Are you familiar with that tedious, once-a-month routine that creates stress and disruption in your business? That time of the month when your jolly accountant or finance person tells you that he or she is about to do a ‘cut-off’ and everything must stop for the ‘month end’ (anything up to four weeks after the end of the prior calendar month)?
You probably are, but why bother producing regular management accounts, given that the guys in suits make an annual visit to audit your books?
If you consider the fruits of their labours, you could make a case for saying many company accountants are actually wasting their time. Monthly accounts are often never read, at best misunderstood or out of date by the time they are looked at. Reports can be difficult to digest or even irrelevant, with lots of numbers that are simply unintelligible. The acid test for whoever is responsible for these accounts is whether the format of information they prepare enhances knowledge about your business and contributes to your decision-making process.
The quality of a company’s management information says a lot about both its management and its decision-making capabilities. Many marketing communications businesses have ineffective management information, with measures that focus on the wrong things and measures that are invariably ignored or lack credibility. With irrelevant information, you cannot expect to make the right decisions. For example, do you know which of your projects are on budget and what types of work deliver profit?
Equally important, do your staff believe the costing information that is being generated?
The optimal performance measures are those that are geared to the knowledge of the business. In turn, it is questioning that gives focus to measurement. Questions such as which projects are profitable, how productive are your designers or how much it costs to undertake an activity can only be answered by measurement. Ask yourself if you are asking the right questions about your business and whether you are able to answer those questions.
To drive a car requires more information than the amount of fuel in its tank. Measures of speed or engine temperature are relevant, not to mention the assurance that the tyres are appropriately inflated. Likewise, a business cannot be managed by financial measures alone. Key performance indicators relating, for example, to market penetration, new business development, client satisfaction or creativity standards are equally relevant in determining what decisions should be made.
In other words, a company’s management information must comprise more than its monthly management accounts and include non-accounting measures. Creativity may be a subjective measure, but the criteria for evaluating it should be consistent and agreed, which is a separate debate in itself.
In design businesses, the general level of financial literacy tends to be limited. Let’s face it, many right-brained creative folk are more interested in the presentation than the content of the management accounts. In that respect, the in-house accountant at a design group has a bigger challenge to encourage and foster the interest of colleagues in what the role involves. However, it is to his or her advantage that the visual communication skills in the consultancy can be embraced to enhance the presentation and make information more accessible and meaningful. For example, simple graphic formats are often far more effective than tabular formats if you want to present financial information to non-accountants.
The internal information used to make decisions should be accurate, timely, relevant and complete, as well as easy to digest. The measures adopted should also be related to business objectives. Ideally, the performance indicators should include early warning measures to provide visibility over future prospects.
Good management information ensures that you have knowledge about your business with which to make decisions and maintain your control. However, it also does a lot to maintain the trust and confidence of your stakeholders. For example, by enhancing understanding and awareness of what is happening in your business you are more likely to maintain the support of lenders and develop a positive relationship with them – something that could have enormous benefit should your business get into difficulty.
You shouldn’t be complacent about the adequacy of your management information. Your auditors will not necessarily have considered the quality of information that allows you to manage your business: their interest is principally your previous year’s financial results, as disclosed in a statutory format.
Similarly, just because you have produced information in a set way for so long does not mean that you should continue doing so. Excuses that operational measures are time-consuming to undertake are also feeble given the availability and capability of desktop software and bespoke accountancy systems for the industry.
A critical review of your management information can help you consider new perspectives to your business and it could yield significant results. If you and your team don’t have answers to questions about how your business is performing it might suggest that a review is already overdue. Encouraging whoever handles the company accounts to make these changes will ensure that they aren’t wasting their time. It won’t necessarily make you love them, but you will value their output.
John Dewhirst, a former financial director at Elmwood, is an independent business turnaround consultant. He runs www.vincimus.co.uk.