5 reasons why management accounts can help you to grow your business
An alarming number of small to medium-sized business owners have little awareness of their financial position until the end of the accounting year when they prepare a set of annual statutory accounts. As a result, for some this may mean that they have little understanding of how their business has been making a profit, and for others, an unexpected shock that they have in fact, made a loss. By this time it may be too late to take remedial action.
Management accounts provide a vital insight into the current financial health of a business and allow you as a business owner to understand your numbers and plan for the future. They are usually prepared on a monthly or quarterly basis and can be tailored for businesses of various sizes from sole traders to multi-million-pound turnover organisations.
Here we explain 5 reasons why producing regular management accounts and using them effectively can become the key to your business growth and success:
1. They can keep you on track
If reported regularly and in a timely manner as part of your management accounts, clear financial Key Performance Indicators (KPI’s) become an invaluable tool which allows you track your progress towards achieving key goals and strategic objectives. If you haven’t established any KPI’s to strive towards, how do you know that your actions are having the desired results you want?
The KPI’s you report on should be chosen to align with your specific strategic objectives. Your accountant can help you with your strategic planning and work with you to decide how many KPI’s and which ones to include.
Download business plans, cashflow forecasts and so much more for free by clicking below:
Reporting on the right information in your management accounts and including budgets and forecasts ensures you are not simply relying on knowing what is in the bank and a vague feeling of how busy you are, but are in control of your business and its route to success.
2. They can help you with strategic decision making
Your management accounts can be much more than simple statements of activity. By working with your accountant, you can start to understand how to use your management accounting information effectively to make strategic decisions within your business.
Should you be focusing on growing sales or cutting costs? Are you able to move to bigger premises or take on that new employee? Without the up to date financial data management accounts contain, it is almost impossible to make the informed financial decisions your business needs.
Use your regular management information to quickly see where you need to improve and to identify any potential concerns across different areas of your business. You are then able to take appropriate action to minimise the impact on your profits before it is too late.
If you have multi income streams, how do you know what to do or sell more of – and conversely which ones to cut back on? Your management accounts will be able to tell you which one is the most profitable and therefore allow you to make decisions that promote business growth.
3. They can assist with planning for the future
Management accounts can provide lots of useful financial information for a small business. With immediate benchmarks and comparisons in place, they can allow you to analyse your business performance going forward in the future. Most importantly, it can reveal trends, especially if the report compares previous quarters or the performance year to date compared to last year and ideally, the year before that.
4. They can help to improve your cashflow
Cash is king and your business health and growth is directly tied to your cashflow. Regardless of the size of your business, maintaining a fluid movement of cash coming into your business can be the difference between business success and failure. Preparing management accounts which include cashflow forecasts allows you to spot potential cash flow problems and gaps in funding quickly before they happen. This way you can identify whether you need to look for external funding or reduce costs before any issues become critical. Your management accounts should show what is happening to cash as well as the underlying profit trend.
You may be able to send your management accounts to banks, potential investors and trade creditors if you are looking to raise finance. Including them can improve your chances of accessing the financial support you need.
5. They can improve communication
As a business owner, your management information doesn’t have to be just for you. It can often help to motivate and focus your managers and your senior team to share key management information with them. This vital report can be used as a visual aid to help keep those around you accountable and bring alive (in practical ways) why they may need to reduce costs or increase sales etc.
Regularly creating a set of management accounts is good practice and can also help you to improve communication with stakeholders.
BONUS REASON: You can make them your own
If you are not currently producing management accounts information on a regular basis, you need to take action to ensure the ongoing success of your business. An accountant can help you to decide how to structure your management information in a form and style that allows you to get the most out of your financial data. From a simple dashboard snapshot of key figures to in-depth analysis, there are lots of tools available that can help you to produce information about your business performance visually and help you to understand your numbers and make them useful.
A business owner normally needs help with their accounting, bookkeeping and tax calculations but the smart business owner also listens to their accountant and shares their plans – benefiting from experience, knowledge and financial strategies that might provide additional benefits to the relationship – find expert accountancy support you can partner with.
Blunt advice from Yorkshire Powerhouse
Now you’ve read our expert article on management accounts – have you any more questions?
Here at Yorkshire Powerhouse, we’re happy to help as much as possible – is there anything else we can do to help you, do you have any further questions or can we help introduce you to an expert – please let us know:
Profit vs Cash Flow - As a business owner, you ‘should’ recognise the difference between profit and cash flow - but do you focus on the wrong thing! Read >