Management accounts are an essential part of any successful business. They hold the key to understanding the current health of your business. And that helps you put more effective measures in place for growth.
But many business owners don’t really know what they are. A study by the University of London found that many SME owners confuse management accounts with financial year-end accounts.
Another piece of research has found that SMEs do not put as much emphasis on management accounts. But large companies, particularly PLCs, rely heavily on them, and that is key to helping fuel their growth.
Of course, running a business isn’t easy. There’s the day-to-day issues to resolve and meetings to attend with colleagues and potential clients. And then there are the seemingly ever-changing compliance rules and regulations for your industry to manage.
And with all that to contend with, it’s no wonder that many business owners struggle to find time to check out the figures until the financial year ends.
But that approach might be damaging the future of your business. That’s because the data they provide for your company is usually too late. Management accounts really can help your business grow because the information is current.
Let’s take a deep dive into the importance of these accounts and how they differ from financial accounts…
What are financial accounts?
Management accounts are not financial accounts. That might seem strange as the word ‘accounts’ is used. But financial accounts focus only on your past 12 months’ financial performance. They are created because they need to be used for mandatory reporting, such as for HMRC, investors or creditors. Financial accounts are often called statutory accounts.
In the UK, businesses that are incorporated must legally prepare these documents under Generally Accepted Accounting Practice. We have looked at these in greater detail in an earlier blog.
Using this data helps chart the health of your business and whether it made enough profit to pay corporation tax. It also helps investors understand how your business performed and its overall health.
These accounts are very useful, but as they focus on your past performance, using them for decision-making isn’t always wise. If they show a spell of prolonged poor performance, there’s unlikely to be much you can do about it once the financial accounts appear. It’s like closing the stable door when the horse has bolted!
What are management accounts?
Management accounts are different. They are usually monthly or quarterly reports that provide a real-time snapshot of a company’s performance. You’re not legally required to produce these accounts, but they are crucial if you want to make informed, strategic decisions to help your business grow.
Management accounts can differ depending on your business, but they usually include:
- Balance sheet: An overview of your assets, liabilities and equity.
- Profit and loss statement: This provides a detailed breakdown of income and expenses.
- Cash flow forecast or statement: This monitors your company’s liquidity, which monitors whether you’ve enough cash to pay your bills and invest.
- Variance analysis: This is a comparison of actual performance against forecasted figures and budgets.
- KPIs: Key Performance Indicators are specific to your company and usually focus on stock levels, debtor days and your business’s gross margin percentage.
Another difference with management accounts is that they can be created for different departments as well as the entire business. You will then be able to see if one department is spending more than budgeted for. This then helps you adjust spending before things get out of control
4 ways management accounts help your business grow
As we’ve seen, management accounting reveals a lot of information about your business at a particular point in time. And these details are powerful. Because they help you know your numbers, they are useful for proactive budgeting, enhancing cash flow and controlling costs, which is useful for strategic planning.
Here are 4 ways management accounts help your business grow:
- Better decision making and strategic planning: By providing detailed, real-time financial insights (including profitability by project or product line), business owners can make data-driven decisions. This can help you decide whether the time is right to expand, change pricing strategies or launch new products. Supermarkets use this kind of data to decide whether to offer a price cut on lines that aren’t moving, for example, so they still make some profit rather than nothing.
- Cost control and better profits: Do you know how much your business is really spending? You may have an idea, but is that realistic? Management accounts help you analyse your spending. If you notice that a department is throwing money at certain supplies and more than forecasted, you can decide what to do about it before it gets out of control. This will also improve your profit margin.
- Liquidity monitoring: How much cash is really in your business? You may be paying bills, salaries and other necessary costs, but have you enough cash flowing in? Using credit might be keeping you afloat, but if that’s out of control your business could be in danger of collapsing. Monitoring liquidity gives you the details you need to make decisions before it’s too late.
- Mitigating risk: Analysing the data revealed through management accounting helps you spot trends. And it can also identify potential risks early. This includes issues with supply chains or sudden market changes. You can then assess what scenarios might arise from these risks. This helps you plan and build resilience in your business.
Where do I start?
It’s clear that regularly analysing the numbers in your business can make a huge difference. By understanding key metrics, the data helps you make better decisions for your company. Without having to guess, you can put measures in place to grow your profits and operate more efficiently.
But when should you start? Well, as soon as possible is the honest answer! Leave it another year and you may have missed a key metric that could risk your company’s future.
You’ll need to make sure your books are up to date and, just as importantly, accurate. If they aren’t then you can’t make the best decisions.
Software accounting isn’t just for statutory annual reports! So, use it to generate P&L statements, balance sheets and cash flow statements.
Creating these reports can be easy if you use the likes of Xero, but the biggest issue, of course, is if you’re not sure what to do with the numbers. That’s when it’s a good idea to call on a qualified accountant.
If you’d like help with starting to produce management accounts and how to interpret them, why not contact our team today for a chat?
