Many business owners initially view management accounts as an additional administrative burden on their already busy day. However, management accounts can actually be a very useful tool when planning and controlling the growth and development of businesses of all sizes across all sectors. We assist a number of our clients in the preparation and review of management accounts on a regular basis and have outlined below some of the key advantages associated with management accounts. Â
1. Up To Date Information
The frequency at which you prepare management accounts will depend on your business; however most businesses will produce management accounts on a monthly basis. By preparing on a monthly basis you will have access to up to date information on key performance indicators which will be beneficial when making key decisions such as:
- Adjustments to stock levels relevant to demand
- Hiring of additional employees/subcontractors during busy periods
- Investment in marketing when cashflows permit
- Discounting or discontinuing slow moving goods
By having information on your business in real time you will be better equipped to make decisions as and when they are needed, rather than a few months later when opportunities may have been missed. Â
2. Growing Your Business
By preparing and analysing your management accounts on a regular basis you will be in a position to identify relevant trends. This will be achieved by reviewing the monthly results against your projections and budgets to identify how actual trading has compared against your expectations. Results should also be compared against the same period in the previous years to identify re-occurring trends. As you will be reviewing results on a monthly basis you will be in a position to identify issues such as decreasing sales or increasing costs. By highlighting such trends you can identify the causes and put corrective measures in place. If you only review the financial performance of your business on an annual basis, most likely when you prepare your statutory Financial Statements, the information will be out of date and you will not be in a position to react to changes within your business in an efficient manner. In fact you may not even be aware of trend changes as a “masking” effect could prevent you from fully identifying improvements or deterioration in different aspects of the business. Â
3. Better Cashflow
For management accounts to be effective they should take into consideration both the cash inflows and outflows of your business. Understanding how much cash is in your bank, what is due to come in and what is required to meet outgoings is vital to the survival and success of any business. Keeping these details up to date will ensure you do not commit to unnecessary purchases which could put a strain on your cash flow; or alternatively if you have excess cash available you may be in a position to take advantages of discounts offered by suppliers when purchasing in bulk. Â
4. Obtaining Finance
We have all seen and heard the adverts from the banks on how they have funding available to help your business. While the banks may have funding available, they also have quite stringent conditions which must be met. A substantial checklist of information which will be required to be provided to the bank at application stage before approval for loan finance can be obtained. From our considerable experience of assisting our clients with finance applications we have consistently noted that one of the main requirements on the bank’s checklists are management accounts. Whether you are securing finance from an investor or a banking institution, having up to date management accounts prepared on a regular basis will provide such investors and lenders with a level of confidence in both you as a business owner and your business. Up to date management accounts indicates that the business owner has a level of control and understanding over their business. Â
Tips For Effective Management Accounts
- Always have your bookkeeping processed up to date – make sure all sales, purchases and bank inflows and outflows are up to date. Review your debtors and creditors listing to ensure all information is captured.
- Obtain advice from your accountant – Your accountant should already have a good understanding of your business and can assist you in deciding what information is relevant and how to prepare effective management accounts that suit your needs.
- Define your information needs – While it may be “nice” to have more information it may not be relevant to your needs. By eliminating unnecessary information you will save both time and money.
- Understand your key financial information – As you will be investing valuable time and money in producing management accounts it is important that you understand the information they provide and how you can use that information to grow your business. When we work with our clients in reviewing management accounts we provide them with the necessary tools to understand the financial information.
- Be prepared to adjust your business plans – For management accounts to be an effective tool you must be willing to act on the results they reflect. Management accounts will become an administrative and financial burden if you do not use the information to grow your business.