It is always an exciting time when starting a business. There are many aspects to think about ranging from brand marketing, product development, and business financing. These are some of the key areas an entrepreneur will focus on as this will contribute towards the growth of the business.
However, this can sometimes mean that back-office processes such as the accounting function will be lagging slightly behind the growth of other business areas because these functions need time to understand transaction flows and business strategy so that the control framework overseeing the business can be developed. It is therefore essential to know when the time is right to invest support infrastructure teams.
But How and When Would you Know This?
It is important for business owners to understand the performance of their business and have information at their fingertips – regular management accounts.
Management accounts are a suite of retrospective looking reports that describe the performance and underlying health of a business at any given time, and it can be using both qualitative and quantitative data. There are huge benefits to have these prepared on a regular basis. Most businesses will opt to prepare management accounts on a monthly basis, but there is no hard and fast rule because they are prepared to enable the business owner to make long term and short term decisions for the business. These benefits include:
Understanding How Profit or Loss for a Trading Period Was Derived
Knowing whether the business is turning over a profit or a loss is vital to ensure the future sustainability of the business. If the business is turning over a profit at the end of a reporting period, that’s great news! The information can be used to identify the products that helped with generating those sales. It will also give the business an opportunity to experiment with the product mix to better the performance next month. On the other hand, if the business is making a loss at the end of a reporting period then management accounts will be able to highlight the key areas of that are draining the business and can be addressed sooner rather than later.
Identify Trading Patterns and Trending
Prolonged production of management accounts will allow an entrepreneur to identify instances of seasonal trending. A simple example would be subscriptions to gym memberships tend to be higher at the beginning of the year and tail-off towards the summer. This allows informed decision making around pricing structures during these periods.
Having a Holistic View of the Business
Small business accountants are designed to provide a complete snapshot of business performance for a given point in time. This will often include tax estimates on a rolling basis and an estimate of costs that have been incurred but not yet billed to the business. It is important to have this information to hand because it will reduce the chances of a surprise at the year-end with financial statements need to be prepared for compliance purposes.
Manage Cash Flow and Stock Levels
Maintaining a comfortable level of liquidity is important. If a business makes sales with 30-day credit provided to a customer, the management accounts will be able to highlight whether these debts are being converted into cash on a frequent basis. Moreover, customers who frequently pay their debts late can be identified and their circumstances can be managed more effectively.
Using Key Performance Indicators
Key performance indicators will allow the business to detect trends in their business and react accordingly. The same indicators can be used to benchmark the business’ performance against competitors.
Detection of Irregular Transactions and Fraud
Regular management accounts will allow an entrepreneur to have a familiar understanding of where profit or fewer levels are on a monthly basis, and at the same time create an expectation for what the expected level of profitability is giving their understanding of the revenue generated. Of course, nobody wants to encounter fraud in their business but management accounts will enable an owner to become inquisitive and therefore detect and prevent instances of fraud.
Negotiation of Leases and Credit Lines
If the office is expanding and the business in need of extra office space, it is likely that potential landlords will want to see management accounts / audited financial statements to gauge whether the business is a going to be a good tenant. Likewise, banks will want to understand the underlying health of the business before granting overdrafts or additional credit.