TThis is CFO Secrets. The weekly newsletter that checks the back of the couch every day for free cash flow.

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In Today’s Email:

• 🔢 Hot tips to make your management accounts better

• ❤️ An accountant on Valentines Day

• 🙉 A naughty review

THE DEEP DIVE

Management Accounts: Why you need them and 11 ways to make them better

A great management accounts process can make or break a business.

What measures improves.

And your management accounts is the primary measure of the health of your business.

Management accounts are financial reports for use within the business. Prepared by the business, for the business. The format is not for external consumption. So it’s not prescribed, as it is for a statutory set of financials. No audit.

That means a business has total latitude over the format of its management accounts.

And what is the right format?

It depends. The right format, is whatever gets the best performance out of your business.

Here are 11 principles for better management accounts:

1. A clear purpose

Your management accounts should tell the story of the 3-5 issues in your business at a moment in time. A story told with data, and in a way that inspires immediate action.

2. Backward looking much more than forward looking.

The management accounts are there to hold a mirror up on what has happened in a business. Not look forward to what will happen.

I’m sure plenty will disagree with this.

But trust me here.

Performance improvement starts with an honest assessment of the current state. The management accounts are that honest assessment.

Good management accounts focus on the parts of the business that are underperforming. Or could be even better. The management accounts must tell that story.

They must shine a light on where performance must improve.

If you conflate this with forecasts, you will remove tension from that message.

Accountability.

Honesty creates tension, and tension drives action.

Don’t misunderstand this message.

Finance capability that can look forward, assess risks, and forecast well, is vital. But the management accounts are not the place for this to have center stage.

3. A clear, consistent format

This does depend on the size and complexity of your business. As a minimum, all businesses should report 2 pages; Income Statement and Cashflow. Reporting both Month and Year to Date Performance.

In larger and more complex businesses your management accounts could reach ten pages. But no more. I run a large corporate on ten pages, and I plan to get that to seven.

More than ten pages and the most important messages will be lost.

As an example of what a management accounts pack for a bigger business could look like:

• Income Statement

• Cashflow Performance

• Balance Sheet

• Revenue & Gross Margin by Income stream / business unit

• KPIs

• EBIT grid (build up of EBIT by Income stream / business based on marginality)

• Waterfall of revenue and EBIT (budget/last year to actual)

• Cashflow Forecast. Rolling weekly 13 weeks, or rolling monthly 12 months dependent on business.

• Risks & Opportunities

4. The right frequency

For almost every business, this should be monthly.

5. Published in 5 days or less following the month end

This will depend on:

• the maturity of your processes

• complexity of your business

• quality of your finance resource.

World Class: <3 days after month end

Good: 4-5 days

Average: 6-8 days

Poor: 9-10 days

Crap: 11 days+ You are now nearer the end of the next month than the one you are reporting on. Be better.

The management accounts are your feedback loop on performance for the business. Tighter feedback loop = A better controlled / more consistent business performance.

Fast closing is often dismissed as finance perfectionism by those outside finance. I disagree with this. A fast close will help you keep control of your business and drive performance as it scales.

6. A year end quality close (down to EBIT at least)

Making sure monthly management accounts are consistently accurate is hard.

Too many businesses fall short here and over rely on big adjustments to tidy things up (at quarter end, or year end). Don’t do this. Get in the habit of a good quality fast monthly close.

The result will be better transactional control through your business. Great transactional recording is the bedrock for a tight finance ship.

7. Carefully thought through chart of accounts and relevant metrics

This is a question of precisely what you should measure.

You should include information from:

• Management Financial Statements: Income Statement, Balance Sheet & Cashflow

• Activity Measures: Units Sold, Tonnage Throughput, etc. Volumetric information is key context for financial performance. Often volume shifts are the biggest variance driver and touch the whole P&L.

• KPIs: Non-financial measures that are leading indicators to financial performance. I.e. Items Picked Per Man Hour, Waste per unit

• Ratios of the above. I.e. Gross Profit per Unit Sold, Net Debt: EBITDA

Getting clear on what metrics are right for your management accounts, is time well spent.

Management financial statements are not the same as GAAP compliant financial statements. There is not enough detail in a GAAP Income statement to be useful internally.

Having a chart of accounts with management accounts at the correct level of detail is vital. Separate future post on this.

8. Use the appropriate comparators against which to measure actuals

If the ‘metrics’ are generally represented by the rows in your management accounts. Then the comparator are the columns.

Example:

• Actual for the Period

• Budget for the Period

• Variance to Budget

• Prior Year

• Year on year variance %

• Repeat above for YTD

You need to decide what your ‘hero variance’ is. What is the variance you will focus attention on. For many this is Variance to Budget.

Your waterfalls and variance analysis should focus on this hero measure.

I’ve seen businesses that flex their budgets for actual volumes. They then ‘hero’ the underlying variance to a flexed budget.

Some businesses (especially smaller) may not have the scale to merit a full budget process.

Here a standard fixed ‘model’ income statement can work as a comparator.

Even just last comparing to last month / last 3 months can be fine for some smaller businesses. Particularly those without access to good FP&A resource.

I don’t report performance against rolling forecasts. It’s too easy to bury bad news with ‘death by a thousand cuts’. Again, lots won’t agree. Finance is all about driving behavior, and reporting against rolling forecasts gives too many hiding places for bad behavior from my experience.

9. An informative narrative built on data

This is where your management accounts spring to life. You must provide a robust commentary based on data from the management accounts. You should highlight (call out boxes, cell borders/highlights) the hero messages.

Use a big headline across the top of each page, signposting a) what happened, b) why, and c) what needs to be done.

Here is an example:

“EBIT of $4m in January, missed budget by $2m, due to cost inflation eroding gross margins. A 3% selling price increase is urgently required to offset this.”

If the headline is that EBIT missed budget, highlight the EBIT variance to budget. Then make that the commentary serves that single message on the page.

Make sure any reader of the management accounts is left 100% certain on what the one-line story is of the month.

10. Clear linkage to the performance management cycle

There is no point doing 1-9 if you don’t link the results to your performance management cycle.

Management Accounts should link to OKRs. Or personal objectives, or whatever system your business uses.

This is how you get your management accounts (output) down to the people on the ground (inputs). The golden thread.

If you’ve decided to measure Average Revenue Per User in your management accounts. Then you need to make sure it’s built into the OKRs of your sales teams.

11. Follow through on actions

Once you review January management accounts and agree what must get done. Follow up on February accounts to make sure:

a) it happened (inputs)

b) it worked (outputs).

Rinse and repeat.

MEME OF THE WEEK

Niche … but it made me laugh.

BOOK CLUB

No book this week. Something better. The one newsletter that I read as soon as it drops each week:

In Mostly Metrics CJ Gustafson breaks down business models and metrics each week.

Alongside having a name that sounds like an NBA Hall of Famer, CJ is a tech CFO sharing his hard won lessons leading venture backed finance teams.

This breakdown of the Cash Conversion Cycle is a must read.

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FEEDBACK

Longtime crispy one Johnny Z had this to say about last week’s edition. He REALLY liked the post on cost behavior:

I’ve pushed back the follow up post on cost behavior by a couple of weeks, because frankly he needs a bit of time to cool off (and dry off).

POACHED GREG

Big boys don’t hold back when delivering bad news. Cousin Greg is a big boy. Here he is telling Tom they ‘were in fact, listening …’

Until next week, find more here:

• CFO Secrets newsletter (www.cfosecrets.io)

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Stay Crispy,

The Secret CFO

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director or friend. Well, maybe I’m your friend. But I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need to make the right decisions.