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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.

 

The paradox of choice

Walking to work the other day I noticed a shop sign advertising that they stocked over 30 types of Dutch salt liquorice. This sparked several thoughts. Firstly I didn’t know salt liquorice existed nor did I know that the Dutch specialised in it to such an extent that they produced over 30 varieties at least.

It also made me think how choice can be confusing. The paradox of choice is a well know theory. Intuitively it makes sense to me; faced with too much choice it becomes more difficult to make a choice. Which type of Dutch salt liquorice is the best one? Too many alternatives can make decision making more difficult and increases the chances of not making any decision at all.

Now, to stretch the point a little, the same can be true of agency finances too. There are so many numbers, metrics and ratios to look at that it’s tempting to be put off and either settle for what you have now or to look at everything equally. There is so much you could look at that a large part of what makes a good FD is knowing what to focus on.

Beyond the staple of the Profit & loss report (although there are always good and bad formats but that’s a different story) there are several numbers that absolutely must form part of the management reporting. They link the financial performance to the operational performance.

Firstly keeping track of headcount will enable you to look at revenue per head. This vital number drives profitability encompassing as it does information about the volume and nature of paid client activity. It’s also a really good, quick insight into how you compare to your peers.

Secondly staff compensation to revenue is the commercial ball game. It’s about how efficiently you can turn client revenue into profit. If you were a hotelier you would obsess about occupancy. If you were a dairy farmer you would focus on yield. If you run an agency you have to care about the ratio of staff compensation to revenue.

Whilst there are many, many varieties of Dutch salt liquorice there is a comfortingly small number of fundamental numbers that you have to focus on. There are others that are really useful but if you get thrown by the paradox of choice then focus on managing the two measures above and you’ll not go drastically wrong.

The author, Simon Collard, is founder of November Fridays which advises Marketing Services Agencies on ways to improve profitability. He is also Head of Operational Performance at Ciesco Group. If you would like to talk to him about helping increase value of your Agency by improving operational performance please email him on simon@novemberfriday.wpengine.com