13th June 2014
“More detail, please!” Is this a regular response to the monthly management accounts in your business?
Having worked with lots of different organisations, it is interesting to see the detail to which they all report or interrogate their accounts. In much larger organisations the management accounts form a summary which sits atop a hierarchy of individual departmental, location and project-based analyses. But this level of reporting is not relevant to your average SME.
There are, however, lessons that can be learned from the bigger companies and put to good use in management accounts for smaller, less complex companies. Here are my top three:
1. Cost Centres and Departments
Most contemporary accounting software applications will allow you a level of analysis for each transaction or transaction line. These ‘tags’ on the transaction allow you to take a total figure on the P&L; salaries for example, and split this out to see how it is made up. They also allow you to split a single cost across different parts of the business e.g. the electricity bill.
Cost centres and departments don’t have to be used as labelled and can be used instead to account for a person, a location, a project or even a vehicle!
2. Detailed General Ledger
If cost centre and department analysis is too grand or unlikely to get you the level of detail you need, you could consider making your chart of accounts more granular. So instead of having ‘motor and travel’ you could have mileage, public transport, car hire and motor costs as four individual codes. This would allow you to see specific areas of expenses, rather than of having a single gross figure.
3. Project & Job Costing
If the majority of your work focuses around a project then you could use a project code to create a mini P&L by project. This method enables at-a-glance analysis of individual pieces of work, but can also help you when quoting, as you can look back over similar projects and see the true cost of delivery.
Project costing tends to have sub-analysis, to show the type of cost (e.g. employed labour, sub contract labour) but this can be optional. If all you want is a pot of cost and a pot of income project/job costing will work fine.
As with cost centres and departments, you do not have to use this analysis in the traditional sense. As a plant hire operator, you could set an item of plant as the job/project and then apply servicing and parts as your costs and each hire as income, allowing you to build up profitability for each item of plant over its lifetime, including initial purchase and disposal costs.
If you need help finding more detail in your accounts – or need help understanding the detail, just ask!