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There Should Never Be 3 Fortnights In A Month

If you think that time went fast over the weekend try fitting 6 weeks into a month.

We have all seen management accounts that do that because….. well… because unless you have been shown how it should be done you have no way of knowing. No one’s fault but it really stuffs up management accounts. Even 5 weeks in a month.

Fixing it does make the management accounts a little harder to do but…. you miss out on seeing vital trends and ratios.

My maths teacher told us a story about a posh english boarding school that declared Pi was equal to 3.0 because “it made it easier on the boys”. Not in the long run I would argue.

Your management accounts are there to help you make important decisions about your business, particularly about margins. It’s usually the biggest costs, especially wages, that don’t line up with your monthly income.

It’s not difficult to fix this problem, you just have to be shown how.

If one week (5 days) of wages are paid in arrears on Wednesday the 3rd of the month. 2 days, 40% of that cost, is added to the previous month. This is called accruing costs. It takes 5 minutes to do. Then you end up with the correct number of days wages, and therefor the correct costs, in every month.

If you make sure your sales are adjusted in the same way, so that they are counted when they are earned, what accountants call revenue recognition, you will have taken what I think is the most important first step of all in controlling your business.

The next critical step is to have good operational reports, not the P&L, that manage the margins in detail. Theses are front line (middle office) operational reports. Your P&L should agree with them every month.

 

 

Photo by Manasvita S on Unsplash

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