Rear view mirror or SatNav? How do you steer your business?
Accountants are a funny breed; mostly they’re focussed on the past, on how much profit (or loss) you made, or how much tax you have to pay, rear view stuff. Vector Accountants are different; heads up, looking through the front window, more like a Satellite Navigation system.
The historical accounting information is typically referred to as the Financial Accounts, whilst the more forward looking data, estimates and forecasts are collectively referred to as Management Accounts or Management Information.
 The Government formally requires you, the business owner, to keep accurate records and accounts. Dependent upon business size, type and sector your accounting needs will vary, but it's still your responsibility. This is called compliance. A standard accountant can help you be compliant and file Financial Accounts, describing the past performance of your business, at Companies House - or the Companies Registry for businesses in Northern Ireland.
If you are paying hard earned money for a product or service surely you would want to get some benefit out of it? The data you use to make assessments and informed judgements needs to be current and relevant. It must be analysed and interrogated regularly and systematically to make sure that you are making the right choices. If your data is more than 2 or 3 months old then it’s of questionable value when it comes to making decisions about your business direction, and it’s likely that it’s actually costing or losing you money!.
Management Accounts (with data derived from the financial systems), on the other hand, are aimed at helping you to plan your business activities and make decisions about key areas such as sales, margins and inventory.
Satellite Navigation
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Management Accounts
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Forecast time of arrival
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Forecast sales, costs, profits and cash
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Warning of speed traps
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Warning of cash shortages, overspend, variation from standard/expected costs
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Improve driver safety by warning about accident black spots
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Improve business safety by warning of potential dangers
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Recalculate route in the event of traffic delays
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Recalculate performance in the event of lost sales, delays, increased material or overhead costs
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Shortest or quickest route and avoid motorways or set a via point
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Evaluate different scenarios using what-if analysis
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The Management Information will attempt to answer questions like:
• “How much does it cost to generate each sale?”
• “How much of my cash (working capital) is tied up in inventory?”
• “How can I improve my cash flow?”
• “How effective are my distribution channels?”
• “How much money will I have in the bank in 3 months time?”
• “What would I need to do to increase my profits by 20%?”
Management accounts will analyse the recent past (for example, what happened in the last period), and include forward looking elements like cash flow forecasts and projections, to help understand the state of health of the business and the outlook. If the business is seasonal it will take into account the time of the year, it may include a comparison with the same period last year to ensure an ‘apples-to-apples’ evaluation.
Management accounts can help to manage the levers that drive your business, and answer vital questions. What would be the effect of increased or decreased production volume? What’s the sensitivity of the business to price increases or reduction? How effectively does the business uses its assets (the cash, inventory and equipment) to generate profit.
The answers provided by the Management accounts are used to steer the business through the troubled times. Like the SatNav system warning of speed traps, enabling a quick recalculation of the route in the event of traffic jams, and providing constant feedback on the estimated time of arrival.
Your SatNav may initially be more expensive than a paper based map, but it pays for itself many times over, both financially and emotionally. It takes much of the stress out of the journey, improves efficiency, and means that you enjoy both life and work that much more.
Can you really afford not to invest?
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