There’s not a lot of point in having quarterly or monthly management accounts prepared unless they’re tailored to your industry to provide clear insight into your financial health and operating performance.
Prospects have provided me with their recently prepared copies which gave them very little understanding of their business. These accounts only included a profit and loss account and balance sheet and looked as though they had been run from a standard report on their accounting system with no customisation.
The profit and loss statement
This is a key report for understanding operating performance and we look at how this should be customised for agencies. The P&L must:
- Have a clear and logical format for agencies – The P&L should present information in a clear, logical manner that aligns with the unique aspects of agencies. It should allow you to see the profit margins on client fees and calculate key metrics specific to the industry.
- Incorporate agency-specific KPIs – Key performance indicators (KPIs) that are relevant to agencies should be shown on the face of the P&L. Additionally, a detailed KPI report should be included elsewhere in the financial documents to offer a deeper understanding of agency operations.
- Use appropriate agency terminology – Communicate with clarity using industry-specific terminology. For instance, avoid jargon that may confuse stakeholders and ensure your P&L reflects the language of marketing and communications. One profit & loss account we received from an agency which was prepared by their accountants used the words “cost of goods sold”!
- Offer the right level of detail for agencies – Overloading the P&L with every individual overhead account can be overwhelming for agencies. Instead, group costs into a sensible number of categories to reduce clutter and increase clarity, whilst providing the necessary level of required detail.
Here’s an example of a generic P&L and a P&L customised to an agency business that we have developed for our clients. Management accounts reports are then further tailored for the uniqueness of each agency’s circumstances.
The Chart of Accounts
To achieve all this, it’s crucial to have a custom chart of accounts set up in your accounting system which categorises and organises your financial data at source. If you’re using the default chart of accounts in your accounting software then you’re using the same as most businesses in a variety of industries, from independent retailers to those in the trade.
We use our own customised chart of accounts template for agencies and consultancies which gets loaded into each client’s Xero. No two agencies are the same, and that’s why further customisation of the chart of accounts and management accounts is often necessary.
Is your accounting system and reporting tailored to your industry? Please get in touch if you’re interested in having regular customised management accounts for your agency prepared by someone with significant agency experience.