We’ve recently been taking a close look at the top 3 advantages of management accounting. It’s well known that cash flow is crucial to the survival of any business, but how can management accounts help? It’s all down to the 3 F’s!
The real difference between your average standard accounts and management accounts is in the degree of focus a business can derive from them. A financial statement is all well and good as a record of the financial activities of a business, but management accounts go much further than this. Management accounts provide vital information to a company, enabling its owners to lead the business forward more effectively. This can be key, particularly for small and medium sized businesses (SMEs) – business owners can focus attention in specific areas, for example the margins of that new contract or the overhead which is increasing disproportionately to the volume of sales.
At its most basic level, they give business owners the ability to see at a glance where the most profitable areas of the business are and focus on developing them, as opposed to battling on with less profitable ones.
They’ll help owners get the balance of their business right, making the most of high-value opportunities, while minimising the role of low-value products and services.
Good quality management information will also help owners improve their pricing strategy. Sadly, too few sales and estimating teams can link their prices back to performance data from their business.
2. Factual Information
Management accounts provide monthly (or more regular) information and in depth analysis on all financial aspects of a business. This means that business owners know exactly where they are at any given point of the financial year, rather than waiting till (after) their financial year-end.
Why is this so important?
For SMEs it can totally transform their ability to manage cash flow in a stress-free way – and we all know how important that can be! Being able to see what your costs are on a monthly basis and matching these to your income makes all the difference to your ability to plan with confidence. This concept is called ‘cut-off’, and means that you include the correct work-in-progress from your contracts. Work-in-progress is the work done at a particular point in time that hasn’t yet been invoiced.
For instance, you may not be able to invoice until you have completed a specific part of the work, however your costs are already in the accounts. This could lead to your wildly and inappropriately fluctuating profits and losses, and means you don’t know whether you are making money.
Management accounts also enable businesses to be more flexible and responsive to change. Business owners can predict more easily with regard to financial affairs and adapt more quickly. It’s all about being proactive rather than reactive. Not only can business owners keep an eye on where they’re at and plan for future cash flow, they can almost instantly see what needs to be changed and do it sooner rather than later. Having the capacity to do this can make the difference between success and failure for a small business.
As a certified partner we recommend Xero to our clients, not just because it is capable of providing high quality accounts for SMEs. Xero supports a wide range of apps including cashflow forecasting tools, workflow and stock management, providing further flexibility.
Finally, when empowered with high quality management accounts, business owners feel more confident about their decision-making. This means they’re more likely to make much needed change, than to keep sticking to the same old ways.
Are you ready to look forward?
If you’re ready to discuss this further, book a free consultation with Wessex Commercial.