It never ceases to amaze me how many businesses (some successful, some less so) operate without accurate, reliable, up-to-date, timely management accounts. The decision makers in these businesses are at best relying on out of date financial information or, at worst, working on gut feelings that things are (or will be) okay – in other words ‘winging it’.
Proper management accounts and financial information (including Key Performance Indicators or KPIs) will show you an up to date picture of how your business has performed recently, how it is expected to perform in the future and flag up any cash blips that are on the horizon. They will also give real-time information about forthcoming tax liabilities and form a basis for discussions with advisers (external accountants and Independent Financial Advisers) about how to reduce these legitimately.
If the only time you see any accurate accounts is several months after your company’s financial year end, it will probably be too late to reduce tax and delaying strategic decisions about products, services, prices or the team that could and should have been made months ago could cost you thousands in lost profits.
It can seem quite daunting moving from little or no management information to the ‘dream’ scenario mentioned above but, if you partner with an experienced adviser, it can be surprisingly painless and the cost involved should be more than covered in reduced taxes, increased profits and reduced stress!
So, what do good management accounts look like? They will be:
- Accurate – They will be error free and include things like depreciation, accruals, prepayments, stock and work in progress.
- Reliable – If you don’t (or can’t) trust the information, you cannot make strategic decisions or the wrong decisions will be made.
- Timely – With cloud accounting, accounts software that links to online banking and Artificial Intelligence that can automatically post invoices, there is no reason why even the most complex of monthly management accounts cannot be produced within 2 or 3 weeks of a month end.
- Complete – Make sure your bookkeeper or accountant includes a monthly Corporation Tax liability within the accounts so you can track how this is building up as you get closer to your year end. Also make sure dividends are shown as such (and not director loans) so you can see how the company’s capital and reserves are increasing (or decreasing) – this will give you an indication of how the company’s credit rating is likely to be affected when the accounts are filed at Companies House.
- Informative – Make sure they are giving you the information you need. As well as profitability and liquidity (how solvent the company is), the following may be useful:
- Profitability of each product or service
- How teams or individuals are performing
- Where sales have come from
- Average sale value
- How quickly customers are paying on average and any trends in this respect
- Actual v budget
- Break even analysis (what level of sales are needed to break even?)
- Real break even analysis (what level of sales are needed to break even but also cover debt repayments?)
Make sure your bookkeeper or accountant is analysing expenditure to the detail you need. For example – if half of your overheads are shown behind sundry each month, this will make it difficult to spot expenditure that could be reduced or eliminated. Also, ask them to show gross wages, Employers NI and Employers Pensions separately as this helps when trying to calculate the impact of wage or taxation increases.
- Understandable – If the recipient of the information does not understand it, you may as well not bother. The information needs to either be user-friendly or to be explained to the user.
If any of the above resonates with you and you’d like a free, no obligation exploratory discussion about your business and our bookkeeping/ management information services, please get in touch on 01482 427360 or help@360accountants.co.uk.
