Only Trends Matter – A step change in management accounting This is not just a book for accountants; it is directed to all managers in all types of organization, commercial, public, charitable or social, that receive regular profit and loss or income and expenditure statements otherwise known as management accounts. They are the most ubiquitous financial report used in the world today. The author is not an academic and all managers, whatever their discipline should be able to relate to it. Although the author was originally a management accountant he spent the majority of his career in general management so has experienced management accounts from both perspectives. As a CEO he recognized that much time was being wasted at board meetings discussing history, prompted by the management accounts and this instigated his research to find a way of transforming management accounts into a modern day and invaluable management tool. There is a dearth of publications addressing the presentation and format of financial information despite the fact that unless it is comprehensible it is of little use as a management report. Some good managers admit that they find numerous columns of numbers difficult to understand and many don’t admit it at all. It appears to be a subject that accountants give limited consideration to, and it is staggering that despite monumental changes in business technology the format and content of management accounts has changed little over 50 years or more. The book reveals that management accounts are commonly criticised by managers for being too little, too late to help them manage their day to day activities but criticism of management accounting techniques is not new, Johnson and Kaplan in their renowned book “Relevance Lost: The Rise and Fall of Management Accounting,” 1987, could not have phrased it better. “Today’s management accounting information, driven by the procedures and cycle of the organization’s financial reporting system, is too late, too aggregated, and too distorted to be relevant for managers’ planning and control decisions.” Whenever presented, management accounts are out of date, they erroneously compare actual performance with a budget which becomes increasingly irrelevant as the financial year progresses, they cumulatively cover a different time period each time they’re presented, they fail to consider differing numbers of days in each accounting period so there is no consistency and they take no account of seasonality, they also fail to consider the consequences of what happened in the previous financial year or what is likely to happen in future. This book sets out a system that addresses and solves all these problems with management accounts. If you are persuaded that the system can be of value to you then the book can be used as a practical, detailed guide to its implementation and use in your organization.

ONLY TRENDS MATTER

A Step Change in Management AccountingBy DAVID WILLCOX

Trafford Publishing

Copyright © 2013 David Willcox
All right reserved.
ISBN: 978-1-4669-7296-4

Contents

Foreword.......................................................................................viiPreface........................................................................................xiIntroduction...................................................................................xvChapter 1: How the Presentation of History Can Help You Predict the Future.....................1Chapter 2: New Ways of Categorizing Costs......................................................31Chapter 3: Trends, Graphs, and Budgeting.......................................................67Chapter 4: Including Rolling Forecasts in Management Accounts..................................107Chapter 5: Using Graphical Management Accounts in Practice.....................................148Chapter 6: Non-financial Performance Indicators (NFPIs)........................................182Chapter 7: Final Thoughts......................................................................199

Chapter One

How the Presentation of History Can Help You Predict the Future

As outlined in the introduction to this book the conventional numeric, tabular approach to the presentation of management accounts that has been prevalent for many decades is stuck in a time warp, no longer adequate for the dynamic environment that business and other organizations find themselves operating in today. Comments from managers gathered during the research for a better way of presenting these financial reports reinforced this. Some of these comments are repeated verbatim below:

• "What I really need to know is are we getting better or worse."

• "Management accounts are a sea of numbers and I don't have time to decipher them."

• "These columns of figures don't tell me whether I shall hit my target this year."

• "Management accounts are history, what we really want to know is how the future is looking."

• "They show a result of what I have done, rather than pointing me to the future."

• "They're too narrow a view, too historical and backward thinking. Not enough trends."

• "They don't show the consequences of anything you want to implement."

• "Looks mainly at how well costs have been controlled against the budget."

When the managers were asked in which format reports were easier to understand (graphical or numeric), the overwhelming majority said "Graphical."

These manager's comments were supported by my own experience; board meeting after board meeting was dominated by discussions about history prompted by traditional numeric management accounts with too much emphasis on examining variances from budget and intensive, time absorbing quizzing of the director responsible for any adverse comparisons with the budget. This occurred despite the fact that all knew the budget was several months old and that times and circumstances had changed; it was out of date and the "fixed" budget clearly didn't reflect this.

What boards and managers really need to know is what impact the implications contained in the accounts have on future performance and in what direction the company is headed, which parts are getting better and which are deteriorating. They want management accounts that not only tell them what their latest results are, but also point to the forthcoming critical areas that need attention; accounts that attempt to forecast what would happen if they failed to act and what could happen if they did.

This does not denigrate the value of historical or variance analysis. Carried out correctly, this is a necessary diagnostic tool, so long as actual results are being compared to a relevant budget. However, if management accounts could look forward and track the trends in income and cost then preventative measures and earlier action could be taken when adverse conditions are forecast. Trend analysis combined with reliable forecasting foresees shortfalls, rather than discovering them after they have happened. The early action this prompts can be critical to an organization's success

Transforming the management accounts to include these crucial factors is a major step forward in management accounting and the new routine encourages a forward-thinking approach that becomes embedded both in the minds of the accountant and the management. But it also leads to better cost control, monitoring of margins, quotation conversion rates, product and service sales cycles, optional cost decisions, and much more. When achieved this is a step change.

Led by the research, the development of a new convention for the presentation of management accounts identified a number of objectives:

• Any presentation of columns of figures to managers must be supplemented, if not substituted, with the same information presented graphically. This included comparisons with budgets.

• The addition of trend lines was vital.

• New-style management accounts must indicate what is likely to happen in the future as well as show the history. The inclusion of forecasts was critical.

• It was necessary to find an improved way of monitoring and controlling costs supplementing that offered by a budget.

These were simple objectives, but how could a complex financial document that contains thousands of numbers be converted into a set of simple graphs that would not only report historic financial results in the current year compared to budget, but also show trends in current performance and forecast what is likely to happen to the results in the future, as well as contain much more information about cost movements and structure than already shown in traditional management accounts? It was evident that this extra information had the potential of further complicating the report and making it even more difficult to understand than the numeric, tabular version it was replacing. Furthermore, this change had to be achieved without dramatically increasing the workload of the accounting department or incurring significant extra costs. All new ideas have to be sold to the receiving audience and this would be even more difficult if it raised costs.

The advantages offered by graphical presentations soon became clear; trend analysis enables a virtually instant view of whether a present situation is getting better or worse and at what rate the change is occurring. An added benefit from utilizing graphs is that two or more sets of numeric data relating to the same timeframe could be compared simply by using more than one data line on a graph. Including all this extra information in a set of numeric, tabular management accounts was just not feasible, but when presented graphically it actually became easier to read despite all the extra data it contained.

In addition it was possible, by using the same format, to better compare internal departments, products, salesmen, non-financial indicators, quotation conversion rates, and much more; the addition of trends to these comparisons revealed a whole new dimension. So much more information was revealed, it was difficult to believe we were looking at the same numbers as those in the numeric version.

During this process certain critical questions had to be answered: the time span of the graphs, how far forward and back the graphs should reveal, how the continuity of business from one year to the next was to be represented, how trends were to be calculated, how...