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Monitoring does work

I'm a professional accountant and I must believe that businesses that have proper monthly management accounts are better run than those that don't. However, having seen David demonstrate the value of (using the right) KPIs, particularly for forecasting profit/cash downturns, I was beginning to wonder. The biggest adjusting factor in most management accounts is the stock/wip figure. [Remember, 1 on stock is 1 on profit – farmers understand this implicitly.] Therefore, if there is no monthly figure for stock (book or counted), then monthly management accounts are potentially meaningless, at least at the gross profit level.

So, I'm bemused by our recent experiences with one retail client:

This particular client, operating in Hereford, sells high value items in a mature market. Whilst our client is an independent operator, the competition is mostly from high street multiples selling more or less the same goods at lower prices on the back of lower service. Getting to a stock figure is a major undertaking on an annual basis, so the management accounts have always been put together without monthly stock. This seemed reasonable as the margin was rock solid at around 70%.

Then, in January, it fell of a cliff, dropping 10% points.

We all looked at the monthly figures and concluded that this must be a stock movement due to Christmas. It would bounce back next month.

But, next month, it was still at 60%.

And the month after.

By this point, David was jumping up and down, although the client and I were still inclined to shrug it off. The client quite rightly pointed out that the simple solution was to raise prices.

Fortunately, this client also has a very competent bookkeeper who was taking the problem seriously. She identified January as the point at which a new supplier was taken on because of delivery/admin problems with the biggest existing supplier. We provisionally concluded that this must be a coincidence as (surely?) this couldn't cause such a big drop in margin.

The only way to prove the point was to follow all purchases through to sales for a given month and compare margins from the different suppliers. The bookkeeper went to it with enthusiasm and, sure enough, the margin on goods from the new supplier was much lower. Furthermore, the switch of suppliers led to a reduction in the volume rebates from the old supplier and, taken together, this was enough to drop the margin by 10% points.

The good news was that the activity created by the bookkeeper had raised awareness of the issue in the sales team and by now the margin was back to normal. The bad news was that this wobble had cost the company 25k in lost profit.

So, management accounts are useful, but you have to believe (and act on) what they are telling you.

Contact David Lloyd at Duckett: