(This is a summary of an actual case. The names and details have been changed slightly to protect the offending parties.)
B Ltd was a relatively young metal fabrication company, set up by an entrepreneurial character (let’s call him Richard B) who saw a gap in the market. Year One saw a turnover of £250k and a small loss. Growth was good in Year Two, and turnover had increased to £500k, with an expectation that the year-end accounts (once finalised) would perhaps show a break-even position or even a small profit.
We were called in in the middle of Year Three before Year Two accounts had been finalised by the previous advisors. Something appeared to be amiss!
Richard B, although he had entrepreneurial skills, was somewhat of an optimist, having spent much of his working life in a sales environment. More sales to him was definitely a good thing, and could only (or so he thought!) lead to more profit. Here we are, in the middle of Year Three, and already sales had reached £500k.
Unfortunately, Richard was so focussed on increasing sales that he took his eye of the ball, and didn’t prepare regular trading figures for the business. Yes, sales were great – but even he recognised that the cash wasn’t coming in quickly enough to cover the payments due. In a fast-growing environment, this can often happen and is referred to as “overtrading”.
Although the basic records were maintained adequately for the preparation of VAT Returns, no management accounts were prepared. Lambert Chapman took these basic records and swiftly identified the problems by preparing the necessary trading figures.
Several areas needing attention were pinpointed by this process, fortunately not too late in the day:-
- Sales had been increasing – but this had been at the cost of reduced margins and excess discounts.
- Debtors had been increasing too – the increased sales were being made at terms such that longer was offered for settlement – the result being the cash flow problems now being experienced.
- Absolutely no control was being exercised with overheads – they were all but running out of control. All that Richard B. had been interested in was sales, sales and more sales.
Richard B. was able to rescue the situation by delicate negotiation with his suppliers, and by seeking assistance from his bankers in the form of an invoice discounting facility.
Quite rightly, his bankers insisted that he provided them with regular management accounts in the future. As well as showing how the business was performing in actual terms, and in good time, these would help to identify trends (be they positive or negative) and give Richard B. the chance to take any necessary corrective action promptly.
Management Accounts combine finance, accountancy and management information, enabling business owners to make informed business decisions by providing regular, timely and relevant information. This is invaluable to a well-run business and can be used to drive performance, maximise profit, make strategic decisions and highlight issues early on.
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Disclaimer
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.