7 Ways to Maximise Management Accounts
What do all major decisions taken within a business have in common? They are all influenced by the financial health of the company.
It could be a defining event like an investment round or an exit, or something more business as usual, such as hiring a new employee, investing in a piece of software, or even paying a dividend. An informed decision is simply not possible without good financial records and if you aren’t making an informed decision, you may be taking on a risk that impacts the future health of the business.
Here, Dragon Argent look at seven ways to maximise management accounts to identify risks, spot trends and inform decision making.
1. Tailor Contents to Produce Key Metrics
Just like snowflakes, no two businesses are the same. As such, using a template for management accounts will only make those accounts less useful. Instead, a deep grasp of the company will enable whoever produces the accounts to focus on what really matters to give insightful information, while ignoring what is of less value.
Doing this will enable decision-makers to see clearly what expenditure adds value and what is proving unnecessary. This should lead to greater growth and higher profit as the business streamlines its spending.
2. Notice Developing Trends
Annual statutory accounts are of value, but often provide information when it is too late. The advantage of regular management accounts is that decisions can be made with real-time information and so actions can be implemented that will improve the business immediately, not merely 9 months after the issue first arose.
3. Understand Business’ Annual Cycle
While statutory accounts provide insight into year-on-year developments, they do not highlight seasonality. Many industries have seasonal aspects to their business. Most clearly, retailers will make well over 1/12th of their annual sales in the month of December. Monthly management accounts provide an insight into when most sales occur in a business and so will help decisions to be made about the best time of year to invest in new marketing, or when to hire new staff.
It also helps companies to know what points in the year that cash flow may be particularly tight and so expenditure can be planned around that to ensure suppliers and staff can still be paid on time. Without this, businesses can quickly run out of money even while being profitable.
4. Monitor Cash Burn
In the early days, companies will seek investment to allow them to spend as they grow towards profitability. Management accounts show the rate at which this cash is being burned up and so allow companies to decide if and when to seek further investment and to know the amount of investment that they may need before the cash crisis hits.
5. Recognise Fixed and Variable Costs
Fixed costs are those which do not change regardless of growth in sales (e.g. office rent). Variable costs broadly grow proportionate to sales (e.g. cost of stock in a retail business). Many costs fall somewhere between the two with a base fixed level and a level of variation on top of this. For example, a sales manager costs their basic salary (fixed cost) but may receive a commission for every new company they bring on board (variable cost).
Management accounts allow different costs to be plotted against sales to understand the business’ split between these two. Higher levels of fixed costs would reveal a much riskier business than one with predominantly variable costs.
6. Test Forecasts Against Actuals
By having monthly management accounts, companies can see, at a glance, whether this year’s performance is in line with forecasts. Where this is not the case, strategies can be quickly adapted to help achieve the desired results.
7. Attract Investment
If a company is seeking investment, management accounts provide potential investors with better assurance of the state of the company finances, and thus decreases the riskiness of their investment.
Management accounts can be produced internally or outsourced to an expert who will understand the company’s needs and can produce the accounts, and associated metrics, for the company to use.
If your business would benefit from outsourcing your management accounting function to create better insight into your businesses performance and inform your decision making, please contact our team as we provide a tailor-made set of accountancy services for small businesses, SMEs and startups.
Book a call with our Management Accountant today ↓