Every business looking to grow needs to start paying attention to its management accounts. Management accounts reveal how your business is performing by looking at key performance reports. They also give you an idea of the direction you need to move in, what is working and what you need to rectify. This article discusses the importance of management accounts and how you should use monthly management accounts. We also cover why understanding profit & loss figures are critical to business survival, cash flow and debtors, and how to present the data so it’s easy to understand. After reading this article, you will see your management accounts with a different set of eyes.
Management accounts act as a benchmark against which to measure your business’ performance. When produced at a predetermined interval, usually monthly, they will provide a clearer indication of how the business is doing financially for the month, the year to date or against the same period last year. A noticeable pattern may start emerging indicating a seasonality to your trading, this is invaluable information for any business. Together with other business information management are empowered to make necessary decisions such as:
The first step to take to get more out of your management accounts is to become accountable. Aim to make the accounts available within five days of the month ending. Make this a key business target and track it. The management team should then meet to discuss the accounts and take action to address shortcomings within the new month (so that next month you can see what has worked and what still needs improvement).
Your management accounts should provide profit and loss information in a concise easy to understand way. The monthly and year-to-date figures compared against budget and last year’s figures will give you a pretty good sense of whether you have had a good month or not. Depending on products and services, try to analyse your data on a product or service basis to get a better understanding. This way you know which service is your best earner and allocate more resource there and vice versa.
You may have a solid business plan and exploiting a profitable niche in the market with great margins but if you are burning through your cash faster than it’s coming in, you are in big trouble.
You will quickly run out of money and there will not be a business to talk about. Running a business when you always feel you could run out of money at any time is a massive strain. Including cash flow and debtor information makes sure you are not slacking at chasing down invoices. Ensure you get paid on time and analyse how and why invoices are outstanding, maybe you need to review business account opening processes and requirements.
Another crucial component of running a business is controlling your overheads and expenses. These are the fixed costs that you will need to pay for whether you make any sales or not. They include the following:
Overheads are one very important number that needs controlling because if you let it run unchecked it could bring your business down. Make sure the numbers are broken down to accountability centres so that responsible managers know they need to do something. The numbers should show month, year to date, budgets and variance broken down by department and expense category. If you are a very small business, you still need to know what your overheads and expenses are.
Remember management accounts should give you a snapshot of your business, in an easy to understand way and preferably in pretty pictures (graphs to be more business-like). No one wants to read a lot of words, that’s just calling for the report to be dumped in the to-do pile. Instead, a graphical representation of all the elements discussed above gives a clear and direct picture of what needs attention. If your sales and revenue figures are falling below budget, then a bar chart showing the budget dwarfing the sales is clear enough in any language, the sales team need to step up their game. Make everything obvious, simple to understand and difficult to ignore.
Taking action to address the issues revealed by your monthly accounting figures is the whole reason you have them in the first place. If you have made the reporting simple and straightforward, then the action that require to be taken should be pretty obvious. If, for the month, you have the number of sales earnings equal to the amount aged debtors owe you, then you know you need to chase debts up. If the sales figures are well and truly below budget, then again you know where the problem lies.
Create an agenda item is for every action, to be followed up next management accounts meeting. It is a good way of closing the loop if in the next meeting the sales figure has shot up then you know exactly what actions were taken. You then can keep taking the same action and keep sales figures up.
By now you have an understanding of what management accounts are all about. The next question is, do you have the resources to produce your management accounts? If not then at Deborah O’Donnell Chartered Accountancy we have been helping clients by producing management accounts for them on a monthly or quarterly basis. We can work with you to see which reporting numbers would mean the most to you. If you need help interpreting them, then we can attend your monthly meeting and make a presentation. Give us a call or drop into the office if you would like to discuss how your business would benefit from management accounts.
Posted on August 4, 2015