Many small and medium sized businesses, as well as some large companies, have little idea of the financial state of the organisation.
It some instances a daily, or even a less frequent check on the bank balance, purports to represent the financial control exercised by the business owner. Other performance indicators may also be used, but unless they form part of a focused and relevant set of key measures, the work may serve little purpose.
Key performance indicators are an invaluable tool if reported regularly, in a timely manner and target the ‘KEY’ areas that will easily highlight if business performance is as planned.
All businesses are required by law to keep certain financial information, however, it is often found that in meeting the business legal obligations the small business owner is found wanting. It may be too convenient to ensure the bank balance is always positive and then wait until the end of the accounting year before knowing the financial results of the business. This approach may not be consistent with meeting the legal requirements.
To day much help is available to overcome some areas of weakness in controls within a business.
Easy to use accounting packages, for example, offer businesses the opportunity of maintaining their books of account in electronic form, from which management accounts can be prepared throughout the course of the trading period.
What are management accounts?
A definition may be that management accounts are a set of financial statements, prepared periodically e.g. monthly or quarterly, and are not audited, but are considered sufficiently accurate to allow the business owner or directors to understand the financial trading position of the business, usually against plan, and to take business decisions based upon that data. Typically the statements would include a profit and loss account, balance sheet, cash flow statement and a short report.
If the business owner is not competent to prepare the accounts personally, a bookkeeper will be able to easily provide such information, particularly if an electronic accounting package is used.
Why should a company prepare management accounts?
The benefits of preparing periodic management accounts may not be understood by all. Possibly the work may be considered an unwanted administrative chore or simply a cost and another source of cash outflow from the business.
Whilst some administration work is required, however, the preparation of management accounts is work that should ease the workload at year end, and form the basis of the annual results.
What are the benefits of preparing and using management accounts?
There are several benefits including:
In some instances a healthy bank balance may not indicate a successful company. The cash balance is taken at one point in time, and may in the future be adversely impacted by current trading conditions.
Unless the business owner can immediately identify adverse operating trends and take action to correct the situation, it may result in a severe cash flow shortfall later.
Management accounts should provide sufficient information to detect positive and adverse trends in sales volumes, operating margins, costs and profit. Importantly this information will be available throughout the trading year and allow for informed business decisions to be taken.
Focus on Key Business Areas
Knowing at year end that sales may have increased or decreased in total against the previous period may be interesting, but is it sufficient to exercise control over key areas of the business?
As part of the management accounts work it would be expected that an analysis of sales, by product is made available. This will allow the business owner to review objective data on product sales trends and to take informed decisions on divestment or investment in different product lines.
The total business costs are of little value when managing a business. The need to have some cost analysis cannot be underestimated. A business owner/director should know where the company money is being spent and if costs are spiraling out of control.
Tax Planning and Dividend Payments
When up to date information is available, a director/owner can plan with greater confidence when transactions need to be made. This approach may be helpful in legitimately reducing the tax liability of the company, and to maximise the potential benefits by payment of dividends as opposed to salary.
Demonstrate the Owner is in Control
Knowledge is power. Certainly if the owner can demonstrate to the professional people the business has contact with, that there is a comprehensive understanding of what is happening within the business then respect will be gained and the level of comfort in the business relationship will be heightened.
This may be of particular importance in the relationship with the bank manager.
Reduced Year End Audit and Accounting Costs
During the process of preparing management accounts many queries will be identified and resolved. If this were not the case, at year end in addition to accounting for twelve month’s work, all queries during the period will need to be addressed at the same time. Memories will fade and resolution of issues will take longer and cost more.
Detection of Fraud
A regular review of the financial performance of the business will increase the possibility of detecting fraud or other malpractices. Simply the longer time gap between financial reviews will allow wrong doings to remain hidden and more difficult to uncover.
The preparation of management accounts will provide a valuable tool on which the business owner can manage the business. Informed decisions can be taken based upon objective data and be taken in a timely manner to enable the business to succeed.