Management accounts – are they providing your business with useful management information?
Management accounts prepared for a business on a monthly or quarterly basis should be presented in a form useful to management to provide information about the business.
If not providing additional management information, on their own, they do not serve any useful purpose.
The management figures should be compared to a range of figures. These will include budgets, expectations and year on year comparisons with appropriate ratio analysis and variances.
Ratios that are useful to review and monitor from period to period include:
Debtors days measuring the number of days on average debtors are taking to pay. If this ratio is significantly higher than the credit terms offered to customers this may put extra pressure on the cash resources of the business and increase the risk of the debt becoming irrecoverable. An increasing ratio comparing period to period should be investigated.
Creditors days measuring the number of days on average the business takes to settle amounts due to creditors. A business will normally aim to find a balance between paying promptly and taking a longer than agreed credit period which may result in pressure being placed on trading terms with suppliers.
Stock turnover measuring the stock held compared to activity in the business often expressed in number of days of stock held. A lower stock turnover or a higher number of days indicates increasing risk of stock damage or obsolescence. This will also put extra pressure on the cash resources of the business.
Variances can be calculated to provide a useful management tool to investigate particular areas. Variances explain the difference between actual results and expected results. They can either be favourable i.e. better than expected, or adverse i.e. worse than expected.
Variances can in simple terms be a comparison to the budget, the previous quarter, the same quarter last year etc. However, of more use to management is a comparison to expected figures with a variance analysis showing what is going right as well as what needs improvement in the business.
Variance analysis can for example in a manufacturing business provide a range of analysis as set out below:
Material price variance measuring whether the actual materials purchased have cost more or less than the standard cost.
Material usage variance measuring the materials used in actual production compared to the standard cost and measuring whether this has cost the business more or less.
Labour rate variance measuring whether the actual hours paid for cost more or less than the standard.
Labour efficiency variance measuring whether the cost of production is taking more or less time that the standard.
Factors affecting the material price variance will help highlight if materials costs have increased and management will need to review if any of these price increases can be passed onto customers.
Factors affecting the labour rate efficiency will include paying overtime and agency staff to fulfil orders and will help management consider whether a decision to employ more staff should be made. An idle time variance comparing hours worked to hours paid will assist with a detailed review of the existing workforce and capabilities.
Overhead variances are also used to provide detailed analysis of the absorption of overheads determined by the efficiency and capacity of the business.
A detailed range of variance analysis may not be suitable or practical to all businesses, but a set of management figures produced as a standalone product will not on its own provide management with any useful information to drive the business forward. Some appropriate variance analysis will assist management with strategic planning directing resources into the most appropriate areas of the business.Talk to Barnes Roffe today