How to Plan for Management Information Systems in a Small Business

Informed managers are better managers. It is fair to say that we all wish to be better managers, bearing in mind that good man­agement is the key to ‘corporate success’. However, one still finds businessmen who attempt to achieve this goal with one hand tied behind their back. In other words, these managers do not have the benefit of regular information on the performance of their businesses. It is often suggested by such managers that they are involved with the day-to-day running of the business nave their fingers on the pulse and therefore do not need, they call it, sophisticated accounting systems. Alternatively, or perhaps as well, one hears the view expressed that to pro­duce such information would cost too much. It is difficult to accept either of these arguments. While not decrying for one minute the necessity for a manager to have ‘his finger on the pulse’, if, in addition, he has relevant information to hand on a regular basis, this would inevitably improve the management of the business. As for cost, the introduction of certain simple management reports do not necessarily involve increased costs, but may require a reassessment being undertaken as to the use that is made of management time.

Information Systems  Small Business

What then are the basic ingredients of a good management information system? First, the information should be up to date, there is little point in having management information produced today which pertained to company performance of some three or six months previously. The situation may well have changed in the interim and thus current decisions based upon out of date information may be totally inappropriate. Second, the information produced should be simple, easy to read, and highlight the factors relevant to the management of the business concerned. In some companies masses of infor­mation is produced for the directors but has not been used as its complexity belied its usefulness. One should not lose sight of the basic purpose of a management information system. Its function is to facilitate the monitoring of business performance, enabling management to review current trading and to aid decision-making. This review should, ideally, incorporate a reassessment of the constraints that operate in the business en­vironment and their effect upon future trading performance, such as availability of labour and cash, and the overall state of the market with which the business operates. This is not an easy task and it is vital, therefore, that the key information factors in­volved are identified and the appropriate systems introduced to aid management if corporate success is to be achieved and sus­tained.

Corporate success depends on the achievement of adequate pr planned levels of profitability and liquidity, and thus any basic management information system should be designed to monitor performance in the following important areas.


The production of a profit and loss report on a regular basis is probably the most important ingredient of any management in-formation system. The degree of regularity required must be decided by individual managers. In some businesses monthly figures are produced, but for many small businesses, quarterly reports are probably appropriate.

The compilation of a profit and loss report is the end result of producing various constituent reports.

The task of producing these reports is not difficult, but there are one or two areas which can cause some concern. The first is the question of stock valuation. This is an all-important area. A full stocktake in a business with a substantial number of stock items can be time consuming, and, if undertaken on a regular basis, disruptive, costly and thus counter-productive. In this type of case it may be possible to use an application of the con­cept of Pareto’s Law or the 80/20 rule. When applied by management accountants in the context of stock val­uation, it is suggested that 80 per cent of the value of the total holdings is made up by 20 per cent of the whole, in unit terms. This is obviously a generalisation, but in many cases, by applying a variation of this law, it is possible to produce a sensible stock valuation. To arrive at a stock figure using this method, it is nec­essary to carry out a physical check of the more expensive items held and to calculate a total value by adding an appropriate per­centage for the remainder. Another method which can be used, if this approach or a full stocktake is not considered feasible, is that of calculating closing stock values by use of an historic gross profit percentage. However, this is only suitable in a busi­ness which has a fairly constant trading pattern and where there is no marked seasonality or discount structure in the sales activity.

Information Systems  Small Business

The second area which can produce some difficulty is that of overheads. For example, certain overheads are paid on an annual basis and if the entire cost was charged to a particular quarter’s profit and loss account, wide variations in perform­ance could be reflected. Thus, if, for example, the year’s insur­ance cost was paid in the first trading quarter, it would be appropriate to charge only 25 per cent of the cost to profit and loss account; the remainder should be charged in equal instal­ments over the three remaining quarters.

Having overcome these problems it should be possible to compile the various reports outlined previously. Ideally, they should be expanded to include comparison with budget on a periodic and cumulative annual basis to facilitate the analysis of any variances.

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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