Luke, are my annual accounts as costly and pointless as I think?

Tuesday 01 October 2013

Annual financial accounts are only really ever needed by third parties - the bank, potentially customers and suppliers and usually the tax office. Other than that, they are often completed so far after the end of the period to which they relate, that their usefulness as a tool for running a business is close to nil.

The delay is rarely the fault of my colleagues in our profession. Business owners know that the accounts are an unwanted compliance cost, and therefore pay as much attention to them as they feel is warranted - which is usually very little. Having not signed my 2012 accounts yet, clearly I, subconsciously at least, agree.

That’s not to say that it is not important to have financial information. Management accounts are vital to run any business effectively. They are not strictly required by law and, in fact, it is very rare for them to be shown to anybody outside the business. Businesses cannot usually be forced to show their management accounts to anyone other than their auditors and (in exceptional cases) the taxman.

There are no rules that say what they must look like - it is up to each business to decide what format will best help it to understand what is going on, control the business and make better decisions.

Management accounts often predict the future as well as keep track of the past i.e. they usually include forecasts of what is going to happen in the next few weeks as well as recording what happened yesterday.

In contrast, financial accounts only ever record what has already happened in the past: something that most business owners do not care about other than potentially to learn from their mistakes.

From a pure accountancy point of view, there are only two historic lessons that you need to get ahead of your competitors:

1) ...have management accounts produced on a monthly basis, within four weeks of the end of the month, which monitor actual trading results against those predicted in your regularly revised forecasts;

2) ...have a regular review of the profitability of each of your contracts, service lines or products.

That’s it. You can then use that information to assess whether or not you are on track for what your forecasts show, and the underlying reasons for that.

But even though management accounts are an incredibly powerful tool for measuring current and near-future achievement, they cannot act as a day-to-day guide for what your team needs to do to create ongoing profitable growth.

One of my professional heroes, Ron Baker, says that running your business based only on your accounts is like timing your cookies with a smoke-alarm. By the time you hear the alarm it’s too late!

Ron has come up with a way of helping a business predict its future, by making the most important numbers a business measures those which also matter to their customers.

Ron uses Gordon Bethune, the former CEO of Continental Airlines, as his shining example of this theory in practice. When Bethune took over in 1994 the airline was losing millions, despite achieving its mission to be the lowest cost airline. The trouble was it was so ‘low cost’ that nobody wanted to fly with them.

Bethune decided the key to a turn-around was to redefine what success really was, and then to get his whole team on board to deliver that vision of success. Continental defined success as percentage on-time arrival, the average time it took to deliver all bags to waiting customers and the number of customer complaints.

Just three things - believing that if everyone ensures these three things happen, customers will keep coming back, will tell their friends and colleagues, and profits will follow. They did.

It’s brilliant in its simplicity. You don’t need to try to boil the ocean with too many metrics, or to get so much into the detail you are metaphorically ‘circumcising mosquitoes’. Just answer the question - what three main things do our customers want from us - every time?

No set of accounts, no matter how clever, can predict the future. But armed with great key predictive indicators, and a very current set of management accounts, which prove your theories are right, you have all the tools you need to manage and drive your business forward.