If you are looking to grow your business and need a tool to help you, then management accounts could be the answer.
What are Management Accounts?
Management accounts are produced on a monthly basis, and comprise the following reports:
- A profit and loss report – this is a summary of your sales income less day-to-day running costs, which are broken down into spending categories.
- A cash flow report – this shows your monthly bank transactions, broken down into income received and money spent on both expenses and liabilities (e.g. VAT payments).
- A balance sheet report – this is a summary of your company assets (e.g. cash, equipment) liabilities (future payments due e.g. Corporation Tax) and retained earnings (the profit in the company plus shares).
- A trade debtor report – this report details which clients owe you money for invoices you have raised.
- A trade creditor report – this report details which companies/suppliers you owe money to.
- A sales report – this details the invoices you have raised in the month.
What are the Benefits of Management Accounts?
There are many benefits of management accounts:
- They provide up to date information:
In contrast to your annual accounts which give historic information about the performance of your company, management accounts provide real time information about your business’s operations and are therefore a more valuable decision making tool.
- They can be used to identify trends and make decisions:
As management accounts are generated monthly, you can clearly identify trends in the figures, and act accordingly. For example, you may see that your trade debtor figure is increasing month by month. This could mean that your customers are not paying on time, and as a consequence you don’t have enough cash to pay your bills. You can therefore act fast to chase and collect this money.
- They can be used to reduce unnecessary expenses:
Monthly reports mean that you will be able to easily see your monthly expenses and you may be surprised how much you are spending in certain areas of your business. With this knowledge, you can act to control and possibly reduce your spending in these areas and therefore improve your profits.
- They are a useful planning tool:
Management accounts can help you understand how much your service costs to provide, and how your company is making money. You can use this knowledge to plan for profits and growth over the long term.
Should I get management accounts?
Management accounts are not a requirement, legally speaking, for businesses. They do not need to filed with HMRC, like your annual company accounts. They also do not affect the day-to-day running of your business and recording of financial data, like bookkeeping services do. However, we think that management accounts are where the truly exciting things happen. It’s where accounting goes from being a ‘necessary evil’ and a chore for most small business owners to being a vital aid to strategic decision making and growth.
Having an accountant put together important information such as profit and loss reports and cash flow statements enables you to make wiser and more informed decisions about the future of your business. Otherwise, you’re effectively going in blind and making decisions on gut instinct… something that most of us would agree isn’t a great approach when it comes to business.
It can be far too tempting for small business owners to simply check their bank balance, see things are in order, and leave it be. But what if you’re missing amazing growth opportunities because you haven’t kept an eye on the incomings and outgoings? Or perhaps there’s an upcoming pitfall which you haven’t spotted because you’ve had a change in payments from a key customer? Maybe you could make your cash flow that bit smoother if you change your payment terms? And what’s the tax bill going to look like at the end of this year?
We suggest starting with quarterly management accounts to give richer insights into how things are going behind the scenes. Some of our clients find this data so useful that they get management accounts on a monthly basis. This data demonstrates when businesses are operating at a financially healthy level and can begin looking at growing, but we’ve also seen numerous businesses avoid problems further down the line that they would never have spotted without management accounts to aid them. Each business differs in terms of how commonly it will need management accounts.
Your accountant should be able to run through your management accounts with you too, providing their own take and advice based on the data they’ve put together.
Tailoring management accounts to your business
As with everything we do at OZKAN, we tailor management accounts to each and every business dependent on their needs and plans. If you’re curious as to how this invaluable tool can aid your particular business, come and see us and we can run through how we would structure management accounts for you depending on your unique position.