BENEFITS OF MANAGEMENT ACCOUNTS FOR YOUR BUSINESS
Entrepreneurs know their businesses more than anyone, as they should, however as the business grows, it becomes challenging to keep abreast of everything that is happening. It is therefore important to have tools in place that give you more control, especially when it comes to the financial health of the business. Keeping up to date management accounts is one of those tools. They are not a legal requirement for businesses, however, they are essential financial management practices that every business should adopt as part of good governance. Management accounts are not just kept for the business’ own benefit, however, they are a critical requirement when sourcing funding or trying to attract investors to your business. Who would take the risk of funding or investing in a business that does not good financial management practices?
What are management accounts?
Management accounts are a set of financial reports that summarises the business’ financial performance over a specific period, usually a month. These normally include, but are not limited to, the business’ income statement, balance sheet, cash flow statement, and the aging analysis of debtors and creditors. The primary goal of management accounts is to provide up to date financial management information to entrepreneurs and management that would assist in making day to day and long-term business decisions.
What are the benefits of keeping management accounts?
Management accounts are all about being in control of your business. They are the lens that zooms in on where the business is and gives a view of the future. Below are some of the benefits derived from keeping a good set of management accounts.
Efficient business decision making
Keeping regular management accounts forces the business to have up to date financial information. This enables you the insight into the full picture of what is happening in the business. Regular could be on a monthly or quarterly basis, depending on the size of the business or the systems in place. Such information becomes handy when there are short- or long-term decisions to be made about the business.
A set of management accounts is great for analysing and identifying relevant trends in your business. They can be used more meaningfully than Annual Financial Statements, in that they can be broken down using whatever key performance indicators (KPIs) that make sense to your business. For example, your business sales can be broken down by product type or geographic location. This gives you greater insight into what’s working well in the business and areas that need to be addressed, therefore, allowing you to make decisions and take corrective actions in a timely manner.
Trend analysis is also a great tool to analyse the actual performance of the business versus planned or forecasted performance. This enables the business to see how it is doing against its planned budget and therefore put necessary corrective measures in place timeously.
Managing cash flow
Cash to a business is what oxygen is to human beings. No cash, no business, therefore, for the survival and success of your business, you need to understand how much cash is available in the bank, how much is due to the business (your debtors), and how much is owed by the business (your creditors). Management accounts give a clear view of cash inflows and outflows in your business. Keeping an up to date set of these assist in ensuring that the business does not make unnecessary purchases that it cannot afford, does not overstock, its efficiently managing customers that are owing or it has excess cash that can be used for bulk buying to take advantage of discounts offered by suppliers. All these cash flow decisions can be made only if there is up to financial information at hand.
Raising funding for your business
Up to date management accounts are a critical requirement when looking to raise external funding. Funders are not interested in taking unnecessary risks. They need to be convinced that they will recover what has been invested in your business, it is therefore important for them to know for sure that your business is professionally managed and controlled. A clear set of accounts that accurately details what is happening in your business gives them the confidence to take the risk of funding you and increases your chances of securing funding that you need.
Detecting fraud
Where management accounts are regularly prepared and reviewed, anomalies and malpractices can be timeously picked up. Where there is a long time gap between financial reviews of the business, it becomes even more difficult to uncover errors, fraud, and malpractice. By that time, it may also be too late for the business.
Tax planning and remuneration
Management accounts enable the business to forecast more accurately and therefore plan for tax more effectively. Businesses are provisional taxpayers and are required to pay provisional tax based on estimated profits. If the estimate is significantly different from actual performance, apart from SARS penalties, the business would also not be in a position to accurately project the cash needed to meet its tax liabilities.
Also if the business is doing well, it may want to pay additional bonuses to its staff or even declare a dividend to its shareholders. These are decisions that require cash commitments; therefore, they cannot wait till year-end. Management accounts assist in providing the necessary insights prior to finalising such decisions.
Reducing financial year-end costs
Keeping up to date management accounts means that queries and concerns that arise are addressed and dealt with as they are picked up rather than waiting till after a year. This means that at year-end there will be less time on preparation, there will be fewer errors and there will not be any unwanted surprises. Less time and fewer queries on your numbers equate to lower costs for the preparation of your annual statements.
Cloud-based technologies have played a big role in assisting SMEs to have up to date management accounts, so there really is no excuse to not have these in place. With cloud accounting, your financial records are kept up to date and are readily accessible to you anytime. A series of articles about cloud accounting have been published on this site, please search for these under our resources page for more information.
At The Accounting Village, we have various monthly packages that give you access to accurate monthly management accounts for your business. If you require assistance with these, please feel free to contact us
