The law states that a company must file a set of accounts at the end of each financial year as a statutory requirement. This set of accounts includes a balance sheet, being a snapshot of the financial position at the year-end date and a profit and loss account, usually covering a 12 month period.
So…. Why might you need management accounts? Management accounts provide you with valuable information about your company and its performance as well as looking at the balance sheet position at different times in a year. This can highlight any seasonality or trends throughout that year which should be considered when planning cashflow requirements.
For companies looking to control or simply monitor income, spending, profit, outstanding balances and ultimately cash flow, the benefits of management accounts will nearly always outweigh the expense of producing them.
We have compiled a list of what our clients say are the ten main advantages of management accounts:-
- Cost control – If your costs are presented to you on a monthly or quarterly basis, it is often the case that you will look at these and question why there have been movements month on month or why they are so high or low in each period. Often when a full set of accounts is placed in front of you at the year end the practicality or reality of these expenses is not questioned. Monthly or quarterly figures can be compared to prior periods, the equivalent period in the prior year or tailored to compare to any period that may help you to review your business costs effectively. This, on many occasions, will highlight to management if there are excess charges, mistakes or unnecessary costs on any expense lines in the accounts.
- Cash flow – The timing between an invoice being raised or received and actually receiving the cash or paying your suppliers may impact on the business’ ability to pay other costs. These costs could be small routine expenses, e.g. wages and unavoidable costs, they may be for a large amount of crucial capital expenditure, or there may be a requirement to pay a dividend to shareholders. Simply looking at the current cash balance in the bank is not always a clean, clear cut indicator as to what you actually have available to spend.
- Credit from suppliers – Filing accounts affects your credit rating as ratios can be calculated from these figures and applied to your credit score. If the first quarter following the year end delivers excellent results, this will not reflect in your credit score for over a year until the year has completed and the year end accounts prepared and filed. Suppliers are though often willing to accept a set of management accounts prepared by a reputable firm of accountants to give or extend credit terms.
- Banks and finance providers – ?If you are planning to raise finance, re-finance or even just looking to maintain current finance levels then a good business plan, including forecasts and management accounts, may be requested by the bank. The fact that management accounts are being produced will often impress a bank manager as this demonstrates good financial monitoring. A set of recent, up to date management accounts, as opposed to statutory accounts prepared and signed off nine months after your year-end, will improve your chances of raising finance, especially where it is clear that business performance has changed significantly since the last financial year end.
- Planning for dividends – Dividends are drawn from distributable reserves held by a company and some business owners take their earnings in the form of dividends rather than salary. This therefore means that in some circumstances, monitoring these reserves is essential to ensure that the level of dividends taken do not exceed these reserves.
- Actual vs budget/forecast – Owner managed businesses will normally know where they want to be financially and have a plan to try and achieve their goal, bearing in mind factors that affect their business and the performance trend they expect to follow. Reality can vary from expectations, with the tricky task being the ability to spot where those differences lie. Budgets and forecast can easily be integrated into management accounts, providing statistics as well as graphs and trend analysis to enable you, the user of these accounts, to consider any causes of any variances.
- Reviewing performance throughout the year – ?Sometimes business owners will have an idea of performance during the year with some knowledge of income and regular costs. However, it can be difficult to monitor margins, exceptional costs and anything new or unusual which is occurring within the business. It can also be difficult to factor in accounting adjustments such as the accruals basis and depreciation, resulting in the year end results being far from expectations. This can result in good or bad news at the year-end: a surprise loss does not go down well and nor does a high tax bill resulting from higher than expected profits.
- Monitoring working capital – When you take into account how much customers owe you and how much you owe suppliers along with how much stock is held (or how much it is necessary to produce) then it may be difficult to fathom how much cash is available to spend. For this reason these balances need to be monitored, but more importantly they need to be controlled! An increase in debtors, without a proportionate increase in turnover, indicates that customers are taking longer to pay and that you are going to have less cash as more cash is tied up in debtors. Monthly or quarterly accounts will indicate when it is wise to invest time in chasing payments, altering production levels or even paying some bills.
- Controlling managers or rewarding them based on results – If staff can see why they need to reduce costs, increase sales etc. to help your business it may help motivate them. In addition, management accounts figures could be used to measure their performance and a rewards scheme could be developed based on this. It is possible for management accounts to be split into profit centres looking at different divisions, locations or product lines within the business so you only need to show staff financial information relating to specific areas of the business.
- Ability to track seasonality – Some companies will sell much more at certain times of the year and less at other times, so will need to plan ahead to deal with these cyclical trends. Monthly or quarterly accounts will clearly show the impact of these trends and allow better planning and knowledge of resources for the next few months or the comparable period in the next year.
One client for whom we prepare monthly management accounts tells us that he now only needs to spend 5 minutes a month looking at the business’s financial position. He said that this is only possible as we prepare the management accounts, review the results, summarise his position and provide a report that is effectively a dashboard of results that he has decided are important to his business. From here he can make informed decisions and consider all of the above points very quickly.
Please contact us if you wish to discuss the benefits of preparing management accounts for your business.