For small business owners, bookkeeping and accounting is a ‘necessary evil’. It’s an essential job that has to be done to meet your legal obligations.
However, not all types of accounting are aimed at fulfilling your statutory obligations, some are designed to give you better information to help run and grow your business and this can have BIG benefits - usually untapped benefits. Not many business owners realise that management accounts give you the financial information you need to manage your business more effectively and efficiently. They’ll put you more in control of your finances than ever before, particularly with the support of a savvy accountant to help the growth of your business.
Unlike statutory accounts, there's no legal requirement to produce management accounts. You can decide what information you want to include each month or quarter. You may just want to create a one-page summary of all the key data, with links to more detailed information.
WHAT ARE MANAGEMENT ACCOUNTS?
Management accounts for small businesses typically include a profit and loss account, balance sheet, cash flow statement and a short report. You can put the accounts together yourself, or more realistically, an accountant can do it for you. For the basics, Xero makes it easy to produce a simple management accounts report. It can also give you access to up-to-date figures such as cash balances at any time, rather than needing to wait for the next monthly or quarterly management accounts.
Management accounts tend to be more useful if they include an analysis of how actual performance compares to budget and how figures are changing over time. Ideally, your management accounts will also include forward-looking figures, such as updated sales and expenditure forecasts, as part of your budgeting.
Where appropriate, management accounts should include explanations of why figures aren't as expected and what's being done. This is essential if others will be viewing them, but also to jog your memory in the future.
WHY DO YOU NEED THEM?
To successfully grow your business, you need to be able to monitor your money and measure your performance throughout the year. That means more than just the occasional glimpse at your bank balance or burying your head in the sand.
A healthy bank balance doesn’t necessarily indicate a healthy company. Your cash balance is simply a snapshot in time and doesn't consider impending outgoings, trading conditions or sales pipeline.
Management accounts lift the lid on all this information and when you are able to identify trends in sales quickly you will also have better information for planning growth, diversification or expansion. Without the information all you have is gut-feeling, which could lead to expensive mistakes.
It can be easy to get bogged down in too much information or unnecessary detail. Instead, focusing on Key Performance Indicators (KPIs) will focus your mind on changes that need to be made. These can be as simple as you need to understand and act on them. Cash flow and profitability are crucial for almost every business. You may well want to target and track key ratios, such as the gross profit margin or growth in sales. Other KPIs vary, depending on your particular business.
For example, a new business that has yet to reach breakeven might focus on how much cash is being used each month and when finance or funding will be needed. Or you might find it useful to have more detailed information on how individual products or markets are contributing to overall performance of your business.
You may also want to include other indicators that reflect key success factors for your business, such as number of new customers or measures of customer satisfaction.
Your accountant should be able to help you with a package of management accounts to suit your business and needs specifically. This can be a simple pack each month, or a more detailed set of information. Your accountant will also be able to guide and help you to grow and improve your business.
GROW YOUR BUSINESS
When you are able to identify trends in sales quickly you will also have better information for planning growth, diversification or expansion. Without the information all you have is gut-feeling, and in business that can cost you dearly.
Other benefits include:
Making more informed decisions based on up-to-date info in real time
Feel more confident in your ability to manage your business finances Rather than wait until the year end, you’ll identify adverse trends and take action
Measure performance of your business and team members
Management accounts provide the basis for KPI’s - an invaluable tool if reported regularly
Gain better control over your cash flow
Understand where money is being spent
Plan your tax and dividend payments
Detect any fraud or malpractice in your business
These are just some of the benefits of management accounts for small businesses. For the bigger picture, contact Purple Accounts today for your no obligation meeting.
WHO WE ARE.
Purple Accounts is a family run Chartered Management Accountants based in Warrington, Cheshire. We are specialists in Management Accounting, with a range of services designed to help and support business owners to easily understand their financial data to grow their business.