I had the conversation again today with a new client; “I prepare management accounts every month”…”Great, what do you include and how do you use them?“…”Well I run the Reports on the software and save them in a file”…”OK, but how do you use them?”…”Well I don’t, I just file them”.
Management accounts can be incredibly valuable. However, if you are one of the many businesses preparing reports simply to file them away, then please stop and ask yourself, why do you need or want to prepare management accounts?
Not all businesses need management accounts. For smaller businesses, it is often sufficient to maintain complete and accurate records to track cash flow, ensure suppliers are paid on time and crucially, to ensure customers are paying their invoices.
When businesses move beyond these basic requirements, whether due to employing staff, tendering for larger projects, taking out finance or simply growing, then management accounts can help you run your business more effectively. If properly prepared, understood, and interpreted, the numbers can give you a huge amount of information, including where your business is going right, and wrong.
The reasons for preparing the reports, and the people using them, will dictate the level of detail and frequency required. For example, you may need to evidence a solvent balance sheet to the bank each month to maintain an overdraft facility. If this is your sole reason then a simple Profit and Loss report to summarise the activity in the period, along with a Balance Sheet to confirm the updated position, will likely suffice. Tax provisions and timing differences should still be considered to ensure the figures are complete, but the final reports will not require a lot of detail.
For most businesses, management accounts should only be prepared to enable decision making, help drive the business forward and should therefore be tailored to suit your needs. The Profit and Loss Report should show detail in the areas relevant to your current purpose, everything else can be grouped to avoid you getting lost in the data.
- They might split the different income streams of the business; are they all profitable or is there an element of the business draining resources? Is one department outperforming all others which may lead to a change in direction?
- Understanding the gross profit of the business (the sales less the direct costs to deliver those products/services) is crucial and includes breaking down the directly attributable costs; the source of any materials, the method of delivery, the value of stock held, and so on.
- The reports may highlight regular use of expensive contractors, which could justify hiring an employee to bring that element of the supply chain in-house. Alternatively, fluctuating sales or downward turns may suggest that the business cannot afford a full-time employee and would instead be better off with the flexibility of a contractor.
- Establishing the profits generated from activities will also allow you to calculate and monitor the break-even point; the volume of sales required to cover the business’ overheads.
- Comparing the activity month by month will highlight trends or areas for further investigation, especially when looking to streamline overhead costs. Examples may include; Are your subscriptions all in use or have you forgotten to cancel old ones? Do you know how much you are paying for advertising, phone contracts, website maintenance, etc. and are you getting value for money, or should you be shopping around?
Reviewing the Balance Sheet will ensure you are familiar with the business’ assets and liabilities. Where reports are to be provided to third parties, the balance sheet is particularly important and small changes such as separating long-term creditors can greatly improve liquidity ratios. This could make all the difference when tendering for projects, as should increase confidence in the business’ financially stability. An accurate Balance Sheet will also confirm the reserves (retained profit) available for dividend income, and for those who struggle to keep personal and business monies separate, regular review of the Director’s Loan Account position (have the directors drawn too much?) could avoid nasty tax implications later on.
The biggest reason to have an accurate balance sheet is that it can highlight potential cash problems down the line. The balance sheet shows what you own (assets), less what you owe (liabilities). If the overall (“net assets”) figure is negative, you need to act now.
Some businesses will include additional reports in their management accounts;
- If budgets and/or cash flow forecasts are prepared, then compare them to actual figures as you move through the year to evaluate performance. Budgets and plans are very useful tools, but should ideally be reviewed and updated as changes occur.
- You may benefit from additional customer analysis; top customer reports are great for identifying strong but also weak customer relationships, this may lead to understanding where the business is losing out on repeat orders, for example, or lost opportunities for add-on sales or after-care services. Are you giving your best customers enough attention to maintain those relationships? Are you too reliant on any one customer which leaves your business vulnerable? (all your eggs in one basket…)
- Some businesses also track the source of their income to assess the success of a particular method, campaign or type of advertising.
The key is to know why you want to prepare management accounts , what you are trying to achieve, and therefore what data do you need to get you there.
The frequency is also relevant; you may not have the time or resources to produce monthly reports and even if you do, this is irrelevant unless you actually intend to use them monthly. For many small businesses, quarterly reporting is sufficient to review the business and plan for the next period.
For those businesses who choose to invest their time, or money if outsourcing, for the preparation of detailed management accounts , they are equipping themselves with a wealth of data on which to make informed decisions. Whether your interest lies in maximising growth in your business, consistently reaching a set target to provide you with a regular income, or trying to recover from a difficult period; management accounts need to be accurate, timely and should be produced with a frequency and level of detail to suit YOUR needs and enable YOU to make decisions. Anything less than that is probably not worth your very valuable time.
- Management accounts – worth your time and resources? - December 10, 2021
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