Running a business well and securely requires that you know your numbers! You have to be able to plan for cashflow and avoid the unexpected. It’s also about forecasting the numbers so that you can plan for growth.
Anyone who’s had the experience of working as a senior manager in a company of 50+ staff will probably have had exposure to “Management Accounts” and to good financial practices. It doesn’t necessarily mean you know how to operate them, but at least you have an idea of what’s involved. But a huge number of business owners lack this experience and accounts are a bit of a mystery. Whatever the past experience, the majority of business owners are not on top of their business financially. Many think it’s just them and everyone else must have a clear understanding. It’s a cause of embarrassment and sometimes fear – the accounts and indeed accountants are to be avoided in case of difficult questions that could expose a lack of knowledge. If this is describing you… it’s time to grasp the nettle and know your numbers.
80% of businesses cease trading within the first five years… and it’s often down to poor financial management. But it’s not as mysterious or difficult as you think, and once you’ve mastered it, your business can perform much better. Let’s get one thing clear first: the purpose of annual accounts. The Government requires every business to submit annual accounts reporting on profit. Guess why? It’s so that the Government can collect taxes. Your annual accounts have little to do with telling the business owners what they need to know to run the business… it’s all about paying tax! So if you look at your annual accounts and wonder “but what does it really mean to the business?” you’re barking up the wrong tree. What every business owner needs is generally known as “management accounts”.
This is a collection of information that helps management understand what has been happening in the business and what it means going forward so that good decisions can be made now. There’s no point waiting until your accountant tells you months after the end of the financial year that you made a profit or a loss! There’s no absolute definition of what should be in management accounts. It’s whatever is key to your particular business. But typically it’s going to be broken down under headings, for example, with fixed costs, variable costs, cost of sale, income (revenue) and the resulting Gross Profit. This should enable you to see on at least a monthly basis an estimate of your profit, and allowing you to see clearly how you achieved it. Your external accountant might be able to provide you with monthly management accounts, but it’s additional to doing your annual accounts for tax purposes and they will want to charge you extra. I would put the task of manual accounts with your bookkeeper, whether that’s internal or external to your business.
How to create management accounts If this is new to you, or in need of improvement, approach your trusted adviser. Give us a call or email if you’d pointing in the right direction. But basically we recommend by starting with a spreadsheet broken down into the sections as described above as row headings. Each column should be a month, starting with the first month of your financial year and continuing for a full year, with totals for the year. Near the bottom will be a calculation of Gross Profit – your sales revenue minus your cost of sales. And right at the bottom will be an estimate of the net profit – all the revenue less all of the costs. What you want to see is how much profit you’re making each month.
You should start with estimates in every section as a forecast of what you expect, then replace with actual numbers as you know them each month to see the reality. (Or keep forecast and actual so that you can see the difference!). We always aim to have completed management accounts for a month by about 5-10 days into the following month. So after each month is complete you can see whether you achieved what you set out to, and if not, where it was different. This is the key point – by knowing this you make management decisions. Without it, you’re running blind – potentially off a cliff. Know your numbers so that your business is safe and so that you can make the right decisions to maximise the profit.