19 Apr

Management Accounts – How to take control of your business finances

While ‘management accounts’ is perhaps not a phrase which quickens one’s pulse, it is something which is actually at the heart of your business and is the key to helping you monitor, review and improve your financial performance. Having a firm grasp on the management of your finances is what drives success.

What are management accounts?

Management accounts are a set of monthly (or even quarterly) financial statements showing the profitability and financial health of your business, so-called because they are the vital numbers your management team needs to know in order to assess the performance of the business.

They are tailored profit and loss reports that show the actual performance against budget and also the profitability of each services or department in the business. It may seem like a lot of data to take in, but these numbers are extremely useful for you and your business in terms of successfully progressing.

Why is monthly reporting so important?

We all know about annual statements, the statutory accounts which show the state of the business on a yearly basis. However, annual accounts always show data from previous months, sometimes as much as 18 months in the past. While this may be sufficient for annual statements, it is a problem if you want to know the financial state of your business in the present.

Management accounts are run every month, so the information is more up-to-date and therefore more relevant when it comes to making strategic decisions. In contrast to annual statements, management accounts are not centred on ticking boxes and keeping HMRC happy. Instead they are about gather timely information which can help you see exactly how you are performing as a business. The can help in the following ways:

  • Control

You cannot view your business profitability based on your bank balance, or even by looking at the number of sales you made last month. You must also factor in your costs and whether you have actually completed the work that has generated your sales. Furthermore, you must also take into account any loans that you may have taken out, which the knock-on effect of boosting your bank balance, as well as any money that you have loaned into your business. Management accounts show you exactly where you money is going and how profitable you actually are.

  • Showing the full picture

Business owners are constantly asking ‘What’s my profit?’ While profit is undoubtedly important, it is really only half of the picture. The other half is your Balance Sheet. This shows what the business owns versus what it owes and gives you the overall health of the business. IT shows what would actually be left in the business once it has paid of any debts (this is known as you ‘Net Assets’).

  • Cash flow

Have you ever wondered why you seem to be making lots of sales but never seem to have any cash in the bank? The answer to this comes from your cash flow statement, which shows exactly what has come in and gone out of your business during the month.

  • Sales and costs analysis

Knowing your projected sales and costs for the year allows you to then break this down into a monthly budget. Management accounts let you see how you’ve performed against the budget each month. Any areas of fluctuation or costs spiralling out of control can be quickly identified and decisions made as a result, before it is too late.

  • Departmental or service-led reporting

As well as knowing the overall profit for the month, you can also take a look into the specific profitability of each service you provide, or each department in your business. That can be extremely revealing.

  • Tax planning

Everyone hates receiving a surprise tax bill. With monthly management accounts, you can know each month exactly how much you need to keep aside for tax. This means that, at the year-end, you will have the money in the business (preferably in a savings account) so that you can easily pay your tax bill on time and avoid any interest being added.

Monitor the heartbeat of your business

Keeping a close eye on the health of your business is the key factor in making it successful and profitable. Monthly management accounts give you the tools to assess your current business performance, highlight any issues, and make better-informed strategic decisions for the future of the business.

As a firm, we use Xero cloud accounting software for all our clients; the flexibility of Xero means we can pull out the reporting you need to make sure the company and its finances are on track. There are even specific management reporting add-ons, like ‘Crunchboards’, that can add a whole new level of insight into the profitability of your enterprise.

Call, or make an appointment with us, to find out how Xero may be perfect for your business and the development of your management accounts.

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