What are the Top 10 Benefits of Management Accounts?
Every limited company must file a set of accounts with Companies House following the end of each financial year. That is a statutory requirement and is seen by some as a necessary evil in exchange for some of the benefits of being a limited company entity. However, far from just being a box-ticking exercise, a set of accounts can provide you with valuable information about your business and its performance, allowing you to make better decisions and strategically plan for the future.
The benefits of Accounts can, however, be limited if you only see them once a year. Many businesses, therefore, produce monthly management accounts. For smaller firms looking to control spending, this may seem like adding an unnecessary cost, but we would contend that the benefits nearly always outweigh the expense.
Here (in no particular order) are our top ten reasons why:
1. Compare to Budgets and Forecasts
Usually, business leaders will have an idea of where they want their business to go, and how it should perform. Often the reality is very different from expectations though, and the difficult part is spotting where those differences stem from. Budgets and forecasts can easily be integrated into management accounts, providing a visual aid to easily see the causes of any variances. Our management accounts packs are specifically designed to be very visual, with graphs and charts to easily see where you are against budgets and forecasts.
2. Help to Control Costs
A monthly set of accounts makes it very easy to compare costs month to month and to set expectations or budgets for the month or year to date. Often savings can be found by analysing costs in more detail, and promptly. It allows you to pick up on small variations against budget, which over the course of a year would add up to a significant difference. It also helps to set out all of your various outgoings/costs in a list that is easy to review, rather than trying to do that in your head. This situation has become even more apparent in 2020, where all businesses are trying to review their costs, and those with management accounts have a very easy place to start.
3. Can be Used to Obtain Finance / Extent Credit
If you are looking to raise finance from a bank or investor, then continuing or increasing an overdraft (usually a good business plan), backed up by forecasts and accounts, can dramatically improve your chances of success. However, this can be difficult to do if you are using a set of accounts that were produced 6 months or more ago. This is especially true if the business performance has changed significantly since the last financial year-end, or in the present situation, where the whole world has changed significantly since the previous year!
4. ‘What Gets Measured, Gets Done’
It’s a bit of a cliché, but it is true! Relying on annual accounts or data is not very useful in measuring realtime, or within a useful timeframe, what is going on in your business. You can use management accounts to help set measures or targets that would be beneficial to your particular business, and then use the monthly reports to measure where you are against those. That way, you are using the data to refine what you are doing, change tact completely, choose what you should be doing more of, less of, or even not doing at all!
5. Helps with Cash planning
Remember cash is not the same as profit. For example, some firms may collect a payment to account from their clients upfront, but obtain credit from suppliers, or have chosen to defer payment of VAT. In the gap between receiving cash upfront from clients, and paying suppliers or deferred VAT, the company may have other costs to payout, such as wages and monthly bills. Cash in the bank can sometimes give a false sense of security, whereas monthly accounts will make it easy to identify problems or gaps in funding quickly so that you can look for external funding or reduce costs before the problem becomes critical.
6. Allows Monitoring of Working Capital
It is easy to see how much cash you have in the bank from month to month, but it’s much more difficult to monitor how much your clients owe you, how much you owe creditors, as well as monthly movements in those figures. An increase in debtors, without an increase in turnover, can be an early warning sign that clients are taking longer to pay, and that you need to invest some time into chasing payment of your outstanding fees or use an outsourced Credit Control service.
7. Helps Motivate (some) Managers and Staff
It can sometimes be helpful to share management accounts with key members of staff so that they can easily see the reason why they need to control costs, increase collection of fees etc. Accounts can be a nice visual aid to focus performance, and can also be split into specific areas if you only want to show staff particular areas of the business relevant to them. However, you should note that not everyone will be interested in numbers!
8. Avoids Surprises at Year-End
Usually, business owners will have a reasonably good idea of turnover, and a grasp of regular costs. However, it can be difficult to monitor varying margins, exceptional costs, one-off projects and anything else out of the norm. It can also be difficult to factor in accounting concepts such as accruals and depreciation. This can mean that the year-end results are far from what’s expected. If a business has made an unexpected loss, it can come as a nasty shock. If the business has performed much better than expected, it could result in an un-planned corporation tax bill.
9. Helps Identify Seasonal Variances
Traditionally, some types of firm will be busier at certain times of the year, and quieter at others, which requires planning ahead. Usually, (albeit not in 2020!) conveyancing firms are busier in spring and autumn, and monthly accounts allow you to track and analyse every individual month so that you can clearly see the impact of this and plan for future years accordingly.
10. Helps to Plan Dividend Payments, Drawings and Other Remuneration
Some business owners will choose to take their earnings in dividends or drawings rather than salary. However, for less established or less profitable companies, this will need careful monitoring to ensure too many dividends or drawings are not taken through the year. For other businesses, it may be that through monthly monitoring, it is perfectly possible to take more drawings each month.
Senior Business Development Manager