Financial management is one key area that can make or break your success as a small business owner (see also our blog on cashflow forecasting). While most business owners focus on yearly financial statements for tax purposes, management accounts provide insights into your day-to-day and month-to-month performance.
To make management accounts work for you, you’ll first need to understand the ins and outs, and why they’re important.
What are management accounts?
Management accounts (different to bookkeeping) are a set of financial reports that provide detailed, regular snapshots of your business’s financial performance. Unlike annual financial statements prepared for tax purposes, management accounts are typically produced on a monthly or quarterly basis and focus on real-time data. These accounts include profit and loss statements, balance sheets, cash flow reports, and other key performance indicators (KPIs).
The main purpose of management accounts is to help business owners make informed decisions based on current data. By reviewing these reports regularly, you can identify trends, spot issues early, and adapt your strategies as needed.
Why are they important?
Management accounts are significant for several reasons:
- Better decision-making:
With up-to-date financial information, you can make informed decisions about budgeting, investment, hiring, and other critical aspects of your business. - Cash flow management:
For small businesses, cash flow is often a key concern. Management accounts help you monitor cash flow closely, ensuring you have enough working capital to cover your expenses. - Financial control:
Reviewing management accounts helps maintain control over business finances, reducing the risk of overspending or running into cash flow problems. - Identify trends and opportunities:
Management accounts allow you to track trends in sales, expenses, and profitability. They help you identify opportunities for growth or areas where you can cut costs. - Compliance and loan applications:
Lenders or investors often require detailed financial reports to assess your business’s health. Well-maintained management accounts can be used to demonstrate financial stability.
Do I need management accounts as a small business?
Yes, even as a small business, management accounts are incredibly valuable. While some business owners may think that financial statements are only necessary for larger companies, small businesses can benefit significantly from regular financial insights.
Whether you’re looking to grow, manage cash flow better, or simply keep an eye on your business’s health, management accounts give you the information you need to stay on track. They’ll help you to spot problems early, make strategic decisions, and avoid nasty surprises.
How to get started with management accounts
If you’re new to management accounts, here are a few steps to help you get started:
- Speak to your accountant:
Your accountant is the best place to start. Ask them about management accounts and what kind of reports they can provide. Many accountants offer monthly or quarterly reporting services, so they can guide you on what’s available. - Determine what information you need:
Depending on your business goals, you may want to track specific metrics. Some common reports include profit and loss statements, cash flow forecasts, and budget comparisons. Discuss with your accountant what information would be most useful for your decision-making. - Decide how often you need reports:
Management accounts can be produced monthly or quarterly, depending on your business’s needs. A monthly report is ideal if you want a closer watch on cash flow and performance. On the other hand, quarterly reports may be sufficient if your business is more stable. - Set up a system:
Work with your accountant to establish a system for gathering the necessary financial data. This might involve using accounting software, integrating your bank feeds, and ensuring you’re tracking expenses and income accurately. - Review and take action:
Once you start receiving management accounts, make it a habit to review them regularly. Analyse the reports, identify trends, and make adjustments to your business strategy when needed. The key to success is not just having the information but using it to improve your business.
To sum up…
Management accounts give a valuable overview for small business owners, offering real-time insights into your financial health. With regular reviews of these reports, you can make better decisions, manage cash flow effectively, and steer your business toward success.
If you’re not already using management accounts, now is the time to start. Speak to your accountant, determine your needs, and set up a system that works for your business.
With the right information, you’ll be in a stronger position to grow your business and avoid financial hazards.
