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What should management accounts do?

 

I’ve seen a lot of management accounts in my time. Bad sets of accounts can be too short or too long, too simple or too complicated. They can focus on the wrong metrics and they can lack context. They can be produced so late that everyone has already moved on. Sometimes they can focus entirely on the profit and loss and ignore the balance sheet entirely. Most importantly they can entirely lack any insight into why the numbers are what they are..

To be useful accounts need to meet the following criteria;

i)     They need to be produced quickly within a maximum of  7/8 working days, ideally fewer.

ii)    They need to show the overall financial position including current and future trading, balance sheet strength and cash flow.

iii)   There should be enough detail to inform but not enough to confuse.

iv)  They must include words of explanation and insightful analysis not just numbers.

v) They should summarise with more detailed analysis available if needed.

Sounds simple doesn’t it? Not surprisingly I think good management accounts and sensible advice from your FD is a vital part of growing your agency profitably. To have accounts quickly makes them more relevant and speeds up decision making. Monthly accounts should always focus on the balance sheet and cash flow as much as the P&L as careful management of cash is integral to growing your agency.

Striking the balance between detail and summary is difficult. There is always so much detail that could be reported. One way around this is to deliver at both levels so there is a summary P&L which just has the headlines with detail, if required, on the inside pages.

It’s also important to recognise that whilst accountants are number focussed not everyone shares this fascination so a narrative which includes an explanation of the events of the month is a good idea. What client activity has driven revenue up or down? How have leavers or joiners affected staff compensation? Have any one-off overhead costs affected the profit? Not least what light can they shed about the immediate future and how can they inform the conversation about what to do next.

At a conservative guess I’ve prepared just over 200 sets of management accounts as a Finance Director of Marketing Services Agencies and more importantly have had to explain them at least twice as often to everyone from Managing Directors to Interns. Anyone who would listen basically. Take a look at your next set of accounts to see if they meet these criteria. If they do, congratulations. If not why not drop me an email on simon@novemberfriday.wpengine.com and we can chat about how I could help improve the quality of your accounts and how they can make your agency more profitable..

 

 

How much attention do you pay to your balance sheet?

As an owner/manager of an agency it is very easy to focus your attention on the profit and loss. Between keeping an eye on the forecast possibly another on freelancers followed by a look at the monthly P&L it’s tempting to think you’ve got all you need out of the numbers, especially with all the other calls on your time.

Tempting though it might be it is a mistake to ignore your balance sheet. A strong balance sheet will provide the working capital to fund growth as well as offer protection in harder times. The good news is that you don’t need an accountancy qualification to know what to look for in a balance sheet. There are some basic disciplines that will build a strong balance sheet.

Insist on a Balance Sheet and cash-flow on a monthly basis.

Sounds obvious but I’ve seen too many agencies where the balance sheet has been optional. If you’ve not seen one recently ask for one.

Review your aged debtor report on a monthly basis

You should always review your aged debtors and agree your credit control policy – a bad debt will go straight to the bottom line. Make sure you’re taking sensible steps to prevent your debtors getting too old but make sure you jump on the old ones.

Manage your working capital.

You should aim to always have net current assets equivalent to at least 3 months’ worth of overheads. If you take too much money out you take away the buffer that protects you from the ups and downs.

There are certain accounts you just have to ask about.

There are some accounts which are just plain dangerous to ignore and, if left alone, can store up problems. Key amongst these are the accruals and deferrals of income and cost. It’s tempting to accrue the income for that half completed project (and technically correct as well – it seems accountants like to throw in the occasional frisson of excitement into the mix). But what if there is a problem in delivery? Keep an eye on accrued income to ensure it’s still billable. If you have more than two trading companies and there is a trading relationship then the inter company must be reconciled every month. If it can hurt Interpublic it can hurt you.

Cash is king.

It’s a cliché because it’s true. Always has been and always will be so why do so few agencies project the next week or month’s cashflow? It’s simple to do and focuses your finance team on regularly ringing around in order to get the cash in as soon as possible. Who are your clients going to pay first – the agency who calls or the one who doesn’t?

Cash conversion

If you manage your working capital cautiously and insist on good credit control and cash management you will generate cash. Over time this should approach 100% conversion of profit into cash. It’s a simple calculation but enables you to spot if something long term is going wrong in the cash cycle.

Everything I’ve described above is simple and repeatable once it’s embedded in the DNA of your finance team.

If you’re not getting this information currently and want a hand getting it quickly then contact Simon Collard at simon@novemberfriday.wpengine.com. The author is a qualified accountant with over 17 years managing creative agencies and, frankly, takes far too much enjoyment in sorting this stuff out.