No, we're not going to tell you how to run your business, but we are going to discuss how financial data can help you make sound business decisions.
Do the words Profit & Loss report (P&L), Balance sheet, Budget, Forecast and Key Performance Indicators boggle your brain? Do you only look at your financial data when forced to by your accountant after the year end? Do you make important decisions without even considering the financial position of your business? Well stop!
Knowing how your business is performing throughout the year is extremely important, and this is where management accounts come in.
What are management accounts?
Management accounts is the blanket term used for a pack of financial information, provided regularly to you about your business. Usually these consist of at least a P&L and Balance sheet and are provided monthly or quarterly. However frequently they're prepared, the key is to receive them as quickly as possible after the end of the period to ensure that you are reviewing recent data.
What can be included in management accounts?
Profit & Loss account
This is a document which shows the performance of your business over a period of time. It summarises income, cost of sales and overheads and shows whether the company is profitable. Figures can be compared against previous periods or a budget.
This is a document which shows the position of your business at a point in time. It shows whether the company has more assets than liabilities on that date. If the net assets (assets less liabilities) are negative, you may have a problem and should speak to a good accountant as soon as you can.
This is a summary of the cash movements over a period of time. It will show how money has been received and spent and will detail the overall change in bank balance.
This is a best guess at what will happen to your cash over the next x number of months. It incorporates the actual position of the business at a point in time, and a budget of what is expected to happen in the future. The benefit of this report is that it highlights any issues the business may have with cashflow (or maybe where there is surplus cash which could be invested).
Graphs, formulae and commentary
Don't panic if the thought of all these numbers makes you want to bury your head in the sand. A good set of management accounts should cater to your specific needs. If you take in visual information best, the accounts should include graphs. Maybe you prefer to read a commentary, or get your head around formulae, then your accounts should incorporate these as well.
Don't forget that the main point of a set of management accounts is for them to be useful to you, the user.
Why use management accounts?
Firstly, management accounts help to give you that peace of mind that the business you're working so hard on is flourishing. Or the alternative, they highlight issues on a timely basis allowing you to ensure that decisions are made to keep the business afloat before it's too late.
Maybe you need to buy a new machine or fancy withdrawing an extra lump sum for that holiday of a life time. Having enough cash in the business account doesn't mean that it's the right decision to make. Management accounts allow you to work out whether you can afford that large cash outlay, whatever it's needed for.
Is funding required to progress the business to the next level, then you'll most likely need management accounts to obtain this.
There are a whole range of reasons that management accounts are useful. But the main reason is to keep you, the business owner, informed on a regular basis, so that you can do what's best for your business.
Want to know more?
Here at Lodestar we use Xero in conjunction with other Xero apps to prepare management accounts that work for your business. Get in touch with us to discuss how management accounts could benefit your business, giving you the visibility you need to make the right decisions for growth.