The quest for value added services has brought management accounts into the spotlight and hence the demand for better reporting from the cloud accounting platforms. However, I often hear accountants complaining about the quality of reporting and I agree, but I think that’s because they’re looking in the wrong place!
Full disclosure : I was a management accountant in a past life
All accounting transactions in a business have a flow – from the point where they are incurred through to recording and reporting for compliance purposes. When I look at the basic flow of accounting transactions in any business, I see layers that could be described in terms of ledgers:
Sales ledger - I think of this as "front of house" as it captures sales and is often specialised by type of business or even product or service
Purchase ledger - captures purchases and might be specialised by type of business or goods or services bought
Sub ledger - you usually find this in complex businesses that may have one or more sales or purchase ledgers and act as a point of consolidation to generate the accounting postings
General ledger - the final system of record for compliance purposes from which traditional accounting reporting is done e.g. balance sheet, profit/loss etc.
So considering the above, where do cloud accounting platforms fit?
Cloud accounting platforms are the general ledger in the stack
Sometimes when accountants talk about management accounts, what they really mean is monthly cashflow, balance sheet and profit/loss but in near-statutory format. Honestly, those aren’t management accounts.
The purpose of management accounts (nee management information) is to inform decisions and with the best will in the world, these statements don’t do that! You can get basic ratios and even some variances from a general ledger but the lack of business context means that very often, its not good enough for management accounts or KPIs.
Management accounts nee management information should inform clients and help them make decisions about their business
Let’s take an example: Jack and Jill run a wellness clinic. They have a coffee shop, gym and multiple consulting rooms that they hire out to specialists e.g. physiotherapists, aerobics instructors etc. They make money by charging membership fees for the gym and rents to the specialists. They also get a revenue share from the specialists.
Now what types of ledgers might they have in their business?
Sales ledgers – retail point of sale systems, booking systems for the rooms, gym membership management system etc.
Purchase ledgers – shift booking system for staff and specialists, purchasing system for the coffee shop perhaps directly integrated with suppliers, HR and payroll etc.
General ledger - a cloud accounting platform
Of course, these days we can integrate all of these ledgers if they are in the cloud and create a very efficient way of getting accounting transactions into the general ledger. Now let’s consider management accounts.
What information is useful to Jack and Jill?
Well, I can tell you what is not useful – standard balance sheet and profit/loss. Cashflow is useful but even that has limited utility. What Jack and Jill want to know is how their business is running, are there any challenges, any opportunities etc.? This information will simply not be available from the cloud accounting platform no matter how much one tries and that’s because most of the information that is needed to provide context and tell the real story of the numbers is in the specialised ledgers.
Examples of what would be useful to Jack and Jill – consulting room occupancy, profit by specialist session, equipment usage in the gym, sales by product line in the coffee shop etc. In fact, a headline metric to monitor for the whole business might be profit per square foot of space.
As Jack and Jill’s accountant I would be looking to a separate reporting solution that could bring in the data that’s needed from all the ledgers in order to produce some meaningful, relevant and most importantly actionable information. The kind of information from which real decisions can be made, for example:
Discontinue the lowest profit margin consulting or invest more in promoting it
Add more variety in the coffee shop in the most profitable and popular category of products sold
Consider if adding more pieces of the most popular gym machine would increase membership
No one is better placed to pull together this kind of information for small businesses than their accountants. In fact, consider now an alternative description of accountants:
Accountants are the story tellers of numbers
Now, that is added value!
Emanur is a former management accountant turned Chief Technology Officer. After 20 years working his technology and accounting skills in investment banking he left his role as a CTO at The London Stock Exchange Group to found onkho. Emanur pushes the business' strategy and execution and occasionally opines on what he thinks is interesting.