Better business decisions lead to stronger businesses, with higher turnover, lower costs and greater productivity. Business leaders and owners, including those in medium sized, and small fast-growing businesses, use Management Accounts as a tool to provide them with financial performance information. For charities Management Accounts are often vital to provide Trustees with the information they require to provide good governance for the organisation. Could your organisation benefit from regular Management Accounts?

What could you find out?

In many ways Management Accounting is an investigative approach to finances. Performance is reported on throughout the year, not just at the year end, which is the case with Annual Accounts. It involves identifying what the most important performance measures are for each specific business and then allows you to drill down to detailed information about how the company is doing against these measures. Management Accounts compare actual results against what was expected, and any differences can be analysed to see what action should be taken. Typically, Management Accounts will include a performance summary, profit and loss account, balance sheet, cash report and debtors report. Depending on the nature of your organisation, you may need to have a greater or lesser focus on areas such as sales performance, stock management, cash management or debtor information.

Performance summary

Management Accounts provide a summary of the Key Performance Indicators for your business to show how well the business is doing and highlight any important issues. Based on actual performance to date, a revised forecast or outturn for the year can show how the business is likely to perform.

From this information you can set out an action plan to address these issues. For example, if sales performance is below forecast you might:

  • Refocus activity by product, territory and price range to uplift sales to new customers and make cross-sales to existing customers.
  • Revise sales forecast downwards and cut costs through the downturn in readiness to scale up when market conditions improve.
  • Identify the profile of your best customers and put in place a programme to attract more lookalike customers.

Profit and Loss

The P&L account will show the actual and cumulative performance for the month or quarter, versus the budget. Expect to see information on turnover, gross profit, overheads, and operating profit.

With P&L information split by product lines or service you can assess which products or services are performing well and which are not.

  • Check what’s behind the underperformance of certain products. Is it a one-off blip or a sustained trend?
  • With top performing services and products, is there scope to accelerate growth even further to make the most of current demand?
  • Has there been an unexpected increase in overheads which needs to be addressed?

Balance sheet

The monthly or quarterly balance sheet will show what the business owns, what it owes and what value has been built up in the business. Expect to see details of assets including fixed assets, equipment and vehicles, money tied up in stock, pre-payments, cash and debtors (money owed by customers and others). Information on liabilities will be provided such as mortgages, loans, credit card debts, accruals, creditors (money owed to suppliers), shareholder funds and tax owed. The balance sheet will also set out the level of owners’ equity which is the amount remaining when liabilities are deducted from assets.

  • Where the organisation is generating a healthy return on its owners’ equity and on its assets, this will provide reassurance to shareholders and the Board.
  • If current liabilities far outstrip current assets, then the company’s liquidity (or ability to cover short-term outgoings) needs to be addressed.
  • By looking at the P&L and balance sheet to assess the ratio of revenue to fixed assets it’s possible to see whether a business is using its assets effectively.

For growing organisations it’s important to track planned capital expenditure on asset purchases or improvement schemes. This information will show how far the capital spend has been completed, with the current and forecast costs and timescale. All of which helps the Board, Trustees or business owner to stay in control.

Cash position

Management Accounts provide a regular view of the bank balance for the business, with details of any overdraft or loan facility to show how much cash is available to the business and what scope there is within agreed borrowing levels. A cash flow forecast, showing the actual and forecast receipts and payments will show the expected balance at year end. By looking at the rate at which cash is used versus revenue generated you can see how many months cash you have as a buffer.

  • Is there enough cash to support business operations?
  • Will there be a need to extend business borrowing to cover specific asset purchases?
  • Does the cash at bank reflect the true position or has there been an issue with misreporting?

Debtors

You can keep on top of customer payments with an ‘Aged Debtors’ report showing the amount of debt and the percentage owed. Expect to see a complete list by customer ranked by who owes the business the most amount of money. High levels of debt being carried by the business (above the time lag in payments expected for your sector) indicates that action needs to be taken. If debt and late payments are an issue you might:

  • Consider changing your payment terms to enable advance or staged payments or provide incentives for early payment with penalties for late payment.
  • Review the profile of debtors and improve credit checking processes for new customers to avoid attracting more customers with the same traits.
  • Review your processes for invoicing and chasing payments to reduce the level of ongoing debt, perhaps streamlining how customers can settle their accounts.

Similarly, monthly reports on creditors can be very informative showing what is owed to your suppliers. You can use this information to improve the purchasing process and management of suppliers.

Find your organisation’s vital statistics

Talk to us about your potential requirements. We can explain how Management Accounts might shed light on how to secure stronger performance in future. We can provide monthly or quarterly reports and we can tailor the information to reflect what matters for your business. You can email our team at  directors@hbaccountants.co.uk or call 01992 444466 for advice.