An Insight into Management Accounts

This week, we’ve been discussing management accounts. It’s an area of accounts and financial information that is generally misunderstood or overlooked, simply because there’s a lack of awareness as to what it is and how it can help your business.

We interviewed an independent management accountant James Sowden from J Sowden Digital Finance Function to delve into what a management accountant is and how it can help your business.

Could you give us a very brief overview of what it is you do?

As a management accountant, I provide business owners/managers with high level financial information and metrics to support decision making.

Essentially, I’ll take the financial information available within your business and work with you to understand key metrics to help your business grow. This usually involves looking at what the costs are in the business, how we can improve them and trim your bottom line or see how your sales are performing and where it stands against your forecast.

What kind of services do management accountants usually offer?

A main part of what I offer is the production of key metrics which I put together for businesses as part of a monthly management pack. This can include things such as a profit and loss summary, looking at net profit percentages, various information on sales targets. It’s all very customisable and really depends on the business.

Most businesses want to look at their profit and loss as a basic overview – however one of the beauty of management accounts is how much we can drill into your business. For example if your costs are 1% more than normal and the business wants to understand why – we can look at the micro details and what is affecting it. Is it an increase in staff levels, has more overtime been paid out for than forecast, has the utilities been higher than normal etc. If the business sells products as opposed to services, we can drill down into their cost of sales. For example as a restaurant - is what they’re purchasing on budget, over budget, are price fluctuations expected, are they manageable and has the business made allowances for this?

Management Accounting historically came from manufacturing, back then analysis was done on cost of sales. It would be looking at material costs, the utilisation of those materials, what the wastage was and how efficiently they were being used. As part of the management accounts, all this information would be pulled together into relevant information that could be understood so that actions could be taken as necessary.

As time has moved on, management accounts has adapted to suit more service based organisations across all industries. It provides a level of information to help the business owner understand how their business is performing.

With service based businesses, the tendency is to be more staff orientated. What this means is that analysis looks more at staff and overtime usage as opposed to cost of sales per se. It completely depends on what the business wants to look at and focus on.

Do you have anything that you specialise in?

Because of the nature of business at the moment, I do tend to be more service based orientated. Professional services don’t really look at cost of sales but more at overheads in general. This can be anything from rent, utility usage etc.

Where I can provide real benefit is helping people get their processes in place so that they can readily access that information. A lot of what I do is helping people get their practises into place and is very process orientated.

My real area of expertise is pulling information together and working with a business to provide them with the tools for business growth. However in order to get to that stage; I find that as very few people truly realise how the information they already have can be adapted for this purpose, I end up working on the process side first. A set of accounts either management or year end accounts is an end product. In order to get to that end product, I do a lot of work with clients to enable their data entry process and get them into a position within a month where they are able to retrieve that information.

Regardless of which accountancy software you use or which CRM system you have, you still need someone to input the data and to ensure that it is being done in the correct and most efficient way.

You manage the accts for businesses of different sizes, ranging from very small to medium enterprises, at what point do you think the best time is it to bring a management accountant into your business? Is it from the very start or after the first year – for you what is best practise?

Usually from the very beginning but it really depends on what type of person you are. If you have zero interest in finance (lots of people don't), if you’re the type of person that just wants it all to be done, I recommend having a management accountant right from the outset.

If you have a bit of an idea and you know what you’re doing to a degree or are interested in the financial side of things and want to do the analysis yourself, then maybe after a year or two, once you really feel the need.

For businesses that have been operating for over a year management accounts is something that a lot of people don’t consider. As with any business most things are inspected under cost vs benefits. The key thing is to first of all determine if a management accountant is needed in your business and then to assess if they are in a position to be using that information. There’s no point in a management accountant providing relevant information if the business then doesn’t use it to their full advantage.

When you work with a business, what is it that you need from them in order to provide your services?

To be honest, I don’t necessarily need anything from them. I’m there to aid the business and help it grow. As mentioned before sometimes people will throw everything at me and say here, deal with this and other times I have a system that I can access and pull information from.

