Controlling for owners: five numbers to look at every month

Many owners learn about the state of their company from two sources: the bank balance and the annual statements. The first is too momentary, the second arrives too late. Controlling sits between those two extremes.

Accounting and controlling are not the same

Accounting records business events according to regulations. Its reports are intended for the tax administration, the bank and the register, are structured by legal rules and look backwards.

Controlling takes the same data and arranges it around the questions management asks: what are we earning on, where are we losing, will we have cash in three months, are we on plan. It looks ahead and has no prescribed form.

Good accounting is a precondition. Without accurate and timely postings there is no controlling either.

1. Gross margin by product or customer

A company’s overall margin is an average that hides more than it shows. Almost every company has a few products or customers that carry most of the profit and a few on which it loses money without knowing.

What to look at: revenue less direct costs (material, labour, transport, commissions), broken down by product, product group or customer.

What it warns of: the customer with the highest turnover is not necessarily the most profitable, especially if they have the biggest discounts, the longest payment terms and the most complaints.

For manufacturers this number is only as good as the product cost behind it. We cover that in the article on bills of materials and work orders.

2. Cash flow for the next thirteen weeks

Profit and cash are not the same. A company can be profitable and run out of money for salaries, because the profit is tied up in unpaid invoices and stock.

What to look at: a weekly view of expected inflows and outflows for three months ahead. On the inflow side, invoices according to customers’ real habits, not contractual terms. On the outflow side, salaries, taxes, loan instalments and suppliers.

What it warns of: the week in which the balance will drop below zero, early enough to do something about it: speed up collection, agree a deferral or arrange an overdraft.

3. Days to collect and days to pay

What to look at: how many days pass on average from issuing an invoice to collecting it, and how many from receiving a supplier’s invoice to paying it.

What it warns of: if customers pay in 75 days and you pay suppliers in 30, you finance the 45-day gap yourself. The faster you grow, the more cash you need, so growth itself can push a company into illiquidity.

Alongside the average it is useful to look at the ageing of receivables: how many invoices fell due more than 60 or 90 days ago, and whose they are.

4. Deviation from plan

Comparison with the same month last year tells you whether things are better or worse than before. Comparison with the plan tells you whether they are good enough for what you intended.

What to look at: revenue, the main cost groups and the result against plan, for the month and cumulatively since the start of the year.

What it warns of: a deviation while it is still small. A cost that is five per cent over plan in March is easy to correct. The same cost discovered in November cannot be recovered.

If there is no plan, that is the first job. It does not have to be complex: monthly revenue and about ten main cost items are enough.

5. Break-even point

What to look at: the monthly revenue that covers all fixed costs. It is calculated by dividing fixed costs by the gross margin percentage. With fixed costs of EUR 60,000 a month and a gross margin of 30%, break-even is EUR 200,000 of revenue.

What it warns of: how far you are from the edge. A company making EUR 210,000 a month is profitable, but a five per cent drop in revenue takes it into loss. The number changes every time you hire, take larger premises or take out a loan, so it should be recalculated before such a decision.

What it looks like in practice

• One page. Five numbers, each with the value for the month, the plan and last year. Nobody reads a thirty-page report.
• By the tenth of the month. A number that arrives six weeks after month-end is only good for the archive.
• The same format every month, so a change is visible at a glance.
• A short comment on deviations. What happened and what is being done.
• A half-hour meeting. Numbers nobody talks about change nothing.

Why it is not done in practice

The most common reason is not lack of will, but data. Sales is in one program, the warehouse in a spreadsheet, production on paper, and bookkeeping with an external firm that posts a month late. Putting together a monthly report then takes days and depends on one person.

That is why controlling and information systems are hard to separate. While data is retyped by hand, the report itself is unreliable. When it arises in one place, the report is one click away.

We work on both sides: we set up financial analysis and controlling and we build the systems the numbers come from. If you want to see what those five numbers would look like for your company, get in touch.