Getting to the Brass Tacks of the #’s
Where do you sit on this spectrum? On one end maybe you ‘never’ look at the accounts, and instead rely on what the bank balance is. Or maybe you routinely examine your ‘Xero’ dashboard and manage specific aspects like outstanding debtors. The third option, and the one I encourage you to take, is to create your own financial dashboards that are management, and not compliance orientated.
Many good accountants will be incorporating a management-based approach to your finances when you interact with them. However, from my experience, the majority don’t, and this is compounded by the easily accessible reports within your accounting programme that are all based around compliance reporting.
The following is your snapshot into a Management based reporting and how to get onto that bandwagon:
Imagine for a moment you are a commercial pilot. You are sitting in your seat looking at the dashboard in front of you and there are dozens of dials, levers and switches. As a trained pilot you have been trained over a long period of time to understand how to manage all these knobs.
Well in business, you the owner and every one of your employees, do not have the luxury of spending so much time or training on understanding every one of the possible ‘financial levers’ that could affect your business performance. Understanding all of this is more a job for your accountant, and this is where your management accounting deviates.
What are the handful of metrics, percentages, or ratios that you should be focusing on? The fewer the better, that way you are assured that they will get the attention they require.
Drilling down into these metrics is business specific. For example: If your business experiences high gross Margin or Gross Profit, then what is more important to measure? Revenue or Gross Profit? And conversely, if your business tends to have low Gross Margins, then what is more important to measure? Revenue or Gross Margin?
I won’t bore you with the correct answer here but contact me if you would like to understand the required thinking of how you should be considering this.
Another example: What is the biggest single driver of performance in your business? What is the one thing that if it goes wrong could sink you and if it goes well gives you amazing results?
For many businesses, this is your labour cost. And let me guess- this cost is reported under a tab called Operating Expenses in your P&L report? Well, that is useful (not!).
For those currently using my 1-page financials, what I am explaining above will be generating a whole bunch of nods. If you are not in head nodding mode right now, and maybe a little confused with what all the fuss is about, then it is time to either contact me now – I will happily talk you through this, or alternatively you can read a little more about this subject in the mini-book I recently wrote on the subject. You can access it here.
Numbers are your business: You as the business owner need to become very proficient in understanding, from a managerial approach, what to measure and how to read them.