Home » Reaping the Benefits of Keeping Managed Accounts
Every business needs three financial statements: a profit and loss (or income) statement, a cash flow statement, and a balance sheet. These documents, when combined, provide key figures and a snapshot of your financial situation.
But, more importantly, what do these figures mean to you? Do they clearly show how your company is growing? Do they demonstrate that you consistently meet your targets? Do they reveal spending patterns that can help you better plan your business?
Many businesses also produce management accounts, which are in-depth analyses of the data that help them get the most out of the numbers. Management accounts aren’t required, and there’s no one-size-fits-all approach to creating them. They are, however, invaluable tools for going beyond the numbers to understand your current performance and make future plans.
Management accounts are a type of financial report that gives you a greater insight into your company’s financial performance. They are – rather obviously perhaps – named for the fact that they’re typically used by business owners and management to help them make strategic decisions.
Management accounts are typically produced monthly or quarterly for the best results, allowing you to more accurately gauge how well you’re doing and make timely course corrections.
Surprisingly, there is no ‘right’ or ‘standard’ way to do them. Each business will have its own way of doing things. Although there are examples of good practice and popular suggestions for what to include, the final structure of the report will be determined by what information is most important to you and your management team.
Do you really need more paperwork, more financial stuff, and more hassles, working on things you are not even required to when you have a business to run? In the case of management accounts no, you don’t have to, but there are lots of benefits if you do:
You can compare your management accounts on a monthly, quarterly, or annual basis to accurately track not only your financial but also your general performance. You could discover that you developed your client base from late payers to on-time payers, for example, by looking at your accounts receivable over time.
By looking for patterns in income and cash flow, you can better forecast future revenue and make allowances for questionable accounts. You might even notice seasonal variations in cash flow, allowing you to plan ahead for slower months in the future.
Investors love to see a good set of management accounts to back up your business plan. You can approach investors with confidence, ready to answer all of their questions about your company’s performance with a good set of management accounts in hand– but failing to do so will almost always result in a quick “goodbye.”
You can make any necessary improvements far more expediently once you understand your cash flow. If customers take a long time to pay, for example, you can improve your collection process or make other credit decisions more quickly. Or you can develop loyalty programs and attractive offers to reward customers who pay on a regular basis if you know who they are.
Management accounts, as previously stated, are by definition unique to your company. However, here are some pointers on what kinds of information to include. Your decision on what to include may change over time, allowing you to develop the most effective strategy for you.
The following are likely to be included in a strong set of management accounts:
Every company has a set of KPIs – a list of measurable objectives that must be met within a certain time frame. KPIs can be financial goals such as revenue growth, gross profit margin, operational cash flow, current accounts receivables, or inventory turnover that you want to achieve each month. Performance-based KPIs, such as the number of sales leads you want to generate, are also usually tracked.
Make a list of your KPIs and compare them to the numbers in your financial statements. Are you on track to meet your revenue targets, according to your income statement? Or, if you look at your balance sheet’s accounts receivable, are enough customers paying within the agreed-upon timeframes? Look for areas where you can improve and readjust your
Your income statement shows whether you’re making a profit or losing money at a glance. You can go deeper with a management account. Compare your monthly income: are you consistently overspending or underspending?
You can also break down your profits – and losses – by department or location: which departments or branches are the most profitable? Compare your actuals to your forecasts to see if you’re setting reasonable profit goals or if you need to rethink your strategy.
Because cash flow is your lifeblood, it’s critical to have a thorough understanding of it for day-to-day budgeting, investment, and funding decisions. While your cash flow statement summarizes the money coming in and going out of your business, your management account examines the data for patterns.
When it comes to receiving payments from clients, how long does it usually take? What are the most expensive parts of the business to run?
You can better forecast the future by planning around higher or lower income months and allocating money across the business optimally if you understand these patterns.
Your balance sheet shows your assets, liabilities, and owner’s equity, giving you a clear picture of your net worth. A management account helps you look for deeper insights, whereas a balance sheet focuses on seeing the numbers balanced.
How well do you manage debt when you look at your liabilities over time? How quickly do you convert assets into cash flow? How well do you generate investment returns?
It may appear from this that a management account must be comprehensive. But keep in mind that your goal is to produce only the most useful and relevant information while remaining focused, specific, and to-the-point. Include only the information that is critical to your business, which may change as your company grows.
Going into too much detail or including everything could make this a time-consuming task that you won’t want to do, defeating the purpose. In other words, make them something you enjoy reading because that’s exactly what you’ll be doing.
Your immediate dilemma, if you’re in the early stages of your business or want to improve your cash flow, is often: “How do I get new funding?”
One of your best tools is having consistent, up-to-date management accounts. If you’re looking for funding from a bank or an investor, for example, a good business plan backed up by forecasts and accounts can greatly increase your chances of success – especially if your management accounts are completed on a regular basis.
Some lenders will give or extend credit terms based on a set of management accounts, which can be a good option if you’re still working on improving your credit score.
If you’re a small, fast-growing company, you might want to set up a set of management accounts solely for pitching for funding. Here, your KPIs and insights should be focused on demonstrating why you’re a good investment.
Because accountants are trained to understand numbers, they can best assist you with your management accounts. They can help you with the ins and outs of examining your financial statements and extracting data, patterns, or red flags that can be useful in making decisions.
However, because you are the most knowledgeable about your company and its objectives, you should play a key role in the creation of the management report. Share your KPIs with your accountant, so they can make note of what figures to look at and forecast with.
Need help with developing and keeping management accounts? We have decades of combined experience in creating – and keeping – managed accounts for all kinds of companies. Get in touch to discuss how we can help you with yours.