Management Accounts Case Study 1
Client X had several shops and was breaking even. They couldn’t understand why they weren’t making additional profit as the number of stores increased and why cashflow was always tight. They constantly used HMRC as a credit facility and although they had monthly profit and loss report from their internal accountant it was always around 6 weeks after the month end and they relied on ‘next month’ being better.
During a meeting between the statutory accountant and the director we were referred in to provide advanced reporting to enable the director to better understand his finances. On our initial assessment it was immediately apparent that the business was not reporting profits/losses by shop. Only one p&l was being prepared which was a consolidated picture, with head office costs also confusing the figures. Our approach was to first sit down with the director and agree what reporting would be beneficial, which in this case was profit per branch. Branch profits were then consolidated and head office costs deducted to ascertain the profit of the business as a whole. To do this we invested significant time into the bookkeeping side by setting up Sage and utilising its department facility. We then audited all the costs to the company and organised the purchases so all PI’s were specific to the relevant store and any crossover costs were recharged accordingly.
We then reported within 2 weeks of the month end date on each branch, the turnover, gross profit and net profit of each branch along with agreed KPI reporting for each branch, e.g debtor days, number of enquiries to orders, number of credits, overhead-to-turnover ratio, profit per number of staff, etc. The following became apparent:
- Some managers were simply being paid too much and some stores has excessive staff numbers — these stores were not the most profitable stores
- Some stores were loss making due to high rent and rates costs, advertising costs and travel and accommodation spend
- Store managers had little-to-no-idea as to how their branch was performing
- As there was no consequences costs were not overly considered when orders were being placed by some branches and some were clearly overstocked
- There were no feedback on who the customers were, what they were buying, and if they were repeat purchasers
We worked with the director providing him with the information he needed to make harsh decisions. Branches were closed, group buying was introduced, travel and accommodation budgets were set as well as financial targets and feedback was given to each manager. Over time we saw an increased performance by each viable store and the business is now highly profitable. We also introduced cash control and report on cashflow on a regular basis, and have forecast an overdraft will no longer be required in approximately 12 months time.