Most business owners are running their business using one of two things.
Their bank balance.
Or accounts that are already six to nine months out of date.
Neither gives you a clear picture of what is happening in your business today.
Your bank balance tells you how much cash you have at that particular moment. It does not tell you whether your margins are falling, your overheads are creeping up or your customers are taking longer to pay.
Your year-end accounts are important, but they tell you what has already happened. By the time they are prepared and discussed, the opportunity to change those results has usually gone.
Unless you own a DeLorean, looking backwards will only get you so far.
More information does not always mean better information
I recently spoke to a business owner turning over around £850,000.
They received regular management accounts. The reports looked professional, were printed in colour and contained plenty of numbers.
On the surface, the business appeared well managed.
But when I asked a few basic questions, the problem became obvious:
- Where are the profit leaks?
- Which areas are over or under budget?
- What opportunities are being missed?
- Where is cash getting trapped?
- What has changed over the last three months?
They could not answer.
The business had plenty of financial information, but very little useful insight.
That is the problem with many management reports. They either contain far too much information or present the numbers in a way that only an accountant would understand.
A 20-page report that nobody reads or understands is not helping you run your business.
It is just a 20-page report.
What should a business report tell you?
You do not need to become an accountant. You need a clear overview of the numbers that actually influence your business.
A useful business overview report should show you what is changing, why it may be changing and where you need to take action.
That starts with the main financial drivers.
Sales
Do not only look at this month’s sales in isolation.
Compare your latest month with the previous quarter and your rolling 12-month performance. This helps you see whether the business is genuinely growing or whether one unusually good month is hiding a wider decline.
Gross profit margin
Turnover can rise while profitability gets worse.
If your direct costs are increasing, your pricing is wrong or jobs are taking longer than expected, you could be working harder without making more money.
Gross margin is often where businesses win or lose.
Overheads
Investing in your business is not automatically a bad thing. You need the right people, systems and equipment to grow.
However, you should also look for zombie costs. These are subscriptions, services and recurring expenses that continue eating into profit without delivering much value.
Profitability and EBITDA
Sales may look impressive, but sales alone do not pay the owner or build a valuable business.
You need to understand what is left after the costs of running the business and whether profitability is improving or declining over time.
Financial numbers are only half the story
Your report should also include the operational drivers behind those results.
For example, there are two basic ways to increase turnover:
- Send more invoices.
- Increase the average value of each invoice.
If turnover has changed, which of those drivers caused it?
You should also monitor areas such as:
- New customers acquired
- Customer retention
- Average invoice value
- Number of transactions
- Debtor days
These numbers help explain what is happening before the final result appears in your accounts.
Debtor days are particularly important. A business can report a healthy profit and still struggle for cash because customers are taking too long to pay.
Profit on paper is useful. Cash in the bank keeps the business running.
Turn the report into action
Producing the report is not the objective. Using it is.
Each month, sit down with the numbers and ask:
- What has changed?
- What is working well?
- What is not working?
- Where are the opportunities?
- What happens if we take action?
- What happens if we do nothing?
The report should help you spot problems early, continue doing what works and make better decisions about profit, cash and growth.
It should also be compared against a realistic budget. That gives you context and makes it much easier to see where performance has moved away from the plan.
Stop running your business in the dark
Some business owners have no useful financial information. Others have so much that they cannot see what matters.
Neither position is particularly helpful.
A concise two-page business overview report can give you the key financial and non-financial drivers without drowning you in numbers.
It will not make decisions for you. What it can do is give you the clarity to make those decisions while there is still time to influence the result.
At MDH Accountants, we prepare Business Overview Reports to help business owners understand what is happening beyond their year-end accounts.
You do not need to be an existing MDH client. We can also provide this as a one-off service.
If you are tired of running your business using an old set of accounts and a hopeful glance at the bank balance, get in touch with us to discuss your first Business Overview Report.
