What are Management Accounts?

Imagine you’re planning to travel across the country. You wouldn’t just jump into your car and head to your destination. You’d plan your route, decide on your timings, factor in any breaks, and check your vehicle.

Then when you’re travelling, you’d monitor your speed, look out for any diversions and change accordingly, refill or recharge and make sure you get to your destination on time.

Your business is your journey, and most traditional accountants will just prepare your compliance accounts and tax, which tell you how you DID, not how you’re doing. Let’s try to go about our business journey as we’d go about travelling across the country, and how management accounts serve as the dashboard of your business vehicle.

Management Accounts – The Dashboard

The first step is knowing where your business is right now. Through our management accounts service, we can deliver a snapshot of your business every month or quarter. This helps you ensure that your business is on the right track, that the numbers are as you’d expect.

Management accounts don’t need to follow the same structure as a statutory set of accounts – we can tailor the categories, rows, columns, and even the style, to suit your sector, goals, and performance. A common change we make is to bring your director/business owner costs, i.e. your small salary, or expenses you put through the business for your own time, out of the normal profit/loss.

Along with an appreciation for how much the business would need to pay for a “commercial you”, this gives a good snapshot of what the business would look like, if someone else were to buy it. If it’s profitable with a “commercial you”, you might have something sellable in future.

Alongside a profit/loss, management accounts can also include a balance sheet, detailing what assets the business owns, what money it is owed it, and what money it owes out, effectively showing you what would be left in the business account if you “cashed everything in”.

We can also include a cashflow statement, a very useful report detailing how your bank balance has changed between each month/quarter. Profit/loss does not always manifest itself in a cash difference.

For example, if you spend lots on new equipment in one quarter, your profit and loss would stay the same, but your cash would reduce significantly. Understanding where your cash has gone can be far more important in the short-term than profit, or to quote the popular phrase: “Revenue is Vanity, Profit is Sanity, but Cash is King”.

Lastly, profit and cash might not be the only performance indicator that keeps you awake at night. We can implement some key performance indicators – KPI’s, to monitor your business performance. For example, how much you spend on direct staff bs the revenue they generate, or how much stock you have unsold as a % of turnover. These can also be non-financial, such as what % of your machines have down-time, or how many people are seated in your café each day.

Budgets & Forecasts – The SatNav

Once your management accounts are providing insight into where you are now, we can start to plan where we want to be, and if we’re on track to get there. By setting a standalone forecast of where you want your business to be, and comparing this to what is actually happening, you can make sure you stay on track, and revise your expectations for better or worse.

Or if cost-saving is your current exercise, you can set budgets for your costs and track what % you’ve spent. Once you’ve hit your limit, you can hold yourself accountable for not spending any more.

Scenario Planning – The Diversions

Now we know where we are, how fast we’re going, and if we’re on track for where we want to be. What we haven’t yet accounted for are any diversions.

These can be threats OR opportunities to your business success such as a change in government, an opportunity to take on new employees, or a change in your sector legislation that will make it harder to make a profit.

Using our scenario planning service, we can look at how these changes might affect your business. If the change is negative, scenario planning will assist in preparing you to steer the business back on track. If it’s a positive change, scenario planning can help you implement it.

Or, if it’s something completely drastic, like buying out a competitor or purchasing an office space, scenario planning can help with the viability of financing such a scenario, such as loan planning, revenue increases from acquisition – the possibilities are endless.

Management accounts are the dashboard to make sure you’re on track. Forecasts help you plan your route in the first place, and scenario planning help you steer your business in the right direction, and plan for any bumps in the road.

It’s a complex area of your business, which needs and expert in the numbers, and someone with knowledge of your industry. We’ve been around the block enough to be confident in advising you on planning the future success of your business.

Give it a try, you never know how far your business vehicle might be able to take you.