What Management Accounting Can Do For Small Businesses
Why management accounting?
Whilst most small business owners understand the need to produce annual accounts, regular management accounting is often dismissed as being a luxury for large businesses.
In a lot of small businesses, the person responsible for the reporting of the business is often the owner too and the idea of learning how to design or produce management accounts can be a daunting task. Whether they are simple or complex, they can provide valuable insight into business operations and can often highlight financial issues at a much earlier stage than waiting until the financial year end.
As well as keeping the owners abreast of the financial well-being of the business, they can be used to identify opportunities within your business operations as well as providing the supporting data to help making potentially game changing decisions.
How are they useful?
Management accounts can provide valuable insights if setup and used well.
Trend analysis in management accounting will help most business users shape a realistic and reliable forecast of the future. This will become increasingly important as your business changes and will help you to spot pinch points in financial operations as you move through various stages in your business life cycle.
Taking a step back
It is important that the small business owner is able to step back and take a holistic look at the overall performance of their business operations. Being able to differentiate between direct in-depth analysis of certain business areas and the overall picture is certainly important when assessing overall financial heath of any business.
In a changing market place or changing entity, keeping abreast of how individual components of your business are doing is hugely important. Standard management accounting wouldn’t typically be focused on minute detail, however, to fully support a growing or changing business, adding in a layer of detailed analysis may be worth it’s weight in gold.
Learning to interpret these reports will almost certainly aid you, as a small business operator, to focus on what is important and will help to provide you with a much more detailed understanding on the financial health of your business.
Management accounting, if correctly setup, maintained and is relevant to the needs of the business can be used to aid future decision making.
Top tips for designing management accounts
- Make it relevant – no point in designing all kinds of fancy reports if they don’t help you make informed decisions or provide the insight you need
- Keep it simple – don’t over-complicate information for the sake of it, make them easy to read and understand to you and to others
- Make them easy to update – don’t get lost in complicated formulas which may take a lot of updating at the end of each month – unless absolutely necessary.
A good place to start
Management accounts come in all shapes and sizes depending on the size of organisation, complication of business operations or focus of management on certain key criteria. The below could be considered to be a standard set of monthly management accounts which, if setup correctly, will provide some invaluable insight into your business:
Profit and Loss Account
The Profit and Loss (P&L) is a financial statement which measures income against expenditure over a given period. These periods can be any length of time for internal purposes but generally, there will be a monthly P&L and an annual P&L – typically with a comparison to budget.
The Balance Sheet is a financial statement of total assets (owned by the business) and liabilities (payable) at a given point in time. The date of the Balance Sheet will usually coincide with the date of the P&L . The net of the assets and liabilities (also known as ‘net assets’) is the net worth of the entity.
The Cashflow Statement is a financial report which demonstrates the changes in profit (from the P&L) and movements in Balance Sheet items in actual terms to explain the movement in physical cash at a given point in time. This is arguably the most important of all financial statements, after all, no cash = no business.
Sales and Margin Analysis
Unlike the P&L, Balance Sheet and Cashflow, there are no statutory layouts for these reports as they are purely for management. Many businesses choose to analyse their sales in detail each month to enable greater understanding of where their income is being generated or what is at risk.
For further information or to discuss the content of this article, give us a call or send us a note and we’ll be happy to assist your understanding.