If the business doesn’t have anything in place, I’ll work with them to get that process set up.

If a business came to me and said I need to increase sales, that’s not something I can do as I’m not a salesman. What I can do is look at what they have forecasted as a sales target, why that target has been set, is it achievable, is it realistic and is it enough to cover their costs?

If the sales target has a huge shortfall, we can analyse the data to understand why this is the case.

If we flip the situation and look at the costs side of things, we can see how we can streamline the business to trim the bottom line. Is the heating and electric bill too high? Are they paying an exorbitant amount for their internet bill? If so we can look at reviewing those bills and quite often, the ball gets thrown back in my court to do something with and I’ll look at better options for them on those fronts.

What really helps in my role is to have the business owner show an interest and then say - right how can I improve? How do I improve sales and how do I cut costs? Generally those are the two main areas that people want to understand. How that breaks down is different per business and how they then manage their cash flow.

For those who don’t know and think that an accountant is someone that deals with everything can you explain the difference between bookkeeping and management information analysis.

Book keeping is getting data from raw form onto an accounting system. It’s effectively data collection. A classic example is CRM – if you have customer data on an excel sheet with their names and addresses and you want to put it onto a CRM system, then it’s just a data entry exercise. All you’re doing is getting information from one location to another. Bookkeeping is getting the data in its basic form from invoices, bank statements etc. onto an accounting system. At this point it’s still in its raw form, all you’ve done is populate the accounts system with data. At that stage the data is all just a bit meaningless. Where I support businesses is by turning that raw data into information that is understandable and meaningful.

The information goes from being a list of customer names to a projection of sales, from being a list of suppliers to a cost saving exercise.

You’ve rebranded into a digital finance function – what is the difference between an accountant and a digital finance function?

The reason I chose to rebrand is simply because I want to highlight the whole digital and cloud aspect of finance and accounts. There is a big push to get your accounts modernised and digitalised through various software packages such as Xero and Quickbooks.

I want to emphasise how we can do away with paper in accounts. Nowadays everyone should be sending invoices by email so that can be forward it onto the accounts system either directly or via systems such as Receipt Bank which is now Dext. Dext has built in OCR which is incredibly useful as it can pull out dates, invoice numbers, values, quantities etc. These can be taken straight from an emailed invoice and goes straight into your accounts system all from the touch of a button.

From old school days it would be a case of having a screen in front of you and having to flick between two different programmes to get the information from the invoice onto the system, or inputting from a paper invoice.

With the OCR function, the entire process is swift and far more efficient. Additionally the image of the emailed invoice is available for viewing next to the transaction in the accounts system, which means you don’t need to go looking for that separate a file. It’s easily available, again saving time and money.

Really the digital finance is to highlight and change the perception of what finance is – it’s more than just preparing year end and tax returns that go off to HMRC.

Putting together tax returns and year end accounts is in reality just a box ticking exercise. It doesn’t give the business any real information that can help the with planning and strategising for their business.

Quite often, if a business does want to look at their accounts from a planning perspective, it’s already out of date. Getting everything digitalised means that you are able to have access to your information quickly and regularly.

A benefit of having a digitalised system is that as a business all the information you need is already there. You don’t need to wait till year end or half year end to access it, it’s already there so why not utilise it to help the business grow?

Another way I help businesses is by working with their bookkeeper. I work with numerous bookkeepers where they provide the data – sometimes they are in-house sometimes they’re out sourced. What I will do is discuss with the bookkeeper what data they are inputting, the method and reasons behind why they are doing things in certain ways. It’s one thing to say here, upload this information onto the system, if it’s not done in the right manner or information is put in incorrectly, not only are you creating a real headache for your year end accounts, but it’s giving you misleading information. Quite often I work with bookkeepers to ensure that the data is processed in the right manner so that I am able to access it and know that the information I’m providing is correct.

Do you do any training on data entry processes?

I do provide training on Xero, not just for bookkeepers but on various other areas as well. Xero is the software package that I specialise in. I am familiar with others such as Quickbooks, however my focus tends to be more on Xero.

