Accurate and timely accounts provide insights that are detailed and actionable and can be an excellent source of accountability for the board and the business owners.
Everyone understands the P&L, and most understand the Balance Sheet, Cash Flow and Ratios. However, our observation is that not all businesses have a suite of management financial reports that are relevant for their business model. Here are four examples of different business models that require different types of reports:
Buy & Sell Business
Arguably the simplest business model. To make financial statements relevant you need to be able to drill down behind the main financial statements into different product groups to get insights into GP, stock, customer demand etc. which will open the door to effective data driven management decisions on sales strategy, sourcing, stock levels and product development.
Project Business
It is imperative in a project business that you are able to get detailed insights into the financials of each project. For each project you need to understand the GP and how it compares to budget, the cash flow, the WIP and the extras, and everything should be able to tie back to the headline management reports. Proper project reporting will give insights into all the departments involved in a project – estimating, sales, project management. It will drive accountability up and down the business, and almost guarantee increased profitability.
Manufacturing Business
Manufacturing is largely about efficiency, managing cost and investment in assets. For a business manufacturing standard products, you need to see reports on how costs are varying from the standard costs – labour cost and efficiency variances, machine cost and efficiency variances, overhead apportionment. This will also greatly facilitate informed pricing decisions. Where you are manufacturing bespoke product, your reporting may need to more closely resemble project reporting. Either way, measuring the throughput of your factory and accurately assigning cost to product will greatly enhance your strategic decisions on pricing, asset investment, outsourcing options and workshop productivity.
Service Business
In a service business, time is money. Time spent on chargeable work as a proportion of total time will drive profitability, assuming the time can all be charged out at a suitable charge-out rate. For value-add work, you should be able to recover more than your standard charge-out rate to reflect the value you have delivered. Ultimately you need visibility of how much of your time you are recovering, which will bring in focus and drive profitability.
Some businesses contain 2 or 3 of these business models all within one business. In such instances, we strongly recommend divisional P&L reporting to split the various components out for further analysis, otherwise management accounts form a high level summary that is nice to see but offers no particular actionable management insights.
This is only a brief summary, and every business is different. How your management reporting is set up will make a big difference to how useful your management reports are, and what understanding you can get of your business.