Why you need Management Accounts
If you are using the annual accounts to know how your business is performing, then you are missing a trick.
Annual accounts are not prepared so that you can manage your company but for outside investors to see how their investment has faired and other external interests such as HMRC, and by the time you get them the information in them is out of date. To truly manage your business you need to know what’s happening now and be able to take action.
That’s where management accounts, or more correctly management information comes in. This is the missing piece in the jigsaw which ties together the other elements of the business, Sales & Marketing, operations and the ancillary support services. It will tell you, without any bias, exactly how the business has been performing in all these areas, however unpalatable that maybe. The information just states facts and forces you to remove the blinkers that all is rosy if it isn’t.
What management information is needed is dependent upon the business, what drives it and at what stage in its business life cycle it is. A great accountant, such as those at Gain Accountancy, will be able to advise exactly what information should be maintained. If the correct information is collated, the management team will be able to make the necessary decisions and take the appropriate action for the business to thrive. The impact of those decisions can then be checked via the same information and by repeating this process the business and business owners will soon learn what levers it needs to pull to have the desired impact on the business performance.
Whilst the information to include and how it is presented is specific to a business, the common categories of information to include are:
- A monthly profit and loss account – this is the minimum that any business needs
- Cash flow forecast – every business should have one
- Variance analysis – a comparison of actual performance to another yardstick perhaps the prior month, prior year or budget
- Non-financial key performance indicators
The last item in the above list is as, if not more, important than the financial measures. If profit is a consequence of doing the right thing, in the right way, at the right time, shouldn’t these “things” be measured, tracked and planned for. The sort of “things” included here could be customer satisfaction, delivery within agreed deadlines, staff satisfaction, number of sales meetings, no of leads converted etc. Without any of these, there will be no profit, but very few people measure them. They need to be in any company’s management information.
Having prepared all the information, if you don’t use it will have been a waste of time. The information is produced so that the business can take action. The business owner/s need to set aside some time to actually consider the information in detail – a mini board meeting if you will. Even if there is only one person this is a good practice to get into – acting like a bigger company can and does bring the same results. Even better is to have that meeting with a third party who you can discuss the results with you, act as a sounding board and who will offer impartial advice – again this is something we encourage and a service that we provide (GainFocus). If you would like to know more please e-mail us.
