Joe Lennon FCCA on why management accounts combined with an advisor of calibre are vital ingredients to business growth.
Generally it wouldn't be wise to run your business purely on the financial statements in your annual accounts. These tend to show you what the performance of the business looks like from a historical, set timeframe. Consequently you'd end up making strategic and investment decisions based on data that may now be out of date.
Fast growth or severe decline can be difficult to see just from a set of annual accounts. This is where management accounts come in for you as the owner manager. They help drive your investment strategies and assist you identifying when you'll need funding. In this post we cover what you need to know and the essential role of your accountant in this process.
What are management accounts?
Management accounts are a summary of accounting data, containing the financial information business owners need to make informed decisions on the day-to-day running of an organisation. Typically they will contain specific financial information that is compared to:
1. Historical trading
3. Key performance indicators
They can be produced at whatever frequency is required, commonly on a monthly or quarterly basis and their purpose is to inform you how well your business is doing. This information is crucial to you as a business owner or member of senior management, allowing you to understand performance. You can then gauge where you're at and what still needs to be done to achieve your goals.
There is no legal requirement to produce management accounts but having this package from your advisor will give you more of an insight into your business and as such enable you to run your business more effectively. At Wellers we always advise that management accounts can be tailored to your individual needs.
If your business is made up of multiple sites or departments, your management accounts can be broken down on a site by site or departmental basis. This is particularly useful for determining if a particular aspect needs extra attention or for understanding where the most profitable areas are in the business.
The role of your accountant in this process
The information that is provided to you by your accountant is confidential and for internal use only. There is no requirement for the management accounts to be published and they do not need to be filed with Companies House.
As part of this service you should also be supported in making business decisions by receiving advice based on actual evidence from your accountant. This will then help you with innovation planning while your advisor should also inform you as to potential areas of risk in your finances.
The production of this information should also be combined with practical business advice. It’s in this later area that your accountant then moves up from being a number cruncher to a business advisor, helping inform you of performance and guiding strategy.
If you have a finance team then they may feel comfortable in compiling these documents themselves but the crucial element offered by an accountant is the structured analysis, guidance and counselling on how to proceed with your business financially.
Remember a good accountant is likely to have seen all the scenarios before, the issues and challenges you face, having acted for many clients, in a variety of sectors possibly over many years. They can draw upon that experience to help you achieve the next goal by informing on what did and didn’t work based on past client work and from running their own firm.
Why management accounts are vital to success
By receiving a well constructed management accounting service, business decisions can begin to make themselves for you. When making an important decision, such as where to focus your marketing budget, your accountant will be able to perform a cost analysis to demonstrate the relative benefits of each option.
This service of predicting potential results means the decisions you have to make become easier and having data as evidence will help you take less time to reach conclusions. Trends that you did not know existed may suddenly surface and opportunities can then arise.
Reviewing expenditure and its relationship to turnover means your accountant can help you establish the specific costs involved in producing your product or service. They may look at the cost of customers, determining which customer base is most profitable and thus where to focus attention and effort.
If your business manufactures a product you may be faced with the decision to make or buy a component of that product. A make or buy analysis can help determine which avenue would be more cost effective.
Many small businesses measure performance by the amount of cash in the bank. Whilst this can give a reasonable and broad indication, without reviewing this in conjunction with the balance sheet, profit & loss and forecast sales & expenditure it only provides a small window of the actual big picture.
The balance sheet shows you how much money you owe suppliers at any one point, information that is not captured purely by a company’s bank balance.
You can’t put a price on quality advice
Hopefully you can now see why management accounts are so important. All of the information above is usually captured in a management accounting pack which delivers a wider view of overall financial health.
Even if you have some resource in house, your advisor plays a key role, in not just producing and delivering this information, but also by drawing upon their experience to conduct analysis and deliver rounded advice. In that sense you should see them as a crucial part of your team that you really can’t do without.
Whether you're starting out with growth plans, or well established and expanding, the temptation is to budget and purchase advice purely on price. Perhaps what you should really be asking is what will you get for what you pay? Then query how useful that will be to the long term performance and goals of your business?
The management accounts service and what it relays can be incredibly powerful to helping drive growth, efficiency and effective direction. So when considering your advisor, perhaps think long term as to what you're looking to get from them because more often than not with professional services, you pay for what you get. Remember this famous quote when pondering over which firm to go with:
"We're not rich enough to buy cheap things"
The content of this post is up to date and relevant as at 06/09/2016.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.