Management accounts and time travel
Between you and I, I wouldn’t say that I was a big consumer of TV programmes but I have, of late, been watching a couple of foreign language series on Netflix which are all about time travel. And last night something was mentioned that made me think about the topic for this blog. A character was describing time as a continuous loop, and they referenced Nietzsche’s thought experiment of eternal recurrence – he was concerned with how we might choose to live our lives if they were destined to forever repeat themselves. I know, I know what some of you are thinking ‘How on earth….?’. Bear with me.
In some ways that describe the focus of this blog; indeed, of many pieces of business / organisational / management advice. There are certain common themes that always come up. Challenges to a business owner/manager and suitable solutions to such. Yes, technological and IT advances can impact these. But often these developments make business challenges somewhat easier to address – but they rarely banish them altogether. They are always with us, so to speak.
Often the challenges can be thought of as a result of bad habits – they can be solved or minimised but we have got into a bad habit of ‘making do’, ‘muddling through’ and not properly sorting them out. And what better time to do something about them than Spring – the season of renewal.
There are several common themes we encounter in terms of the typical challenges facing many SMEs; one which we frequently come across is a lack of timely, accurate and meaningful management information. This doesn’t necessarily just mean monthly management accounts; but it is very likely the case that materially accurate management accounts, produced quickly after the month-end will be the central pillar of meaningful management information. For themselves, they may not be sufficient to achieve the goal, but they are necessary.
You could be forgiven for thinking ‘Typical! An accountant going on about the need for historic accounts. Management accounts are always backwards-looking and I need to know what is coming up!’. There is a degree of truth in this, but I don’t think that the charge actually sticks.
Yes, management accounts are backwards-looking – but they are also focused on the present, i.e how have we gotten to where we are now; and where exactly are we now in terms of business performance.
Put another way, if you don’t know where you are and how you have got there it can be quite a challenge to work out what might be coming down the path towards you; and, importantly, what direction your next step should be in.
There will always be a trade-off between accuracy and timeliness when producing accounts. But if these trade-offs are known we can understand which elements of our data rest on shakier foundations and, importantly, make decisions much more aware of the limits of our knowledge. We know from our work with our clients how they have approached the trade-off question and that it is relatively straightforward to do this.
With Covid, climate change and now the conflict in Ukraine we have witnessed and been impacted by, several unexpected, unusual ‘black swan’ events. There have been so many recently that they are starting to no longer feel unusual.
As many of us have seen, these types of occurrences have the potential to have material, possibly even catastrophic impacts, upon businesses and their operations.
Timely management data allows the owner to better understand what those impacts currently have been and are and, crucially, what their short to medium term future impact might be. By accurately understanding the recent past of the business, the owner is better able to make a balanced judgement on what the range of options in the immediate future might look like. And as a historical database of monthly management accounts is built up it holds out the potential for some businesses to identify underlying patterns which allow some degree of prediction of the future.
There is another benefit of accurate management accounts and that is if you are contemplating a transaction or receive a tempting approach from a potential buyer. Accurate and timely monthly management accounts, produced over the long term, can allow the owner to more readily communicate the cash generation capacity of the business to a potential funder and/or a potential acquirer. And in both cases will form a fundamental component of clearly and persuasively articulating the ‘value proposition’ of the business.
There can be a degree of nuance and difference from business to business in terms of what the management accounts should include – but, there is also usually a great deal of commonality relating to such questions as what are the levels of revenue generated?; what is the gross margin per product or service line?; what is the overhead cost base (especially those costs which produce a cash outflow) and to what extent is this smooth or characterised by peaks and troughs?; what is the current working capital position?; are there any problem debtors? and is the business collecting in cash and paying it out on appropriate timescales?
So, let’s turn back to Nietzsche and his thought experiment. If you knew that you were going to live your business life in an eternally recurring time loop what would you do differently now to make that life easier?