Turning on the Lights

Setting targets

Management accounts should not just be about assessing how well you have done. They should also include some form of budgeting facility.

Budgets have had a bad press in recent years. We all know about government bodies desperately throwing money at projects because they have to spend their budgets. They are examples of how budgets can have a detrimental effect but if used properly they can have several positive benefits:

1. They can act as a target for the owners and managers. On this basis they should be achievable so that they do not have the effect of de-motivating everyone.

2. They can be used as the basis for profit-sharing bonuses e.g. a percentage of all profits over a certain amount are shared between staff. This can even be done on a departmental basis

3. The act of preparing a budget will force the management team to consider what situations may arise in the year and plan accordingly e.g. staffing issues, capital purchases, cash flow etc.

Costs should be an investment

Many businesses focus too much on cost. Their aim is to get costs as low as possible. This can be counter-productive and leads to decisions that damage the long-term health of a business. Think of costs as an investment. Do they enable the business to earn more than they cost? Many businesses ignore small costs that add nothing to the business and cut back on larger costs that might enable the business to grow.

Key Performance indicators

In preparing budgets you will need to consider certain key performance indicators even though you might not call them that. Examples could be the average profit margin you make on goods that you sell or the amount of productive labour against unproductive labour.

If you don't achieve the overall results that you had hoped for it is important to see where you have failed and sometimes to see it in microscopic detail. Having techniques for measuring your key performance indicators is crucial; remember if you can measure it, you can manage it.