INTRODUCTION
Management accounts provide unique insights into your business on a regular basis with accompanying actionable advice and analysis. This understanding can make strategic decision making both easier and more effective.
In this blog we will go through the Management account process and how it can help with and range of tasks, including:
· Price setting
· Expenses review
· Budgeting
· Forecasting
· Cash flow
· Financing
· Being more in touch with your financial state
The key difference between Management and statutory accounts is that they are not a mandatory requirement. They do, however, provide arguably more value to you as a business owner. Statutory accounts give information for a full financial year which is vital but can be a slow response to issues and opportunities. In addition, this will mean that any actions taken will not show up until next year’s accounts. Statutory accounts for most SME’s will only need to provide basic insights whereas management accounts can be tailored to provide the valuable insights on a monthly or quarterly basis.
THE MANAGEMENT ACCOUNT PROCESS
I will not bore you with the finer details, as I have found they are not as interesting to everyone else as I find them. This is a simple breakdown of what is included in management accounts.
PRICE SETTING
Management accounts enable a review of prices through exploring sales performance and cost of sales. Together this allows profit optimisation through improving sales performance and ensuring your gross margin is on an appropriate level. If an increase in the price is likely to cause a decrease sales, then methods of lowering costs can be explored. Price setting through other means such as gut feeling or review with the statutory accounts cannot give the same level of detail, accuracy, or speed of response.
REVIEW EXPENSES
This can relate to the cost of goods sold as mentioned above but can also allow for detailed review of all spending. Having a regular review of expenses allows for quick responses and minimises surprises further down the line. Good bookkeeping can enable minute details of expenditure to be explored in management accounts. For example, office costs can be further broken down into rent, utilities, and insurances. Now you can see the costs more clearly and then determine ways of lowering this cost. Leaving this until the end of the year could result in a significant amount of money not being saved, thus impacting your bottom line.
BUDGETING
After reviewing expenses looking either quarterly or monthly setting a budget can be an effective method of keeping expenses under control. This can involve setting soft caps on expenditures which allows for expected spending to be tracked against actual. Budgets can be produced with statutory accounts, but they do not reflect current circumstances are likely to be inaccurate. Inaccurate budgets can be as ineffective as no budget as your method of measuring success is incorrect. It is somewhat akin to using a ruler that is meant to be 30cm but is only 27cm.
FORECASTING
A vital tool for any business for looking into the future and exploring “what if” scenarios. Based on the information that management accounts provide detailed above a lot of predictions can be made. For example, if fuel prices are going to skyrocket the cost of services sold for a logistics firm will likely increase. A forecast would allow for the impact of this increase in expenses to be understood before it happens. Conversely should you drop the price by x amount, and you believe sales was to increase by x amount what would that look.
CASH FLOW
Management accounts allow for cash flow to be examined in smaller periods than a full year enabling you to be more responsive to changes. The benefits of good understanding of your business cash flow are explored in detail here.
FINANCING
When gaining finance from investors or banks having regular management accounts to share with them will improve your chances of being successful. Management accounts help to display the health of your business making institutions more likely to give you capital.
BEING MORE IN TOUCH WITH YOUR FINANCES
More important than up to date information for the bank is up to date information for you ensuring you are aware of your current position. This coupled with the other benefits mentioned above helps to make the best decisions. Statutory accounts will never be able to provide the information that management accounts can be due to the period they cover. They are also generally prepared too far after the year end. The fact that they are prepared after the year end limits the action you can take to make an impact on the current year. To make the most out of you financial reporting and your accountant management accounts are a must.