the success of these changes it may then be necessary to revise the plan and targets. But all the time you know how the business is performing and you have a process in place that moves the business forward in the way that you want.

Won't It Take Up A Lot Of My Time?

Putting the plan together can take time but I use a structured process which focuses on the main issues.

Even faster is if you already have a plan in place that we can use. Just to be on the safe side though, I'd want to review it and take you through our business health check to make sure that the plan didn't miss out any major issues.

You don't even have to have a plan beyond "improving on last month/year" but it will mean that some of the potential benefits of our planning and control process are lost.

Your involvement in the monthly control process shouldn't take long because we would agree to focus on the key issues that really matter whilst I worry about reviewing the details below that level.

Of course, if problems are revealed it will take extra time but it is far easier to correct a small problem that has been caught early rather than try later on when it has had the chance to develop into a major crisis.

Won't It Cost A Lot?

As a small business owner myself I know that low costs are important so I take a flexible approach to match my services to your budget whilst delivering the services that you need.

This means that services like the Monthly Financial Review are available for a lower cost than you might think.

Because I don't have junior staff I can't carry out many of the tasks other firms of accountants are happy to offer.

Instead my solution is to review your processes and provide training and regular support and guidance to your accounts staff. This way works out cheaper for you and means that I have extra time to focus on the issues that really add value.

Preparation of monthly management accounts is a service that is offered by many accountants but again, except for complicated accounting problems or where there are sensitive issues, my preferred approach is to train your staff because it means lower costs and independence for your business.

With the right help it's not too difficult because modern accountancy software has made it much easier to produce these important reports.

Where experience really counts is in the review of the accounts, both to spot errors that need to be corrected before the accounts are issued and more importantly, to identify the key messages and warning signals that the accounts contain.

It takes a special skill and aptitude to be able to look at a report full of figures and to make sense of them.

Not everyone has got it but then I don't understand how my car works. We all have our strengths and it's best to accept our weaknesses and find a solution.

Once any issues are identified in the monthly financial review, they need to be explained to you and your managers without resorting to unnecessary accounting jargon.

This means that decisions can be made about how or what to change so that your business takes advantage of opportunities and corrects any problems. From there we move to an action plan and the individual actions.

It's Time To Take Action

Little worries people as much as money. If you don't have enough, you want more. If you are already comfortable you want to protect what you've got.

But many people have a mental block to money, finances and accounts. They know they should have more control but it's too easy and tempting to put it off.

But if you do that it could cost you thousands and thousands of pounds.

Now is the time to take action. Give me, Paul Simister a call on 0121 554 4057 for a free no obligation chat.

If what I say makes sense to you on the phone, then the next step would be for us to meet. Again that's free but you can learn a bit more about me and I can learn about your business.

Alternatively if you are outside the West Midlands then take a look at our page on part time Finance Directors and the Finance Director Register that has senior commercially experienced accountants from around the UK.

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Are you making some of the common mistakes that could be holding back your business and costing you thousands of pounds in lost profit - find out here business owners, marketing, sales, employees or finance.

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Last updated on 2007-07-04

Helping You To Build A Bigger, Better Business With More Profit

For more details about how our business coaching & consultancy services can help you to build a bigger, better business call Paul Simister on 0121 554 4057 or email him at paul@plancs.co.uk, Birmingham, West Midlands, UK

Planning & Control Solutions Ltd, Registered in England, No 3897173