One of the most important business tools that you may not be using is management accounts. These accounts allow more measurability for your business that can help you to improve specific areas to benefit the entire operation. What you can measure you can manage.

What are management accounts?

Management accounts are detailed financial reports produced for the owners and managers of a business. They provide similar data to year-end accounts, but are usually produced monthly or quarterly and are personalised to the requirements of the business owner or manager. In summary, they provide the data that is most important to the goals of the business.

While most businesses will measure their sales, orders and understand their overall financial situation, management accounts can provide more detailed analysis, such as gross margin percentage, profitability, overhead costs, trends, the breakeven point for profitable sales, and which areas of the business are performing well, month on month. Almost all businesses can benefit from management accounts.

Why are management accounts important?

Using management accounts can help in a number of ways, all of which revolve around the discipline of controlling finances:

They allow a greater understanding of business success and areas for improvement

Rather than just looking at the overall profits of your business, management accounts provide a detailed analysis of the different areas of your business, showing you which areas are performing well and which are underperforming. This allows you to focus on the areas of your business that need development, without having to disrupt the processes that are performing.

They allow you to make informed decisions to improve your profitability

It’s hard to overstate the importance of understanding your business’s finances because it allows you to make more informed decisions. For example, to improve profits, a business will often try and increase sales. However, the same profits could be achieved by improving margins, such as reducing the direct cost of a product through more efficient management of labour or sourcing cheaper materials.

They allow you to be in a better position at the year end

Management accounts don’t eliminate the need for year-end accounts, but they can prepare you for them. The data from management accounts also allows you to make impactful changes throughout the year, leaving your year-end accounts in a more favourable position. Even if there are problems that you can’t yet rectify, they won’t come as a shock when the year end comes around.

They enable you to keep an eye on in-goings and outgoings

Businesses should have an understanding of their in-goings and outgoings, but using management accounts allows you to see this information in more detail, such as where you are spending too much. Monthly management accounts, in particular, allow you to spot problems before they get out of control and compare previous periods to identify and curb any negative trends.

They make it easier to prevent cash flow issues

Without regular reporting and analysis, it can be hard to keep on top of cash flow issues, which may lead businesses to make financial decisions without all of the data. Maintaining a steady cash flow is essential for businesses to keep operating during difficult times, as many experienced during the pandemic.

Even when profits are low due to circumstances outside of your control, bills, leases, and employee wages still need to be paid, so it is important to see where in the business you can free up some cash.

Management accounts also allow you to manage growth sustainably; if your business expands too quickly, it may run out of working capital, such as when suppliers and staff need payment before customers have paid the business.

They are good for demonstrating the ‘health’ of your business to potential investors

If you are trying to attract potential investors, then you need to provide them with real data concerning the health of your business, rather than just a sales pitch. Investors will want information about your profit margins, overheads, how you are performing against others in your industry, and your potential for sustained growth, among other things. All of this can be taken from your management accounts, either directly, or by providing the data needed to analyse the market.

Being able to measure your businesses performance across multiple periods and discover both positive and negative trends is a key component of sustainable growth. Management accounts are an important tool that can provide the foundation for your most profitable business improvements.If you need help preparing management accounts for your business, you are welcome to get in touch with our team to see how we can help.