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Help Manage The Future

The role of the Finance Director has evolved significantly over the years; due in part to technology but mainly due to changes in expectations.

No longer is it enough to report on what has happened. More and more the focus is on Finance’s role in strategy – what is going to happen.

Only by having the basics sorted can a good FD shift the conversation from “what has” to “what could” happen.

The first and most important requirement is a robust forecast. Based only on booked work for the next month or quarter this will give you a clear starting position. Because it includes only booked work it will also be the worst case scenario.

If we add in the running totals for staff costs and overheads we will then have a very simple forecast P&L. Depending on the nature and volatility of your Agency’s work you will either have a vaguely comforting feel or a downright scary vision of the future.

So far, so easy. To make this into a simple planning tool we need to add some “what if” tools to help manage that future.

Again they break down into the main components of the forecast;

Revenue. What is in the pipeline that is likely to be signed off quickly enough to affect the numbers? Be realistic. Assuming you are going to win that big contract that you are pitching for as 1 of 8 is a surefire way to walk into trouble. However if a client has verbally agreed to start the project next month there’s a good chance it will happen. Depending on the client obviously.

Staff. What changes are already planned and known about? Leavers, joiners and reviews should all be planned in.

Freelancers. Ifyou have freelancers supplying core activities on a regular basis then you need to include them at a realistic level. If needed though you can take a zero based approach if the forecast activity is expected to decrease so that workload is shifted from freelancers to staff members. 

Overheads. Are there any discretionary costs planned in the next quarter? Consultants, training and entertaining should all come under scrutiny if the forecast looks bleak 2 months out.

With a simple analysis of each of the above that feeds into your main forecast you have a very simple but effective tool that helps you know what levers you have and how hard you need to pull on them.

Year on year comparisons are too useful to be left to the year end

Accountants love to compare numbers. It’s trained into us early on in our careers. Call it analytical review and you’ll always have something to say at Board Meetings.

Don’t misunderstand me, I love comparing annual financial performances as much as the next accountant. I’m just not sure it should be a once a year treat.

Management reporting by its nature tends to focus on the monthly and cumulative annual results. If we’re sensible we will compare it to budget and get to explain why it is up or down against target.

What we don’t do enough of though is compare the year on year (YOY) performance. YOY looks at the results for the 12 months up to present and compares it to the 12 month period before that.

Looking at the monthly numbers and comparing it to budget are important but if you want to understand the long term trends in your business nothing will beat looking at the YOY performance, especially if there is any seasonality in your business.

Changes in revenue, staff costs and overheads really pop out when you look at them over a longer time period. Individual months can be affected by a single issue, project or unexpected cost. Over a year the importance of those issues get flattened out and you are left with the trend.

It is by focussing on those trends and the reason for them that management reporting can come alive by linking the numbers to the reasons. With an understanding of the reasons comes an opportunity to do something to improve future performance.

Whether it is a change in revenue from an activity or sector; additional resource cost or an increase in property costs it becomes clearer and more understandable when you compare the effect over a rolling 12 month period.

If you want to lift your management reporting out of the routine and link it to the real operational performance of the agency then start looking at the longer term trends affecting your business. Start thinking about what you need to do now to affect the figures in a years’ time.

The author, Simon Collard, is a chartered accountant with 20 years’ experience running and advising on Agency finances. If you’d like to improve your agency management reporting, talk about ways to increase the long term value of your agency please email simon@novemberfriday.wpengine.com.