Management accounts and why your small business needs them
Posted on 27th January 2022
As a small business owner, you might think bookkeeping and accounting are necessary chores rather than useful business tools.
Producing your annual statutory accounts is a legal requirement which might not be of any special benefit to you, although it can help you with your tax planning. However, there’s so much more your accounting can do for you.
What are management accounts?
Management accounts are regular financial reports you can use every month or quarter to understand the financial health of your business.
You don’t have to produce these reports for any other purpose but they will give you more control of your business finances.
For your small business you might choose to regularly review your profit and loss account, balance sheet, and cashflow. You can create these reports yourself or you can work with your accountant or bookkeeper who will be happy to explain what they mean and how you can use them to improve your business performance.
If you’re using accounting software like Xero, the information you need will be readily available and can be easily converted in to useful reports.
How management accounts can help your business grow
Monitoring where and when money enters and leaves your business is an important tool you can use to measure and manage performance throughout the year.
Importantly, you won’t be leaving everything until it’s time to finalise your annual accounts to check your financial position. In fact, having a good balance in your bank account at the end of the year could be hiding issues that could mean there are possible cashflow problems or that your business could have been much more profitable.
Your management accounts provide information about the monthly and quarterly trends in your sales, expenses, and stock levels for example. When you make good use of your management accounts you can:
Make good decisions at the right time – when you see something that is out of line you can act quickly to address the problem. This could be customers who are regularly late with their invoice payments or signs that you are overstretching your credit limit to support a large project.
Understand how all the parts of your business are working – you can set up key performance indicators or KPIs for your business so you can understand how everything is working.
Improve your cashflow – cashflow problems can be quickly identified in your management accounts allowing you to respond before you run out of money to pay your bills. You can use management accounts to identify opportunities to reduce your outgoings, to make better use of your available resources, or to renegotiate payment terms with your suppliers. Looking at all your business costs will show you how and where money is being spent and who your most valuable customers are.
Plan your tax and dividends – you might pay yourself a small salary and top this up with dividends from your business. You will have a much better view of how much you can pay yourself and what you will need to reserve to pay your taxes.
Prevent fraud – while you have complete confidence in your business partners and employees, making sure you have good processes and an accurate and up to date view of your business finances will make sure any bad practices or bad intentions are quickly detected. On the other hand, the longer the time between financial reviews, the more chances there are for something to go wrong.
Because everything is up to date, your management accounts can also help to reduce your accounting costs and your overall tax liability.
Please get in touch if you would like to know how management accounts could help to improve the performance of your business.
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