Management information and why it’s important (October 2017)
Management information (MI) matters because it tells you everything you need to know about your business: where you are making money, how efficient you are at collecting it and where improvements can be made.
Everything in the monthly MI for your business is an indicator of where improvements can be made.
I believe there are four fundamentals that contribute to good MI:
- Monthly accounts: If you are serious about growing your business you have to analyse performance every month, looking back at actual sales and forwards through predictions.
- Financial analysis of the monthly accounts: Looking beneath the headline numbers to understand how that work was won and analysing it by product, department, geography etc.
- Managing cashflow on a short term and long term basis.
- A one-year financial forecast, or a two-year forecast if you are looking to raise finance.
What a lot of accounts don’t provide, especially in small and medium-sized businesses (SMEs), is a breakdown of the top line of your profit and loss account. Gross margin is rarely split by customers; how that work has come in; where it was won etc. There are all sorts of layers you can analyse when it comes to your gross margin, but most businesses ignore it because they are fixated on actual sales and profits. They don’t look beyond that to HOW those sales and that profit were achieved.
There are many reasons why a business becomes successful, or fails, but understanding the organisation and its numbers and planning for the future are key to overcoming obstacles ahead.
One of the big benefits of robust MI is that it can be a good predictor of the short term future, and thereby avoid problems in the longer term.
When we start working with a client, one of the first things we do is run a three-month, day by day, rolling cashflow forecast. We record everything that needs to go out of the business, make assumptions on things that probably need to go out and set down all the cash that will be, and should be, received.
This forecast might show that two months down the road the business will be £50k over its overdraft limit. So we then have the opportunity to plan different strategies to combat that. We might consider if there are payments we can defer beyond that date. We can also start to look at whether this situation shines the spotlight on a more fundamental problem: Is the business not making enough sales? Is the business not being paid on time? Are the payment terms too long?
Many businesses don’t do that detailed day by day cashflow forecast, so they will be unaware of the looming problem until it lands on them in two months’ time. MI allows you to plan ahead and solve problems before they hit and have a major impact.
Many SMEs don’t have the controls and processes in place to make things happen. For example, we see many businesses that hold stock but don’t do even an annual or a quarterly stocktake, let alone a monthly one. If you are going to have accurate numbers that show where you are making, or losing, money you must have a procedure in place that ensures someone does a stocktake every month so that you have up-to-date valuations constantly.
The systems you implement are the mechanism through which you get accurate MI that helps the business to flourish.
Business owners and directors need information that is accurate and relevant to their business. For example, everything has to be up-to-date and accurate on the bookkeeping side. That is fundamental to the basic numbers that are the foundations of the success of any business. It’s possible to analyse anything in a business, but you must focus on what’s relevant to YOUR business, its sector and your competitors.
From the MI, the management team will have the tools to monitor the performance of the business. It will show what is working well, where money is being made, what unnecessary costs are being incurred and so on. With careful analysis of MI, any business can quickly gain a major competitive advantage.
Working with MI specialists, such as Elite MI, can get your business on the path to growth and greater profits. To set up a free, no-obligation meeting to explore how MI could be used efficiently in your organisation, contact us today.
Written by Katie Moore ACCA, Finance Manager at Elite MI Limited.