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Business tips Cash Finance Function

Management Accounts – what are they and do you need them?

Management Reporting - What is it and do you need it?

 

 As a limited company you know that you must file a set of accounts every year, it is a statutory requirement and something that doesn’t seem to provide you much value. You cannot make proactive quick decisions based on historic data that is now probably out of date.  

 

Yet a set of accounts can provide valuable information, allowing you to make good decisions based on current data, this is why large companies employ management accountants to work inside the business. These large companies will have up-to-date accounts every month, they will be able to spot any potential issues and react quickly to resolve them.  

 

Improving your businesses financial efficiency requires a clear overview of your key numbers, so you can track your performance and drive improvements. 

 

So, what are management accounts? 

 

Monthly management accounts are a snapshot of the financial health of your business. 

It is good practice to get into if you want to grow sustainably because you can plan based on real numbers and are equipped with the facts if you need to change course. 

 

The information included in a set of management accounts can vary as it depends on the needs of the business and it’s stakeholders but generally, they include: 

 

1) A profit and loss for the current year and a forecast for the next 6- 12 months.  

2) A Balance sheet and a forecast for the next 6 – 12 months 

3) Both of these will have comments explaining key numbers and possibly a variance to forecast or budget.  

4) A cash flow statement and a forecast for the next 6 – 12 months 

5) KPI (Key performance indicators) which are relevant to your company. 

6) Risks and opportunities which may impact the above forecasts and what you can do to mitigate those risks? 

7) Trends – What trends can you see in the numbers, how do these compare to competitors, is there any external factors impacting the numbers.  

 

6) Insights – So what? How can we improve the position above? What drivers do you have control over and how can you use them to change the forecast outcome? 

 

The purpose of management accounts is not to provide a whole load of extra numbers and data which really doesn’t make any sense and doesn’t help you to support the business. The numbers provide the data but the key part is understanding what those numbers mean to your business and what you can do to impact them.   

 

Smaller companies they may not be able to afford a full-time finance expert, but they can still benefit from this service with a part-time or outsourced advisor. Below are the benefits available from having regular management accounts.  

 

1) Helps to control costs: Month on month data will enable you to spot trends and anomalies. If one particular month stands out, you can dig down into the numbers and understand why. Some businesses continue to pay for items they longer use as they do not regularly review their costs.  

 

2) Spot potential problems: Is the debtor balance (amounts receivable) increasing without a corresponding increase in sales? If so, then this gives you a signal to look into unpaid invoices. Some management accounts include a review of unpaid invoices.  

 

3) Compare budgets and forecasts: This will help to understand if your business is moving in the direction you wanted it to. Are sales picking up as expected, if not, why?  

 

4) Understand the profitability of products/services: Overall, the business may be profitable, but wouldn’t it be useful to know if you had an unprofitable product or a high performing product that was generating most of your profit. This will help you to make decisions on what to focus on.  

 

5) Helps with financing: When seeking external financing the lender will often request a business plan along with current accounts and forecast data. This will greatly improve the businesses change of securing funding. It also provides the shareholders with reassurance that they can afford the finance repayments.  

 

6) Spot opportunities: Management accounts may highlight an excess of cash above and beyond the buffer you like to maintain. This could provide the shareholders will confidence in making that next investment.  

 

7) Cash Planning: Even though the business bank account may look healthy it is important to understand future cash commitments. Within the bank you will have cash set aside for Corporation Tax, VAT, supplier payments, payroll, stock etc which can cloud your understanding of the cash position. Forecasting will enable the business to see those payments going out and understand if there is enough cash to sustain the business or make those desired purchases.  

 

8) Aids risk management: By understanding what risks and opportunities can impact the businesses future, the shareholders can make decisions to mitigate those risks or have plans in place if those risks materialise.  

 

9) Tax Planning and Dividend Payments: When up to date information is available, a director/owner can plan with greater confidence when remuneration can be taken. Dividends can only be taken when a company has distributable reserves, so for less established or less profitable companies this will need careful monitoring, to ensure too many dividends are not taken through the year. 

 

10) Detection of Fraud: Regular accounts review will increase the possibility of detecting fraud. If long periods pass by without a financial review the wrong doings will remain hidden and it may become more difficult to uncover.  

 

11) Helps to identify seasonal fluctuations: It is important to understand and plan for seasonal fluctuations and align income and expenses as much as possible. Some expenses will continue even during a low season; therefore, the business needs to prepare and have cash reserves for this period. 

 

Management accounts put you in the driving seat of your business and mean you are no longer flying by the seat of you pants and relying on chance.  

 

If you’re looking to get in real control of your financial destiny, we’ll work with you to set up a management pack that puts you firmly in the driving seat. 

 

Talk to us about setting up management reporting 

 

2. Download our free guide on “stopping your fitness business running out of cash”  https://debbiebaileymoney.co.uk//fitness-ebook/  

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Categories
Business tips Cash

The Cash in your bank

Cash solves problems, cash is king 

What is cashflow? 

Snapshot of business finances, it is a picture of money flowing in and out of a business. This picture shows the long-term financial health. You can track this on a weekly, monthly, quarterly or annual basis.  

Why is cashflow important? 

It enables you to buy supplies, pay yourself and your employees and invest in assets.  

Inefficient management of cashflow will almost certainly lead to failure.  

There is a need to plan ahead to ensure all costs are accounted for correctly, on the correct dates and avoid penalties, fees etc.  

You can be profitable but be cash negative and this leads to issues.  

There is a need to account for short term cash flow issues, such as a customer who is slow to pay. 

How to analyse and monitor cashflow 

Add together all your bank accounts and any cash on hand, this is your starting number.  

Subtract all payments (do not forget VAT payments to HMRC if VAT registered, annual employee costs such as Class 1A NIC and PSA and corporation tax or payments on account if self-assessment) 

Add all income (not sales as you need to account for when you expect to be paid, not when you will make a sale) 

This will give you a negative cashflow (more cash out in the month) or positive cashflow (more cash in, in the month). It is best to do this for at least a year, so you can see the ups and downs that you can expect and when you may need to hold onto cash to ride out the negative cashflow months.  

It is good practice to use past data as well as future expectations to get the best cashflow forecast. Past data may reveal seasonal trends, or dates when major contracts are up for renewal.  

Consider future requirements of the business, such as will a greater work flow require you to hire more staff, are there any tax changes expect such as auto-enrolment pension increases and if you are not registered for VAT are you expected to reach the VAT threshold which would increase your prices to clients and change your cashflow.  

Consider if you like to see information presented visually such as graphs or in table format.  

What can you do to sleep soundly at night, reduce any potential stress and maximise opportunities? 

  • Avoid Surprises
  • Keep up to date accounts and cashflow forecast – add control and strategy
  • Consider if you will need finance in the future and start to seek out those relationships, understanding what you will need  
  • Make your cash work for you  
  • Could you move some of the funds into an interest baring account
  • Consider different methods of collecting payments such as; direct debit, GoCardless, stripe, up front payment or partial upfront payment.
  • Reduce costs
  • Repair equipment instead of re-buying
  • Look at your regular bills, have you reviewed them recently? Do you still require all the services you are paying for? Can you move utility provider?