The Benefits of Management Accounts
Management accounts is a reporting format that enables businesses to review their financials in more detail than a generic TB. It allows detailed analysis on past trends, which is then used for future decision making to improve business performance on key financial areas such as sales, costs and overheads.
Why do management accounts give more insight?
The key to analysing business information is inputting basic bookkeeping at the right level of detail, that allows business owners the ability to export information in a useable format. Often businesses only see their accounts once a year after they are drafted by their accountant at year-end, which although provides basic information such as sales, costs and profit for tax purposes, it does not give any other business insight such as:
1. Seasonality’s – To understand sales trends in your business that can impact cash flow, so businesses can make informed decisions on how to best manage their purchase cycles etc.
2. Any one-off transactions which may have a large impact in one year but may not occur again in the future. This is important for forecasting purposes to ensure the right level of sales and costs are built in.
3. Cost analysis – No ability to directly attribute costs to their key sales driver and calculate margins at a detailed level.
4. Cash – Minimal information to calculate an accurate future cash flow i.e. costs payable in advance, stock intake etc.
How should I implement management accounts?
A generic management accounts format is pulled together from a trial balance. It is best used when bookkeeping is input into a system (rather than manual spreadsheets although this is not impossible) and transactions are allocated into a format which enables detailed visibility for sales, costs and profits. The example on the next page is based on a retail company ‘A’ Ltd and shows the benefit they can bring by utilising a management accounts process to expand visibility into their financial performance.
The year-end format is combining all sales and costs into one category so at high level ‘A’ Ltd has made a 47% margin. ‘A’ Ltd may feel this is a good margin but there is little information on what the key drivers are, or how they can improve without going back and looking into individual transactions. The management accounts format is automatically breaking down the accounts into a greater level of detail, which ‘A’ Ltd can use to identify opportunities to improve their future performance. Key areas ‘A’ Ltd could look into are:
1. P&P margins are negative Why? Is the pricing matrix and charges to customers incorrect?
2. Amazon sales are significantly higher in Feb than Jan and March. Why? Is this seasonal for Valentine’s day?
3. Internal product margins are generating higher margins than Amazon Why?
Now ‘A’ Ltd have identified the areas above they can target themselves with future objectives:
- Improve P&P margins to be at least break even by September.
- Grow Amazon margins to 52% by August.
If ‘A’ Ltd implemented the above they would grow profit margins by c9%, however to actually implement the change they would need to investigate ‘what’ needs to change and monitor the actual future performance.
In summary a Management Accounts process is a methodology that business owners can use to give key decision makers the ability to review detailed information and set realistic objectives to improve bottom line performance. The information provided will only be effective if it is reviewed on a regular basis, actions are cascaded to the right person and outcomes monitored.
At Wilkinson Accounting Solutions we specialise in working with businesses to help them understand their key sales drivers, build effective bookkeeping processes, support with interpreting and analysing data and provide recommendations, offering support with full implementation of key objectives, ensuring outcomes are achieved. If you want to see how we can help your business then contact us today for a free consultation.
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