Monthly management accounts can help pinpoint areas of opportunity or concern. Big businesses use them all the time to help them grow their profits.
Here are five key reasons why every business needs them.
1. Who to sell to and what to sell them in future
Planning your “chart of accounts” for your business with management accounts in mind, will help ensure the right information shows up in your accounts.
Your accounts should be able to pinpoint:
- What is your highest gross profit on each service/product you sell?
- Who is your best customer, by goods sold and by gross profit margin?
If you know the answers to these questions you can take action to target your best customers with more offers, and make more efforts to sell the item with the highest gross profit margin.
2. Monitoring and controlling your costs
If your Profit and Loss account information is shown month by month on one sheet of paper, it will show your clearly what costs are doing over the year.
Staff costs are a major area to keep an eye on, particularly where you pay overtime. Management accounts should show you how staff costs compare to the gross profit you’re making each month.
If you’re concerned about eg energy costs, or telephone costs that just keep seem to go up all the time, your management accounts can show you clear trends.
3. Cashflow report enabling you to plan ahead
It’s no good making lots of money if there’s nothing in the bank. Many a business has gone bust on that basis.
What you need is an early warning about cashflow problems in future so you can plan ahead. That’s where a cashflow report is essential for anyone not wanting a nasty surprise.
4. Estimate of Corporation Tax and Dividends
Your monthly management accounts should be able to predict a rough figure for corporation tax and give you a clear idea of what you can take for dividends. That means you can put money aside and plan your personal income properly.
5. Borrowing money
Banks keep telling us all how keen they are to lend to small businesses. However, if you apply for any finance you will know that amongst many other requirements, lenders will usually want monthly management accounts to assure themselves that you are spending their money wisely.
Getting started on management accounts
Get all your bookkeeping done up to date and check that it’s been done properly. Too many businesses don’t check what’s been input to make sure it’s in the right account.
And far too many of them don’t ask their accountant for advice on where to allocate an item. (Perhaps they don’t feel they can)
You will need to ask your accountant to help you to do the management accounts. Maybe it’s something you’ll want your accountant to do for you. For example giving accounts to third parties like banks without your accountant checking them first could cause all sorts of problems if you don’t understand accountancy principles clearly yourself.
Work out some key areas where you need good quality information so that the accounts format can be designed to show you that information. And have a look here at the services I offer to help you.
I train companies how to do better bookkeeping and prepare regular management accounts for them. Some of my clients retain their external accountant and just ask me to do the management accounts work.
Do give me a call on 01737 559211 if you would like some help.