Are
You Managing Your Business Effectively?
What do you do
on receipt of the monthly management accounts? Are they
placed in a drawer and forgotten about? Do you actually
read and understand them? Do you use them as a basis for
decision making..........................................or
do you wonder what management accounts are!?
In our experience
management accounts tend to be inaccurate, lacking in focus,
deficient in key performance indicators, produced too late,
not used to great advantage and misunderstood.
One of the frequent
causes of company failure is lack of meaningful management
accounts and poor interpretation thereof due to a lack of
understanding. Management accounts, if produced accurately
and timeously, provide useful feedback on business progress.
Used properly, management accounts can provide detailed
information on all areas within the business thereby resulting
in better decision making, increased profitability and improved
efficiency.
There are many
ways in which detailed examination of the management accounts
can make a positive contribution toward the effective management
of the business including:
-
identification
of those areas where business performance can be improved;
-
identification
of business trends by analysing key performance indicators
e.g. gross margins, return on capital employed, gearing
ratios, turnover/gross profit by business segment;
-
identification
of value and cost drivers;
-
measurement
of actual results against budget;
-
cost analysis.
The foregoing
is not an exhaustive list and clearly, each business will
tailor its reporting to the issues of main importance to
it.
Management accounts
are an effective tool which, if used to best advantage,
enhance the decision making process and lead to improved
business performance. An examination of the products and
services presently on offer, customer profile, customer
needs, existing markets and delivery channels will facilitate
the development of a long term strategy which will secure
the continued success of the business.
Detailed review
of the management accounts will identify areas where gross
margins are falling which could lead to a decision to cease
operating in a specific business sector. Such a review will
also lead to discussion on those areas which the business
may wish to become involved in the future because of an
increase in demand/high margins within that particular sector.
Management need
to ask themselves constantly "what businesses are we/could
we be in?"
Your unique selling
points need to be identified to determine how customers
perceive your products and services as compared with those
of your competitors. In other words "why do your customers
buy from you?" Is it because of:
Do you benchmark
against competitors?
By examining these
factors closely you will identify areas for improvement
thereby increasing your competitive advantage. You will
be able to carry out "what if" analysis by investigating
the effect on the value drivers of improvements in competitive
advantage. An example of the value drivers to be considered
would include:
Case
Study : X Limited
Meston Reid &
Co has been working with a client for a number of months
where the principal scope of work is to assist with the
strategic planning process. As part of the ongoing assignment
we have developed a management accounts reporting system
whereby all costs arising within the business are scrutinised
and categorised between direct costs and overheads. Time
is being invested by management to ensure that monthly accounts
are as relevant, accurate and timely as possible. The key
performance indicators relative to the business have been
identified and a monthly report summarising the results
and quantifying the key performance indicators is scrutinised
in detail by the management team in order to identify those
areas of the business which are performing well and highlight
those areas which are underperforming. The results and key
performance indicators are also compared with forecast.
This allows management
to take swift corrective action thereby improving profits,
increasing efficiency and enhancing the enjoyment of working
in the business.
Result : a happy
client.
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The
Balanced Scorecard
Another useful
management tool is the balanced scorecard which was developed
in 1993 by
Dr Robert Kaplan
and Dr David Norton. The balanced scorecard seeks to set
a range of targets with specific objectives within a range
of areas covering finance, customer satisfaction/needs,
product development, internal business functions, learning
and growth. Utilisation of this process will provide excellent
feedback on both the internal processes within the business
and the related external outcomes which will, in turn, improve
a business's strategic performance and results.
This approach
will assist in identification of:
-
systems and
processes requiring improvement;
-
past and future
trends in performance;
-
those key performance
indicators and other measurement methods most appropriate
to the organisation.
The balanced scorecard
is a management system which enables organisations to clarify
their vision and strategy and translate them into action.
According to Kaplan
and Norton:
"The balanced
scorecard retains traditional financial measures. But financial
measures tell the story of past events, an adequate story
for industrial age companies for which investments in long-term
capabilities and customer relationships were not critical
for success. These financial measures are inadequate, however,
for guiding and evaluating the journey that information
age companies must make to create future value through investment
in customers, suppliers, employees, processes, technology,
and innovation."
An example of
the balanced scorecard follows:
Strategic
objectives Strategic measures
Return on capital
Return on capital employed
Cash flow Cash
flow
Profitability
Net margin
Profitability
growth Volume growth rate versus industry
Reliability
of performance Profit forecast reliability
Sales backlog
Value for money
Customer ranking survey
Competitive
price Pricing index
Customer satisfaction
Customer satisfaction index
Mystery shopping
rating
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Marketing
Product and
service development Pioneer percentage of product portfolio
Shape customer
requirement Hours with customer on new work
Manufacturing
Lower manufacturing
cost Total expenses per unit versus competition
Improve project
management Safety incident index
Logistics
Reduce delivery
costs Delivered cost per unit
Inventory management
Inventory level compared to plan and output rate
Quality Rework
Innovative products
and services Percentage revenue from pioneer products
Time to market
Cycle time versus industry norm
Empowered workforce
Staff attitude survey
Access to strategic
information Strategic information availability
Continuous improvement
Number of employee suggestions
Source: Drummond
& Ensor 2002
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"Disney
Drops Muppets Deal"
Do you remember
this story? Well it appeared in the Financial Times in 1990
and it is an extreme example illustrating that even in large
businesses people are important.
