Disturbing trend
Most South African business owners receive their monthly reports or management accounts, received from their accountant, glance at the bottom line number and move on. If it is a profit, they feel relieved. If it is a loss, they feel anxious. Either way, they rarely dig deeper.
This is an expensive habit.
What are management accounts?
Management accounts are a set of reports that are sent by your accountant monthly. They might range from just an income statement (profit and loss) to a full set of reports tailored to your business. What makes them up is actually irrelevant. I say this because you can have a beautifully prepared pack that is 20 pages long in cute colours delivered by hand and they are useless. You can also have a 1 page report that looks like it was slapped together in 5 minutes delivered via WhatsApp that you can run a company with, easily. It all depends on what you want and what you use it for.
It is a story.
Your management accounts, are a story that is told. Whatever reports make it up, are not just a record of what happened. They are a signal. They are telling a story about the health of your business, the direction it is heading and the decisions you need to make. The business owners who learn to read those signals, and act on them, consistently outperform those who treat their accounts as a tick in the box of the monthly emails. It is a compliance obligation and nothing more.
Let’s go through how to read your management accounts as a decision-making tool. Not how I would read them but as you (the business owner) who wants to use the information to run a better operation.
The difference between reading and understanding
Reading your accounts means looking at the numbers. Understanding them means knowing what those numbers are telling you about your business.
Here is a simple example. Your income statement shows revenue of R180 000 for the month and a net profit of R12 000. You read that as: we made R12 000 profit this month. Fine.
But what does it mean? A net margin of 6.7% on R180 000 revenue.
- Is that good for your industry?
- Is it better or worse than last month?
- Better or worse than the same month last year?
- Is your gross margin holding, or are your direct costs creeping up?
- Are your operating expenses in line with your budget, or have they grown?
- Is the R12 000 in profit actually sitting in your bank account, or is it tied up in unpaid invoices or stock on hand?
- Do you know what Gross margin and net margin are?
Those are the questions that turn reading into understanding. They are also the questions a good adviser should be prompting you to ask every single month.
Reading your accounts means seeing the numbers. Understanding them means knowing what those numbers are telling you — and what you should do about it.
The signals hidden in your monthly accounts
Here are the six most important signals I look for when I review a client’s management accounts — and what each one tells you about the business:
Please note that not all of these are relevant to your business. In my business, I don’t look at gross margin as it does not help me much at all.
| What you see | What it means | What to do |
| Gross margin is shrinking | Your direct costs are rising faster than your prices. Are you doing work at lower margins to stay competitive. | Review your pricing. Check whether your cost of sales has crept up. Are you discounting too quickly? |
| Revenue is growing but net profit is flat | Your operating expenses are rising in step with — or faster than — your revenue. Growth is not translating into profit. | Audit your overhead structure. Identify which expenses have grown without a corresponding return. Question every cost line. |
| Debtors are increasing month on month | Are clients are taking longer to pay? Are you invoicing more but collecting less? Cash flow pressure is building. | Tighten your payment terms. Activate automated payment reminders in Xero. To chase for you Consider deposit requirements for new clients. |
| Gross margin is stable and growing | Your pricing is holding and your delivery costs are under control. This is a healthy signal. | Protect it. Do more of it! Resist the temptation to discount to win new work. Focus on volume at the margin you have built. |
| Operating expenses as a percentage of revenue are falling | Your fixed costs are becoming more efficient as your revenue grows. Brilliant! | Reinvest selectively. This is the profit improvement moment. Use it to build cash reserves or invest in growth capacity. |
The three reports that matter most
Your management accounts typically include several reports. Here is how to prioritise them:
The income statement is your primary performance report. It tells you whether you are making money and how efficiently you are making it. Read it first. Focus on your gross margin percentage and your net margin percentage — these are your two most important profitability metrics.
The balance sheet tells you what you own, what you owe and what is left over — your equity position. For SME owners the most important lines are your debtors (what clients owe you), your creditors (what you owe suppliers) and your bank balance. The relationship between debtors and creditors tells you a great deal about your short-term cash position.
The cash flow statement — or a cash movement summary — tells you where cash came from and where it went during the period. It reconciles the gap between your profit number and your actual bank balance. If you only receive an income statement and a balance sheet without a cash flow summary, ask your adviser for one. It is the most frequently overlooked and the most valuable of the three for day-to-day management.
Most SME owners focus on the income statement and ignore the balance sheet and cash flow. All three together tell the full story. Any one of them alone gives you an incomplete picture.
Five questions to ask your accountant every month
If your accountant sends you a set of accounts without a conversation, you are not getting full value from the relationship. Here are five questions worth asking every single month — and why each one matters:
| Ask your accountant this | Why it matters |
| What is my gross margin this month compared to last month and to the same month last year? | Margin trends reveal whether your pricing and cost control are holding up over time. |
| Which expense line has grown the most over the past three months? | Costs rarely stay flat. Knowing where growth is happening lets you decide whether it is intentional or accidental. |
| Is my cash position moving in the right direction relative to my profit? | If profit and cash are diverging, there is a structural issue that needs to be identified and addressed. |
| How does this month compare to my budget? | Without a budget comparison, you have no benchmark. This question only works if you have set a budget — which is a reason to set one. |
| What is the one number in this report I should be most focused on right now? | A good adviser will always have an answer to this. If they do not, it is worth asking why. |
What good looks like
I want to give you a picture of what a well-functioning management accounts process looks like — because many South African SME owners have never experienced it and do not know what to expect.
Your accounts close within the first two weeks of the following month. Depending on the size of your business, this can be done in days. You receive a set of reports — income statement, balance sheet, cash flow summary, or any other reports that have been agreed upon, along with a brief written commentary from your adviser highlighting the key movements, any concerns and any decisions that need your attention.
You spend 20 to 30 minutes reviewing the reports, guided by the commentary. You have a short call or meeting with your adviser, monthly or quarterly, to discuss what you are seeing and what it means for your next 30 to 90 days.
Your Xero account is fully reconciled so the reports reflect accurate data. You can cross-reference the income statement against your goals — the ones you set using the framework from the previous post — and see clearly whether you are on track.
That is the standard. It is not complicated. It is not expensive. It is simply what competent financial management looks like for a South African SME — and it is what every one of our BCAS clients receives as part of their service.
In the next post we will look at the hidden costs that quietly bleed South African SMEs — and how to spot them in your books before they become a crisis.
Are your management accounts working as hard as they should be? Book a free discovery call with Bruce, Founder of BC Accounting Services. Let us show you what a proper monthly reporting process looks like.