A law firm was doing well, or so it seemed. Fee income was rising every month, and the partners believed the firm just needed to keep winning more work. Then the monthly management accounts told a different story. Work in progress (WIP) was climbing quickly, debtor days had stretched beyond 90, and the cash balance was falling despite the growing revenue.
The problem was not the lack of work
The firm’s real issue was that it was slow to bill and slow to collect. Without monthly reporting, it would have kept chasing more work and kept wondering where the cash was going.
Once the numbers were on the table, the partners acted. They introduced monthly WIP reviews, set billing targets for each partner, and put a follow-up process in place for overdue invoices. Within six months, WIP had reduced significantly, debtor days had improved, cash flow had strengthened and partner profits had increased. The biggest opportunity had never been more work. It was billing discipline.
Revenue growth alone does not guarantee success. Margins and cash flow show whether the growth is working.
How management accounts differ from financial statements
Standard financial statements are built for compliance and for external readers such as the bank, the IRD and shareholders. They are usually prepared annually, in a standard format, and they show what happened.
Management accounts are built for the people running the business. They are prepared monthly, tailored to the business, and look forward as well as back. Their job is to explain why the numbers moved and what to do next. That is the difference between financial reporting that satisfies a requirement and financial reporting that helps you decide.
What belongs in monthly management accounts
A good set of management accounts starts with a short executive summary, so the key messages are clear before anyone reads a table. It then includes the profit and loss report for the current month and year to date, the balance sheet and a cash flow report. A budget versus actual comparison shows where the business is running ahead or behind plan, and a KPI dashboard puts the key business metrics on one page.
A forecast for the next three to twelve months adds the forward view, and commentary explains the significant movements. The best reports finish with recommended actions, because numbers without a next step tend to sit in an inbox.
The business metrics worth tracking each month
The right numbers depend on the business, but most owners should watch five areas.
Profitability covers revenue growth, gross profit percentage, net profit percentage and EBITDA. Cash flow means the bank balance, operating cash flow and the forecast cash position.
Working capital covers debtor days, creditor days and inventory turnover, and it is where the law firm’s problem showed up first. Growth looks at new customers, retention, average customer value and the sales pipeline. People cover revenue per employee, utilisation or productivity, recovery rate and staff turnover.
Beyond these, every industry has its own measures. Professional services firms watch WIP, recovery percentage, debtor days and billings. Retailers look at sales per square metre and inventory turnover, manufacturers at production efficiency and scrap rates, and construction businesses at project margins and work won compared with work tendered.
Three more businesses, three decisions
The law firm is not unusual. In another case, a business grew revenue by 25% over 12 months, and the monthly reports showed gross margin falling from 35% to 25%, debtor days rising from 45 to 82 and inventory nearly doubling. Growth was consuming cash. Management raised prices, tightened credit control and reduced inventory holdings, which improved cash flow, profitability and the balance sheet.
An engineering company reviewed customer profitability each month and found that about 20% of customers generated most of the profit. Several large customers earned little or nothing once discounts and service costs were counted. The company raised prices for low-margin customers, stopped serving some unprofitable ones and focused on higher-value work. Revenue stayed similar, but net profit rose significantly. Not all revenue is good revenue.
A professional services firm saw WIP growing, recovery rates falling and write-offs increasing. It billed faster, improved job management and began earlier conversations with clients about changes in scope. Cash collection improved, write-offs fell and staff productivity rose. What gets measured gets managed.
Making it a monthly habit
Management accounts only work as a habit. Review them every month, ask what has changed since the last report and what you will do about it, and keep the same measures from month to month so the trends are easy to see. A report that is read, discussed and acted on is worth far more than a polished one that is filed away.
Want your numbers to work harder?
If you would like to see how monthly management accounts could work for your business, from choosing the right metrics to setting up a regular report, get in touch with our team.