"Walt Disney has
abandoned plans to acquire Henson Associates, the company
behind the popular Muppet characters. The talks ended late
last week with the two sides unable to agree terms on a
deal that analysts estimated would have been worth between
$100m and $150m. Disney and Henson had been negotiating
for almost eighteen months.
The death in May
of Mr Jim Henson, founder of Henson Associates and the instigator
of the deal, sparked disagreements between Disney and Mr
Henson's five children, who took over the business from
their father. It is believed that Disney argued that Henson
Associates was worth less after its founder's death, because
he had been the creative force behind all its successful
characters
Mr Henson's children
were thought to have been demanding a higher price. The
deal, announced in August 1989, envisaged Disney acquiring
publishing and licensing rights to all Muppets characters,
except those created for the " Sesame Street "
television programme."
Can you
Imagine?
It's Monday morning,
as you sit back in your chair you reflect on the successes
of last week and look forward to the challenges that the
forthcoming week may bring to you, and the business. The
phone rings. it's the Finance Director's wife, " I'm afraid
John will not be coming into work today, in fact for quite
a while, he's had a heart attack." How robust is the business
plan now? What happens next?
The business had
many plans but had not considered how it would cope if one
of the partners, or a core member of staff was seriously
ill or even worse, died unexpectedly. Early unplanned exits
from employment can mean a loss of valuable experience,
skills, expertise, and often contacts, or clients, to a
firm. It is important that the business looks towards ways
of insuring the company against these risks.
People are 2.5 times more likely to suffer a critical illness
before age 60 than they are to die. A firm may already have
life cover in place, have you thought about extending this
to critical illness cover?
Insuring important
people within the business can help cover a potential loss
of profits as a result of the individual's absence or death.
The funds could also be used to help hire a top quality
replacement. Alternatively you may be concerned with retaining
control of your business and buying back the deceased's
shares from their Estate. It is often forgotten that there
is no ready market for private company shares, with careful
planning the deceased's partner can receive the value of
the shares whilst the remaining business owners retain total
control.
Like people, no
two businesses are the same. Each business is likely to
require a different type of protection package to protect
itself and its core members of staff. For this reason, the
new breed of menu products, specially designed for the needs
of the business protection market, provide the flexibility
required to create a tailored package for each business.
In association
with Meston Reid & Co we plan to run a series of articles
on the importance of Business Protection. We will consider
different types of businesses such as Partnerships, Sole
Traders and Limited Liability Companies. The main focus
will be on how a business can survive in the event of death
or series illness of its key people. It is hoped the articles
will provide a reference point for business owners and should
also appeal to professionals who support businesses such
as Lawyers, Accountants and Bankers. If there is sufficient
interest we are keen to run workshops which will be CPD
accredited for professionals but more importantly we are
keen to hear from all business owners who may be concerned
of the impact to their business and their own personal wealth
in such circumstances.
This article has
been supplied by Paul Shanahan of Futura Investments, 15
Victoria Street , Aberdeen AB10 1XB Tel: 01224 624113 E-mail:
paul@futurainvestments.co.uk. Futura Investments is an Appointed
Representative of Sesame Ltd., which is authorised and regulated
by the Financial Services Authority.
Futura Investments
cannot accept any responsibility for any loss arising from
actions taken as a result of the information contatined
in this article. The article is not intended nor should
it be taken to create any legal relations, contractural
or otherwise.
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How
to Reduce the Risk of Bad Debts
Before transacting
business with a potential new customer do you carry out
a credit check as a matter of course? If yes, well done.
If not, you run the risk of incurring bad debts.
By obtaining a
credit rating on a customer, or indeed a supplier, especially
where payments are required in advance, you will help to
satisfy yourself about the financial stability, or otherwise,
of the organisation with which you are dealing. You are
then able to make an informed decision as to whether or
not you should enter into a relationship with that business
based on an official credit rating supplied by an independent
third party and also the credit limit to be set for each
customer.
In return for
a very small investment in terms of time and money you will
substantially reduce the risk of incurring bad debts, which
will, in turn, increase profitability.
Meston Reid &
Co provide this facility at low cost to you, coupled with
a fast efficient response time.
Interested?
Call Us Now
For further information
or to arrange a free consultation contact Bill Griffin on
telephone number
01224 625554.
We can also be
contacted by e-mail at griffinb@mestonreid.com
or by fax on 01224 626089, or visit our website at
www.mestonreid.com
to complete our interactive questionnaire.
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