Written by: Debbie Austin
Management accounts can be produced at intervals to suit your requirements however, they’re usually put together on a monthly or quarterly basis. Their overall purpose is to inform you how well your business is performing. Such information is vital because it allows you to understand performance – where you’re at and what needs to be done to reach your goals.
This means management accounts can inform strategic and investment decisions which in turn will help you identify when the business will likely need additional funding.
What should they contain and what is their use?
There is no legal requirement to produce management accounts. That said having this package will provide you with essential insight into your business and better equip you to run your organisation effectively. We usually recommend that management accounts are tailored to the individual needs of our clients. Often they will contain financial information that is compared to:
• Historical trading
• Key performance indicators
If you have a business spread over different divisions or office locations, then your management accounts can be reported in a departmental or geographical basis. This can help you understand where the most profitable areas are or, if a segment needs extra attention.
You will probably have noticed by now that management accounts take a somewhat forward looking perspective. This makes them useful for informing your next move and guiding where and when the business will need investment to achieve the desired level of expansion. By comparison end of year financial accounts tend to look at more historical data.
The role of your accountant in this process
As part of your management accounts package you should also be supported by your advisor in your business decisions through the provision of advice based on actual financial evidence. This can assist with product development and innovation planning while your accountant should also deliver an assessment as to potential areas of risk in your finances.
Combined with practical business advice, you’ll then be well informed as to the level of performance which can help guide strategy. If you have a finance team then they may feel comfortable in compiling these documents themselves but the crucial element offered by an accountant is the structured analysis, guidance and counselling on how to proceed with the business given its financial position.
A good and experienced accountant is likely to have seen most situations before. They’ll have first hand knowledge of many of the issues and challenges you face, having acted for many clients of different sizes and sectors over the years. They should draw upon this to help you achieve the next goal by informing on what did and didn’t work based on past experience.
Why management accounts are vital to success
In looking forward and predicting potential results, the decisions you have to make can become easier. Having data to hand as evidence will likely help you take less time to reach conclusions. Trends that you maybe were unaware of will emerge and that can bring opportunities.
As part of this you should expect reviews of expenditure and its relationship to turnover to establish the specific costs that go into producing your product or service. Consider the cost of your customers and where your customer base is most profitable? How should you focus future attention and effort?
If you manufacture a product for example, should you be making or buying a component from a supplier as part of the production process. A make or buy analysis can help provide the most cost effective option.
Many small businesses measure performance by the amount of cash they have in the bank. This provides an indication but not the whole picture. It needs to be reviewed in conjunction with the balance sheet, profit & loss and forecast sales & expenditure. As an example, the balance sheet shows you how much money you owe suppliers at any one point, information that isn’t accessible when just looking just at the bank balance.
The price of quality advice
The management accounts service, and what it relays, can be incredibly powerful to helping you achieve growth, by becoming more efficient in your operations and more effective in your decision making. Despite the cost pressures associated with purchasing business advisory services, think long term as to what you’re looking to get from the accounting relationship and thus how much that is worth to your business.
Ultimately when it comes to running an organisation remember, knowledge is power!