The objective of management accounts is simply to provide small business owners with key financial and statistical information in a timely manner, which can assist them in making effective day-to-day business decisions. Management accounts generally consist of a profit & loss account and a balance sheet, which form a management pack:
- Profit & Loss (P&L) Account - This measures the profitability and highlights business performance over a given period. Typically, this period is a month and/or consolidated year to date. It shows how much money the business has made, and how it has made it.
- Balance Sheet - This shows the value of the business at a specific point in time and points out the ability to pay what is owed from current resources. It indicates where cash is tied up in assets such as stock, debtors or plant and machinery.
Why use management accounts?
Management accounts often prove very useful to owners as they can:
- Indicate the likely long-term prospects and give insight into how management could better utilise the assets in the business.
- Provide important information how a company is trading and what action might need to be taken to improve trading.
- Provide essential information for others stakeholders, such as banks and investors.
- Offer transparency in trading and allow a small business owner to keep a finger on the pulse of the business and spot trends/make quick changes where necessary.
If the P&L account is taken in isolation, it may show a business is making healthy profits. However there might not be any cash in the bank to pay suppliers. On viewing the balance sheet, management will see that all the cash made is tied up in either stock or debtors. Working with the management pack as a whole allows potential issues to be spotted and immediate action to be taken. In this case management could make quick decisions to either:
- Reduce stock levels by offering discounted prices to sell more and raise cash quickly or reduce purchases over the coming months.
- Look at tightening up credit control to ensure customers are paying their outstanding invoices in a timely manner.
- Seek increased finance from shareholders or their bank.
- Ask for extended payment terms from their key suppliers.
- Look to put in place an invoice finance facility such as Invoice Factoring and Invoice Discounting which will free up cash tied up in outstanding invoices usually within 24 hours.
These are key business decisions which can be the difference between success and failure if not spotted and acted upon quickly.
Keeping up with technology
In today’s fast-moving society where over 80% of the UK population have technology at their fingertips, it is amazing how many small businesses still do not produce monthly or even quarterly management accounts. Many wait until the year-end visit to their accountant, who is expected to rummage through a shoebox full of receipts and invoices and tell them whether they have made a profit or not!
The problem is, for many, by the time they actually see these accounts, it’s too late to make any changes to their business... particularly if they have been making losses.
Utilising management information is critical to a business. They are an essential tool to steer a business in the right direction towards success and help provide management with the basis to make informed business decisions.
If we do not change our direction, we are likely to end up where we are going. The above may be an old Chinese proverb, but it still rings true today!
If you'd like to discuss your management accounts and find ways to help grow your small business, why not give our team of experts a call on 0845 602 9354 for a friendly chat today.