Ercan Demiralay FCCA explains how management accounts will change as your business develops and expands.
Regular management accounts are absolutely essential to your business in helping you to monitor performance. But what should they contain? Well, they’re not a legal requirement so there isn’t anything that’s compulsory, but they’re business specific so you can simply include the aspects that are of most interest to you as the owner.
In writing this post we’ve included the Stages Model (courtesy of Shirlaws business coaching) to help you determine where your organisation currently is in the growth lifecycle. Then you can better decipher what to include in your accounts to help gauge progress and drive decision making.
It may seem like a chore having another set of accounts to focus on, but they can help drive your business forward. Whether you’re in start-up phase or scaling, we have some suggestions for what you might want to be reporting on and when. Preparing and reviewing these on a regular basis will allow you to reflect on past decisions and learn for making future ones.
What are management accounts?
Management accounts form a financial report used by business owners and management for day-to-day and strategic decision making. They are produced, usually, on a monthly or quarterly basis, and provide insight into the current financial health of a business by tracking various key performance indicators.
What should be included in management accounts?
In short management accounts need only include what a board or management team need to see. The report should contain enough performance analysis and financial data so that investment decisions can be made in a well informed manner by decision makers.
Today’s world of tech companies and the internet of free (via freeconomics) have resulted in a lot of collaboration between entrepreneurs. Whilst this mentality is understandable with the aim of budgeting and keeping costs down, you need to understand that your business is unique! Therefore your accounts should reflect this and be tailored to the areas which need to be recorded to achieve your growth targets.
Start by taking a look at the Stages Model (a concept originally developed by Shirlaws) below to help you identify which criteria you may want to include depending on your current lifecycle position. Don’t be afraid to change the criteria you focus on in your accounts as your business grows. What’s important to review now may not be needed in six months time. That’s what’s so great about them; they’re tailored to your needs.
Whether you want to create a budget, analyse your business in segments, or simply see a summary of your accounts, it’s entirely up to you. We have a few examples below of what you may want to include depending on where you’re currently at.
If you’re in start up stage or progressing but haven’t yet hit the first brick wall, you may want to create a basic set of accounts as there isn’t an overwhelming amount to analyse or compare. This may include:
Summary of accounts
Profit and Loss
This will enable you to see the basics of your business and base decisions on your current figures. As your enterprise grows or encounters its first brick wall (where you’re likely to need to make a significant investment), you may want to rethink what is being reported. This is to ensure that the correct performance data is analysed to help inform your decision making.
I want to analyse my growing start up business in more depth, what do I include?
As your business develops, it’s likely to hit the first brick wall of the Stages Model. Inevitably, problems may crop up such as needing an increase in funding; in turn you might decide to start assessing your payables and receivables to get a better idea of the money you have yet to receive, and money to be paid out.
This is when you should start to consider creating a more detailed set of accounts. Other aspects such as a budget would allow you to pinpoint areas where you are spending too much or too little. It may be beneficial to additionally include:
Of course it’s tempting to keep the criteria you’re monitoring the same if your business is growing at a steady pace, or you simply just don’t know what else to include that would be beneficial. But, as your business expands the numbers will alter. It could be useful to focus on various aspects such as specific departments or segments.
My enterprise is at the fast growth stage, what should I report?
A fast growth business typically includes more factors in their accounts to provide a more specific and detailed breakdown of performance. Here's what is likely to be included in the summary:
Key Performance Indicators (KPIs)
Shareholders Loans Transactions
Accruals and prepayments
Profit & Loss actual vs last year and/or forecast
By monitoring these aspects, you’re undertaking a deeper understanding of your business, more specifically its strengths and weaknesses. After all to make significant business and investment decisions requires an in depth knowledge of these factors. Remember, knowledge is power!
If your business has scaled the second brick wall and moved into the final phase of expansion, you may find it more beneficial to include just the minimum in your accounts to allow you to focus on the four or five most important criteria in your enterprise.
The issue here being your business is of a significant size whereby you can’t continue to keep adding elements to your accounts. It becomes unproductive and simplification is likely to be the best route forward.
So consider exactly what you need to see on a regular basis based on which phase of growth you’re currently in. Remember, there isn’t anything that you have to include; only the aspects which will help you expand your enterprise. Ultimately using the Stages Model should allow you to determine where your business currently is and ensure you have the most suitable management accounts based on your needs. Bear in mind that it’s not necessarily the length of the document that is important but the content and its usefulness.
This post was created on 06/09/2016 and updated on 28/10/2019.
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