Why would a business work with a management accountant as opposed to just a financial accountant?

To be honest there aren’t many management accountants around that are independent. Most work within practices or in corporate companies.

The main reason I think its helpful for businesses to work with a management accountant is that it’s always good to ensure that you are getting the right level of expertise. I’m not the best at doing tax returns, that’s not an area I focus on.

As a business if you want key management information, that’s where I can help. Having an outsourced management accountant and an outsourced financial accountant means that you are receiving expert advice and work from individuals in their chosen field.

Who are your customers?

I have a wide range of businesses I work with. To be honest it’s less about industry and more to do with size.  

For providing management information, where I can really help is at the point where a business has grown and hits the VAT threshold where their turnover is around ￡100,000 and they have a handful of staff on board.

It’s at this stage where the numbers can become more complex that I can assist in the planning and analysis for the businesses growth.

For smaller businesses, I’ve had a recent uptake with people wanting to move towards digitalisation and training on Xero. There is no set industry that they come from and I’m able to work with anyone regardless of location.

I understand that you are a BBX customer – from an accounts point of view, how does BBX impact on finances?

I treat BBX as another bank account, it’s simply another stream of revenue. Its money that is available to spend.

If you have spare capacity and sell that on BBX then you raise an invoice and it’s paid in BBX. You can then use that to pay for other items as and where needed. It’s a little like crypto currency in that you have funds that can be used to pay for other goods and services.

How does it work in terms of adding to overall turnover?

With BBX, you have an option to use your spare capacity. If someone wants your service on BBX then you have the chance to make more revenue as opposed to not using your spare capacity to generate additional revenue.

It’s particularly helpful for start-ups and smaller business and those that have spare capacity as it is income that can be used for other services.

How does BBX help in terms of cash flow?                         

BBX is incredibly helpful for cash flow, especially if you are able to utilise it for any regular overheads. For example if you are able to pay for your office rent on BBX, it means that your cash flow is available for other items that will require cash.

For myself personally, I have to pay for a lot of subscriptions such as Xero accounts for my clients. I have to pay cash for that, so if I am able to use BBX to pay for my overheads, I can then use cash to pay for those subscriptions.

If you need to pay for admin or telemarketing and it’s available on BBX, then it’s a good idea to do so as it means that cash is kept in the business.

As a BBX customer looking for finance such as bounce back loans, how can a BBX account help?

As BBX is a currency I would treat it as any another currency. If you have BBX in your account then you can add it to the balance sheet on your business. It will improve the liquidity of your business and strengthen your overall position. It helps with liquidity in that loan repayments will require cash and if you are able to use BBX for other expenses such as phone costs or office space costs, it means that you have more accessible cash to repay a loan and that will be taken into account.

How long have you been providing management accounts to businesses?

I’ve been doing management accounts for over 20 years and been providing independent advice for 5 years. I tend to work with small to medium businesses who don’t have an internal management accountant. Often, it’ll be half a day to a day a month which makes it affordable for a business as they’re not then having to pay a full time salary by having one in-house. They’re getting relevant and meaningful information they require for a very affordable amount.

How are you finding business at the moment?

Work wise, it’s going well. As mentioned earlier I’ve had a huge increase in customers wanting to digitalise their accounts and needing training on Xero.

The area that I’m keen to see more work in is the preparation of key metrics. To quote someone within my network, “you don’t know, what you don’t know.”

By this I’m referring to the fact that so many people still don’t understand what a management accountant does or how they can help your business. For me it’s part of what I feel I need to do in order help my business grow - educate people on management accounts and the benefits it brings.

Do you have any further plans in terms of growth or rebranding?

I’ve recently re-branded and have made the move to emphasise that I am a digital finance function. What I am looking at now is offering bookkeeping services so that I can offer a complete package to clients.

For the time being I feel its important to educate people on management accounts and although I can work with anyone location wise, I still feel that individuals prefer to work with someone within reach.

I’ll be keeping my focus on the South West region and looking at working with people where I can do what I really enjoy and that’s analysing and interpreting data.