This guide is based on some of the experiences during my accountancy career in and around Northampton where management information, budgeting and planning have helped to improve the bottom line of businesses I have worked with.
What is management information?
Although it’s a very broad area management information (MI) generally includes statistics about a business that relate to its performance, this doesn’t necessarily have to be financial information although a profit & loss, cash flow statement or balance sheet do fall into this category, MI could just as easily include figures on customer satisfaction, employee retention or health & safety. The best management teams out there will have a tailor made set of statistics know as a balanced scorecard, the idea behind this is that the business itself will become well balanced by considering multiple aspects relating to its success.
Identifying your objectives
As a starting point to developing your own management information strategy it is important to have a think about your businesses objectives and what you are trying to achieve, a SWOT analysis is often the most thorough way of doing this as it forces you to consider the risks involved as well, see below for an explanation.
Strengths – These are the activities and attributes your firm excels at that make you competitive, it is important to identify what they are because then you can work hard to protect and maintain them as well as use them as an unique selling point when trying to acquire new customers.
Weaknesses – These are the opposite of strengths and are generally areas you want to improve on or you may want to create a contingency plan in case your competitors start using them against you.
Opportunities – These are different from strengths as they focus on the world outside your business, they are factors which you have little control over but could potentially adapt your business in order to exploit them for profit or other gains.
Threats – They are the direct opposite of opportunities and they pose a risk to your business if they were to arise, good business owners will have a plan to reduce the effects of any threats to their business.
Collecting the information
Once you have identified the objectives and risks to your business you can start to think about the statistics relating to them that either measure success and failure or the ones that act as an early warning indicator so that you can react in time.
Sales and profitability are the obvious indicators but then perhaps looking at customer retention rates to track customer satisfaction or the relationship between your marketing spend and the number of new customers it generates can help you fine tune specific areas of your business and allocate resources effectively.
A list of all of the key performance indicators (KPI’s) would overwhelm this guide and as a firm Northants Accounting would work closely with our clients to tailor a management information strategy that’s right for their business.
The information required can be collected in various ways including through your bookkeeping methods, reports filled in by staff or if you want to invest in it an advanced electronic point of sale (EPOS) system that records your transactions in a greater level of detail.
Analysing the figures
The numbers you have obtained will generally only mean something if they are part of a ratio, after all its pointless arguing that your new marketing activity is expensive because costs have increased by 20% when it has doubled the number of customers you have and your profits are up. You would want to look at spend per customer achieved to get a real reflection of the value generated.
In addition to considering the ratios, trends for previous months and years will give you an idea of what normal looks like for your business and help you manage the impacts of seasonality, this could lead to better promotional strategy, stock control and staffing levels over busier periods.
Using the information
Okay so your analysis of your chosen KPI’s shows that the number of defective products sold per thousand has increased since last year, what can you do about it? You could potentially start with an investigation into how your business handles stock to see if your procedures or lack of them are causing damage to the products. If you have traced it back to the supplier you may be able to negotiate a flat rate damage discount in order to help you compensate your customers, or if they refuse to acknowledge the issue exists then maybe it’s time to part ways.
What if the number of referrals you were generating per 100 customers reduced? You could launch a campaign to try and encourage more customers to recommend you or maybe create a customer satisfaction questionnaire to identify why they don’t feel as eager to tell their friends about your business as they used to.
Both of the examples mentioned above require a proactive approach to recording information in your business and at first will seem like a lot of effort, whether or not you go to that effort will depend on how strategically important you feel that particular business activity is to you. A good accountant and business advisor will always be able to help you with this, in the same way we have done for our clients in and around Northampton.
Budgeting & Forecasting
Once you have developed some expectations for the performance of your business it can be a good idea to incorporate them into a budget. You won’t always have time to micro analyse every part of your business and a budget will give you something to compare your actual performance to on a monthly basis and identify the areas that are the furthest out from your expectations.
A budget can be a helpful reminder of upcoming issues in your business in case you didn’t remember what happened at the same time last year or if you had planned additional activity later on that you now need to start preparing for. Budgets and forecasts are commonly used to project a weekly or monthly performance over a year however they can also be used as part of a 3 – 5 year plan to highlight the growth potential of a business.
As you progress thorough the year you may realise that the initial assumptions you built your budget on are no longer valid due to changes in your business or external environment. A forecast is essentially an updated budget, which looks at your actual performance in the year to date (YTD) and projects it out over the rest of the year to give you an updated view of where you will end up.
How to use Budgets
Budgets are a great tool when negotiating any kind of pricing, be it with customers or suppliers. If you know what your annual business is worth with a supplier then you can use volumes as a discussion point when trying to get a better buying price or agree a rebate. With customers you will have a better idea of the discounts that you can afford to provide in order to keep their business or maybe even charge a premium as you will be able to provide an improved service due to better planning.
Budgets also help you set targets for commission based staff to achieve and will identify the team members that are good for your business, this doesn’t just apply to sales, it can be used to encourage people to control costs as well. The most important thing however is to ensure that any targets you set will encourage the staff to act in the overall interests of the business and not just for their personal gain.
Cash flow forecasts are also a type of budgeting activity and some businesses can save themselves thousands of pounds in bank charges every year by carefully planning cash levels to avoid using overdrafts and improving their credit ratings so other loans are at a lower interest rate.
If you have the attitude to obtain and use this type of information to create growth then we can put the systems you need in place, to capture and explain it. Contact us here to discuss anything in this article.