Management Accounts – what do they mean to your business?
I have worked for many SME’s and it is very common that I find that they either don’t produce Management Accounts or any sort of monthly reporting or they do, but don’t even look at them.
As a finance professional, I can tell you that this is not only very frustrating but also very demotivating as what your main role is, starts to seem a pointless task! However, it’s not and I think it is up to me, in my position to help those reports add value to the business by encouraging and supporting the Directors so that these documents can be of real value to them.
I understand that a lot of small businesses started out as just one guy/woman with a few clients and as it has grown, so has his/her understanding and depth of knowledge of his/her business. So why does the business owner need these reports?
Aren’t they just for the bank or the accountants?
No, they are so much more than that.
With regular monthly reporting you are tracking your sales and costs down to the last penny. You may know roughly how well your business is doing or whether you have cash in the bank but do you know if you will in 6-12 months?
One of the roles I often play when I assist as FD, is designing and setting the processes up for these monthly reports.
By creating a budget you immediately start seeing the pattern of your business finances. You can see that actually, if you turned down the advertising you have been paying for, for the last two years which you see no benefit of, you can afford to take on another member of staff to help grow the business. It enables you to start thinking about how much you really need to spend on different areas of the business and how that spend will impact the profit. You can then start to place more control on costs and keep them to where they need to be to ensure your profit is where it needs to be.
When your monthly reports are produced, you can compare what you budgeted to your actual spend and see where budgeted spend was exceeded and why and what this means for expenditure for the remainder of the year.
Or, by reducing that cost now, you could avoid a redundancy in 6 months time.
The companies that tend to be less inclined to bother with MA’s are the cash rich ones. The ones who have those guaranteed contracts and never have to watch the business pennies.
However, they are the ones that won’t be prepared should one of those large contracts get tendered out and they lose it.
Had they had their fingers on the button with their overheads, they could have been trimming them down to ensure should the worst happen, they have enough in their retained profit to keep things ticking until that contract is replaced. All too often that extra cash is spent on vehicles, flash marketing etc. which has it’s benefits for tax reasons but you should always be prepared for the 12 months ahead and what that could throw at you.
Another reason I find company owners don’t rate MA’s is because they genuinely don’t understand them and why should they? They started out as a bricklayer on the tools and built up their business to what it is now. They didn’t get taught about P&L’s and Balance Sheets on their apprenticeship and since then they’ve been a little busy growing their business!
So, this is where your accountant, finance manager whoever you have producing these for you, should step in. Any decent accountant will be happy to sit down and explain things in plain English, in non-technical terms so that you can understand these reports and use them to make good decisions.
You should be able to be the one to hand these to the bank when you are looking for finance and not feel like a rabbit caught in the headlights, when you are asked a question about them.
To feel confident that you can tell them what each of the reports means about the strength of your company.
Overall, you have the peace of mind of having control over your company and it’s future.