How to read your management accounts

A lot of business owners are handed a set of management accounts every month and quietly have no idea what to do with them. They flick to the profit figure at the bottom, decide whether it looks about right, and move on. That is a waste, because a good set of management accounts is one of the most useful tools you have for running the business. The trick is knowing where to look and what each part is actually telling you.

Here is how I talk it through with clients when they are new to it.

Start with the profit and loss, but do not stop at the bottom line

The profit and loss account shows what you earned and what you spent over the month, and what was left over. Most people go straight to the last line. The more useful habit is to read down the page.

Look at your income first, then your direct costs, then your overheads. The gap between income and direct costs is your gross profit, and it tells you whether the core work you do is priced properly. If your gross profit margin is sliding month on month, something in your pricing or your delivery costs is drifting, and that is worth catching early rather than at year end.

Below that sit your overheads, the running costs of the business that do not move much with how busy you are. When profit is disappointing, the answer is usually either in a shrinking gross margin or in overheads that have crept up while you were not watching.

The balance sheet tells you what you own and what you owe

If the profit and loss is the story of the month, the balance sheet is a snapshot of where the business stands right now. It shows what you own, what you are owed, what you owe others, and what is left for you as the owner.

The two lines I would always check are your debtors and your creditors. Debtors are the money your customers owe you. Creditors are what you owe your suppliers, and what you owe in tax. If your debtors are climbing, you are doing the work but not collecting the cash quickly enough, and that will catch up with you. If your creditors include a growing tax bill, that is money in your account today that is not really yours to spend.

Profit is not the same as cash

This is the one that catches people out most. You can have a healthy profit figure and still be short of cash, and you can have money in the bank that is already spoken for.

Profit is what is left after costs on paper. Cash is what is actually in the account. The two drift apart because of timing. You might invoice a big job this month and count the profit, but not see the money for sixty days. You might take a deposit for work you will not deliver until later in the year. A profit figure on its own does not tell you whether you can pay the wages next week. For that you need to look at cash alongside it, which is why a cash flow forecast matters as much as the accounts themselves.

Compare against something

A single month's numbers in isolation do not mean very much. The value comes from comparison.

Compare this month against last month, and against the same month last year, and against whatever budget or plan you set at the start of the year. That is where the useful questions come from. Why is this cost higher than it was. Why has this margin dropped. Are we ahead of where we expected to be, or behind. Good management accounts are set out so those comparisons are easy to see, because the differences are what tell you where to look.

What to actually do each month

You do not need to understand every line to get value from your accounts. If you have twenty minutes a month, spend it on a handful of things. Check whether your gross margin is holding steady. Check whether your debtors are being collected on time. Check whether there are any costs that have jumped without a clear reason. And look at your cash position next to your profit, so you are never surprised by a shortfall.