Accounting for Growth
Wouldn’t it be nice if the business accounts could be used as a tool for growth, rather than just a way of working out how much you owe the tax man?
Producing accounts at regular intervals throughout the year gives you an opportunity to track business performance to date AND plan over the coming months.
- What are management accounts?
Effectively they are the same as the accounts produced at year end, but much more regular and in a format that is more helpful to you as the business owner rather than the tax man.
If numbers do not work for you, regular information can be produced in a style that is more suited to your skill set, such as by using graphs, colour coding or audibly.
You also benefit by having regular meetings with a professional accountant and business adviser who can go through the figures with you, identify areas of opportunity and help to take the business forward.
- How can they help me grow my business?
If you start the year with an idea of how much money you want to make or a sales level you want to achieve, regularly tracking your performance will give you a good indication about how well you are doing, and if you are making money.
It is better to find out two or three months into a financial year whether you are on track, rather than waiting until after the year end when it is too late to make a difference to your figures.
By having a detailed review of your performance periodically throughout the business year, you have more opportunity to deal with issues as they arise and to modify your plan to ensure you stay on target.
You can also use the management information to communicate your plans to those around you in the business to ensure that they can help you achieve your aims.
- Why else might I want management accounts?
New businesses sometimes feel that they are making money because there is cash in the bank. This can be misleading, especially when there are outstanding creditors (people you owe money too) and debtors (people owing you money).
Sometimes early stage businesses will generate sales but not always make a profit or sufficient profit due to the fear factor that leads many new businesses to chase unprofitable work. Understanding the management information will help businesses identify profitable business elements compared to unprofitable areas and so can help target resources or efforts.
Annual accounts have to be adjusted for many items including closing stock levels, prepayments (items that you have paid for in full in an accounting period, such as insurance but some of the cost relates to the next year) and accruals (items of expenditure that you have incurred but not paid for or been billed for at year end). This can result in your bookkeeping records often being dramatically different to the year end results, which doesn’t help with planning.
By having periodical management accounts, the year end surprise is taken out of the accounts and you are better equipped to plan.
Growing businesses starting to make a profit often fail to make provision for the tax bill. Having a regular review of the finances can ensure that provision is made for this and other liabilities.
Cash-flow is different to profitability. Often profitable companies can have poor cash-flow due to a variety of reasons. Having regular access to management information means that you can identify areas to target efforts, such as credit control or cost control.